production and distribution; and it is necessary to take account
of the inter connexion and mutual dependence of these departments
and that of exchange, in which the idea of value is predominant.
In the last resort production will not be carried on
unless labour and capital receive a sufficient reward and the
sufficient reward is the normal value of the factors of production.
But when we are comparing the relative values of commodities
and are seeking to explain, for example, how it is that for long
periods of time these relative values are stable, or conform
to some regular law, we have to break up the elements of value
into the constituents of the expenses of the various factors of
production. This leads up to the analysis of cost (or expenses)
of production as dependent on the amounts and qualities of the
labour and capital required.
If all commodities were produced directly by the expenditure of labour, and in such a way that capital need not be considered, as in the simple natural state of society taken by Ricardo, then the only element to consider in value would be the quantity of labour. And in a society of a more developed character, in which wages are Elements of expenses production. paid, if we consider that the rate of wages is uniform, and that profits may be disregarded in comparison with wages, the quantity of labour is the most important consideration, and a fall in the relative value of any article can only take place through some economy of labour. But, as we approach more nearly to the actual constitution of modern industrial societies, we find serious differences in the rates of wages in different employments, the use of fixed capital becomes of greater importance, and in some capes the lapse of time necessary for the completion of the commodity is considerable. Thus interest and profits, as well as the differential rates of wages, have to be taken into account just as much as the quantity of labour, and it is generally convenient to consider also the established differences in various returns to capital under different conditions (risk, irregularity, &c.). Indirectly, of course, since all capital in the ordinary sense is the result of labour, the quantity of labour is always of primary importance; but, in considering the proximate causes of relative values, it is best to consider capital and labour as independent factors. It follows, then, that, in order to compare the relative values of two commodities, A and B, freely produced in a modern industrial society, we must take into account, first of all, the relative wages and relative profits, and the relative amounts of labour and capital employed. If the producers of A are skilled workmen, and if the return to the capital is uncertain, whilst in the case of B the labour is unskilled and profit steady, then the value of A will be higher than that of B, supposing each produced by the same amount of capital and the same quantity of labour. Obviously, too, any change in the relative wages and profits will affect the relative values. If the commodities considered are not capable of division into similar parts (such as yards of cloth or silk), but must be considered in their entirety (e.g. ships and houses), then we must take into account also the different quantities of labour and capital required for their completion, as well as the relative rates of wages and profits. As regards changes of value in this case, it will be observed that, if the proportions are different in which labour and capital are employed in the production of two commodities, then any change in the general rates of wages and profits will affect relative values. By making various suppositions as to changes in the different, elements of the expenses of production, a great many cases may be obtained, as is done, for example, by Mill (Pol. Econ. bk. iii. ch. iv.).
All the cases enumerated and others may, however, be deduced from a general formula. Let E, represent the total expenses of production of commodity A. Let Q1 be the quantity of fixed capital employed, and let 1, be the rate of wear and tear per annum, so that the loss is Q1/r1 . Let P1 be the rate of profits per cent. per annum which must be obtained on the whole capital. Let Q2 be the number of labourers, and w2 the rate of wages per annum. Let t1, represent the time taken for production reckoned in years (t1, may be less than unity, thus t1/Q2 would be weeks). Then the total expenses of production are
E1＝{ Q1 . . .
This simply means that the commodity must return in the normal case profits on the nxed capital with repair of waste, and also the wages expended (the amount depending on the number of labourers and the rate of wages), with profit on the circulating capital over all the time necessary to complete production. In some cases, it may be observed, it would be necessary to take differently for the fixed capital and the labour or circulating capital. Then, in a similar way E2, the expenses of production of B, may be expressed:
P3 I P3
E2＝{ Q3(100 +R) + Q4 wi (I+ IOC) itz
Thus the relative values of A and B will be found by comparing the aggregate of these several elements expressed on the right-hand sides of the equations. It will now be evident on what a number of variable elements relative values must depend, even when we consider that the commodities can be indefinitely increased by the proper expenditure of capital and employment of labour. the progress of invention and the development of industrial competition, constant changes are taking place in the various elements, and in the somewhat complicated formula given certain practical elements have been eliminated. Even if we suppose, for the sake of simplicity, that P1 and P3 are equal, as also 'wg and wi and tl and 12-that is, if we suppose a uniform rate of wages and profits, and the same amount of time required -still any change in these general rates will affect relative values, owing to the different proportions in which fixed and circulating capital may be employed in the two cases. ' Thus, for example, we arrive at Mill's statement: “ All commodities in the production of which machinery bears a'large part, especially if the machinery is very durable, are lowered in their relative value when profits fall.” And it will be found on trial that by making various suppositions as to the identity of certain of the elements, or as to their disappearance, many other causes of changes in relative values may be deduced. Two important practical conclusions of a general character may be drawn from this analysis. (1) Relative values are liable to constant disturbances, and accordingly, since relative prices tend to be adjusted to relative values, relative prices must be constantly changing. (2) It is extremely difficult to measure changes in the value of the monetary standard, or movements in the general level of prices, or variations in the purchasing power of money incomes.
These difficulties are further increased by the importance of the group of commodities-which can only be increased (the arts of production remaining the same) at an increasing cost, and which are placed by Mill under a third law of value. The most important examples of this law are agricultural and mining produce. In order to make the principles Value and rent. on which this law depends clear and intelligible, it is necessary to proceed at first by the abstract method. Assume then that there is an isolated country and that its agricultural produce consists of corn. Then at any given stage of the growth of wealth and population the amount of corn may be increased (the art of agriculture remaining stationary) either by taking into cultivation inferior lands or else by cultivating with greater care and expense the lands already in cultivation. But in either case what is known as the law of diminishing return would come into play, and the additional supply could only be obtained at an additional cost. It may be assumed that at any stage of development the cultivation would be carried to such a point as to give just the ordinary return to capital on the last “' dose ” of capital expended. Further it cannot be carried, for no farmer will work at a continuous loss; and competition will ensure that it is carried so far, for, if this last application of capital yields ordinary profit, the former “doses” must yield more, that is to say, rent as well as profit. It thus becomes manifest that, under the conditions supposed, the extent to which “the margin of cultivation”
