of for present consumption. Accordingly, in order that a
thing may be continuously produced, labour must obtain
a sufficient reward for toil, and capital a sufficient reward for
“abstinence” or “waiting,” or for preservation and accumulation
of wealth. Thus the ultimate elements in the real cost
of production are the toil and trouble and irksomeness of labour
and of saving. But this toil and trouble will not be submitted
to unless in any particular case the fair reward of industrial
competition is forthcoming. However much pleasure a good
workman may take in his work or a prudent man in his savings,
in the industrial world as at present constituted both labour
and capital will be attracted towards the point of highest
reward (compare Wages); and, accordingly, it is a necessary
condition of the production of any article that the price obtained
will yield the average rate of wages and profit obtainable for
that species of work. Now these rates of wages and profit
can be expressed in terms of money, and may be designated,
Expenses of production.
following Marshall, the expenses of production
as distinguished from the real cost. The real cost of
production would on analysis consist of a confused unworkable
mass of “efforts and abstinences,” or “disutilities,” and
the relation of these mental strains to their material rewards
is the problem of wages and profits. But for the purpose of
relative values it is not necessary to push the analysis so far;
and thus, if we regard the capitalist as the producer, we may
look on the elements of production as consisting of wages
and profits. And this is quite in accordance with customary
thought and language: every one who asks for the details
of the cost of a thing expects to have a statement of the wages
and profits directly involved, and of the material, which again
directly involves wages and profits. So far, then, as freely
produced commodities are concerned, the general law is that
they tend to sell at such a price as will yield on the average the
ordinary rate of wages and profits which by industrial competition
the occupation can command. It is at this point
was, that the difficulty emerges as to the precise nature
Wages and values.
of the Connexion between the prices of commodities
and the money wages and profits of producers. Are
we to consider that the former are determined by the latter,
or the latter by the former? If, for example, commodity
A sells for twice as much as commodity B, are we to say that
this is because wages are higher in the former case, or are the
wages higher because the price is higher? The answer to this
question is given in the theory of Wages (q.v.). It is sufficient
to state here that, in discussing relative values, we may assume
that industrial competition has established certain relative
rates of wages and profits in various employments, and that
any prices of articles which yielded more than these rates, whilst
in other cases no corresponding rise took place, would be unstable.
Thus, in discussing the normal values of freely produced
commodities, we have to consider the quantity of labour
and the rates of wages and the quantity of capital and the rate
of profits, the normal rates of these wages and profits being
given.
The use of the term “normal” requires some explanation. The word norma properly refers to the square used by masons and carpenters, &c., and thus a thing may be said to be in its normal position when no change will be made: that is to say, the normal position is the stable position, or it is the position to which the Workman will try to adjust his Normal. work. And, similarly, by the use of normal as applied to wages and profits, we mean the stable rate or the rate towards which they are attracted. It is thus quite possible that the normal rate may differ from the average rate or the rate obtained over a term of yearsl For it may easily happen that as regards wages, for example, a high rate for a short period may lead to such an increase in that kind of production that for a much longer period the rate will fall below the normal. The normal rate seems to refer to the actual conditions of industry, the rate which can be obtained for a given amount of exertion, taking the average of employments at the time, rather than to the particular rate obtained for some class of work over a period of years. values.
With these explanations the proposition holds good that the normal values of freely produced commodities tend to be equal to their cost, or rather expenses, of production, and any price which yields a greater or less return to labour and capital is unstable.
Marshall (Principles of Economics, bk. v. 5th ed., 1907) has treated very fully the subject of normal values and the relations of normal and market values from the side of theory; but the nature and importance of the distinction is perhaps best realized if we compare the normal relative values of important commodities over a period of centuries, as was done by Adam Smith and in the monumental work by Thorold Rogers on the History of Agriculture and Prices. At this stage in the analysis the difficulty must be met that even in a position of stable equilibrium, i.e. when the normal demand is just satisfied by the normal supply, the different portions of the aggregate supply may be produced at different costs according to differences in the natural environment or in the availability of different factors of production. In dealing with this difficulty the modern conception of marginal cost is of importance. If a commodity is produced at a uniform cost per unit whatever the amount, then the normal value depends simply on this uniform or normal cost; any temporary divergence in market prices will lead to a contraction or increase in the supply until the exceptional gains or losses are got rid of. It may happen, however, that portions of the supply can be obtained at different costs, and in this case the normal value is determined by the cost at the margin. It is this marginal cost which just gives the rates of remuneration to labour and capital which suffice to keep up the continuous supply of the requisite factors of production. If a commodity is produced according to the law of diminishing return, or, what is the same thing, if the supply can only be increased after a certain point at an increasing cost per unit, then the marginal portion just pays its expenses and the previous portions yield a differential remuneration which constitutes economic rent. If the conditions of difference in cost are natural and permanent we have the case of pure economic rent (see below), but if the factors of production in response to the stimulus of extra remuneration can be increased or improved the extra rates of remuneration tend to disappear with the increase in supply of the more advantageous factors, and instead of pure economic rent we have various species of quasi-rents. “Even the rent of land is seen not as a thing by itself but as the leading species of a large genus; though indeed it has peculiarities of its own which are of vital importance from the point of view of theory as well as of practice ” (Marshall). Marshall has given special attention to the development of this application of the principle of continuity, of which Cournot was the first writer to realize the significance.
If a commodity is produced according to the law of increasing return (or diminishing cost per unit as the quantity is increased) the solution of the problem of normal value presents peculiar difficulties which cannot be treated in a preliminary survey. Two results, however, of practical importance may be noted. In the first, under increasing return the first established business can be expanded more easily than it is possible to start a new concern, and if new competing concerns are started there are obvious advantages in amalgamation, so that we arrive at the modern generalization that the natural tendency of increasing return production is to monopoly. This again gives the chief economic justification for “trusts”; it being said that through the adoption of various external and internal economies they more than neutralize the higher prices of monopoly.
The other result of importance is that under competition the less advantageous methods of production tend to be extruded and the law of increasing return gives way to that of constant return. For further consideration of these difficulties the reader may refer to the analysis by Marshall (Principles of Economics, bk. v. ch. xi.). The economic analysis of cost of production (or if we take the money measures of the various elements involved, expenses of production) involves a reference to the other great departments of economics, namely,
