Principles of Political Economy (Malthus)/Book 1/Chapter 2/Section 3

by Thomas Malthus

Section III.—Of the Cost of Production as affected by the Demand and Supply, and on the mode of representing Demand.

It may be said, perhaps, that even according to the view given of demand and supply in the preceding section, the permanent prices of the great mass of commodities will be determined by the ordinary cost of their production. This is unquestionably true, if we include all the component parts of price stated by Adam Smith. Yet, still it is true, that in all transactions of bargain and sale, there is a principle in constant operation, which can determine, and does actually determine, the prices of commodities, independently of any considerations of cost, or of the ordinary wages, profits, and rent expended in their producticn. And this is found to operate, not only permanently upon that class of commodities which may be considered as monopolies, but temporarily and immediately upon all commodities, and strikingly and preeminently so upon all sorts of raw produce.

It has never been a matter of doubt, that the principle of demand and supply determines exclusively, and very regularly and accurately, the prices of monopolized commodities, without reference to the ordinary cost of their production; and our daily and uniform experience shows us that the prices of raw products, particularly those which are most affected by the seasons, are at the moment of their sale determined always by the higgling of the market, and differ widely in different years, and at different times, while the outgoings required to produce them, may have been very nearly the same, and the general rate of profits has not varied.

With regard, therefore, to a class of commodities of the greatest extent, it is acknowledged that the existing market prices are, at the moment they are fixed, determined upon a principle distinct from the cost of production, and that these prices are in reality almost always different from what they would have been, if this cost had exclusively regulated them.

There is indeed another class of commodities, such as manufactures, particularly those in which the raw material is cheap, where the existing market prices much more frequently coincide with the costs of production, and may appear therefore to be exclusively determined by them. Even here, however, our familiar experience shews us, that any alteration in the proportion of the demand to the supply quite overcomes for a time the influence of these costs; and further, when we come to examine the subject more closely, we find that the cost of production itself only influences the prices of these commodities, as the payment of this cost is the necessary condition of their continued supply in proportion to the extent of the effectual demand for them.

But if this be true, it follows that the great law of demand and supply is called into action to determine what Adam Smith calls natural prices, as well as what he calls market prices.

It has been shown that no change can take place in the market prices of commodities, without some previous change in the relation of the demand to the supply; and the question is, whether the same position is true in reference to natural prices? This question must of course be determined by attending carefully to the nature of the change which an alteration in the cost of production occasions in the state of the demand and supply, and particularly to the specific and immediate cause by which the change of price which takes place is effected.

We all allow that when the cost of production diminishes, a fall of price is almost universally the consequence; but what is it, specifically, which forces down the price of the commodity. It has been shown in the preceding section, that it is an actual or contingent excess of supply.

We all allow that when the cost of production increases, the prices of commodities rise. But what is it specifically which forces up the price? It has been shown that it is an actual or contingent failure of supply. Remove these actual or contingent variations of the supply; that is, let the extent of the supply remain exactly the same, without excess or failure, whether the cost of production rises or falls; and there is not the slightest ground for supposing that any variation of price would take place.

If, for instance, all the commodities which are produced in this country, whether agricultural or manufactured, could be produced during the next ten years without labour, but could only be supplied exactly in the same quantities as they would be in the actual state of things; then, supposing the wills and means of the purchasers to remain the same, there cannot be a doubt that all prices would also remain the same. But if this be allowed, it follows that the relation of the supply to the demand is the dominant principle in the determination of prices whether market or natural, and that the cost of production can do nothing but in subordination to it, that is, merely as it affects the ordinary relation which the supply bears to the demand.

It is not, however, necessary to resort to imaginary cases in order to fortify this conclusion. Actual experience shows the principle in the clearest light.

In the well known instance noticed by Adam Smith of the insufficient pay of curates, notwithstanding all the efforts of the legislature to raise it, a striking proof is afforded that the permanent price of an article is determined by the demand and supply, and not by the cost of production. The real cost of the education would in this case be more likely to be increased than diminished by the subscriptions of benefactors; but a large part of it being paid by these benefactors, and not by the individuals themselves, it does not regulate and limit the supply; and this supply, on account of such encouragement, becoming and continuing abundant, the price is naturally low, whatever may be the real cost of the education given.

The effects of the poor-rates, in lowering the wages of independent labour, present another practical instance of the same kind. It is not probable that public money should be more economically managed than the income of individuals. Consequently the cost of rearing a family cannot be supposed to be diminished by parish assistance; but a part of the expense being borne by the public, and applied more largely to labourers with families, than to single men, a fair and independent price of labour, adequate to the maintenance of a certain family, is no longer a necessary condition of a sufficient supply. As by means of parish rates so applied, this supply can be obtained without such wages, the real costs of supplying labour no longer regulate the ordinary wages of independent labour.

In fact, in every kind of bounty upon production, the same effects must necessarily take place; and just in proportion that such bounties tend to lower prices, they show that prices depend upon the supply compared with the demand, and not upon the costs of production.

But the most striking instance which can well be conceived to show that the cost of production only influences the prices of commodities, as it influences their supply compared with the demand, is continually before our eyes in the artificial value which is given to bank-notes by limiting their amount. Mr. Ricardo's admirable and efficient plan for this purpose proceeded upon the just principle, that if you can limit the supply of notes, so that they shall not exceed the quantity of gold which would have circulated if the currency had been metallic, you will keep the notes always of the same value as gold. And I am confident he would have allowed, that if this limitation could be completely effected without the paper being exchangeable for gold, the value of the notes would not be altered, while the same demand for a circulating medium continued. But if an article which costs comparatively nothing, though it performs the most important function of gold, can be kept to the value of gold, by being supplied in the same quantity; it is the clearest of all possible proofs that the value of gold itself no further depends upon the cost of its production, than as this cost influences the supply compared with the demand: and that if the cost were to cease, provided the supply were not increased compared with the demand, the value of gold in this country would still remain the same.

It does not, however, in any degree follow from what has been said, that the costs of production have not a most powerful effect upon prices. But the true way of considering these costs is as the necessary condition of the supply of the objects wanted.

Although at the time of the actual purchase of a commodity, no circumstance affects it but the relation of the supply to the demand; yet as almost all the objects of human desire are obtained by the instrumentality of human exertion, it is clear that the supply of these objects must be regulated—First, by the quantity, skill, and direction of this exertion; Secondly, by the assistance which it may receive from previous accumulations; and Thirdly, by the abundance or scarcity of the materials on which it has to work, and of the food of the labourer. It is of importance therefore to consider the different conditions which must be fulfilled, in order that any commodity should continue to be brought to market in the quantity wanted to supply the effectual demand.

The first condition is, that the labour expended upon it should be so remunerated in the quantity of desirable objects given in exchange for it, as to encourage the exertion of a sufficient quantity of industry in the direction required, as without such adequate remuneration, the supply of the commodity must necessarily fail. If this labour should be of a very severe kind, few comparatively would be willing or able to engage in it; and upon the common principles of exchangeable value before explained it would rise in price. If the work were of a nature to require an uncommon degree of dexterity and ingenuity, a rise of price would take place in a greater degree; but not merely on account of the esteem which men have for such talents, as stated by Adam Smith, but on account of their rarity, and the consequent rarity of the effects produced by them. In all these cases the remuneration will be regulated, not by the intrinsic qualities, or utility of the commodities produced, but by the state of the demand for them, compared with the supply; and of course by the demand and supply of the sort of labour which produced them. If the commodities have been produced by manual labour exclusively, aided at least only by the unappropriated bounties of nature, and brought to market immediately, the whole remuneration will of course belong to the labourer, and the usual money price of this remuneration in the existing state of the society would be the usual price of the commodity.

The second condition to be fulfilled is, that the assistance which may have been given to the labourer, by the previous accumulation of objects which facilitate future production, should be so remunerated as to continue the application of this assistance to the production of the commodities required. If by means of certain advances to the labourer of machinery, food and materials previously collected, he can execute eight or ten times as much work as he could without such assistance, the person furnishing them might appear at first to be entitled to the difference between the powers of unassisted labour, and the powers of labour so assisted. But the prices of commodities do not depend upon their intrinsic utility, but upon the supply and demand. The increased powers of labour would naturally produce an increased supply of commodities; their prices would consequently fall, and the remuneration for the capital advanced would soon be reduced to what was necessary in the existing state of the society, to encourage the application of such capital to the production in question, in the quantity required by the effectual demand. With regard to the labourers employed, as neither their exertions, nor their skill would necessarily be greater than if they had worked unassisted, their remuneration in money would be nearly the same as before, and would depend entirely upon the kind of labour employed, estimated in the usual way, by the money demand compared with the supply. But the price of labour so determined would, under the influence of good machinery, give the labourer a greater quantity than before of the produce obtained, though not necessarily a greater proportion of it. It is not, therefore, correct to represent, as Adam Smith does, the profits of capital as a deduction from the produce of labour. They are only a fair remuneration for that part of the production contributed by the capitalist, estimated exactly in the same way as the contribution of the labourer.

The third condition to be fulfilled is, that the prices of commodities should be such as to effect the continued supply of the food and raw materials used by the labourers and capitalists; and we know that this price cannot be paid without yielding a rent to the landlord on almost all the land actually in use. In speaking of the landlords, Adam Smith's language is again exceptionable. He represents them, rather invidiously, as loving to reap where they have not sown, and as obliging the labourer to pay for a license to obtain those natural products which, when land was in common, cost only the trouble of collecting.^[1] But he would himself be the first to acknowledge, that if land were not appropriated, its produce would be very much less abundant compared with the demand, and that consequently the producers and consumers would be much worse off; and if it be appropriated, some persons or other must necessarily be the proprietors. It matters not to the society, whether these persons are the same or different from the actual cultivators of the land. The price of the produce will be determined by the general supply compared with the general money demand, and will be the same, or very nearly so, whether the cultivator pays a rent, or uses the land without rent. The only difference would be, that, in the latter case, what remains of this price after paying the necessary labour and profits, will go to the same person that advanced the capital, which is equivalent to saying that the farmer would be better off if he were also the possessor of land, a fact not to be disputed; but_it cannot imply, that the labourer or rent who in the lottery of human life has not drawn a prize of land, suffers any hardship or injustice in being obliged to give something in exchange for the use of what belongs to another. The possessors of land, whoever they may be, conduct themselves, with regard to their possessions, exactly in the same way as the possessors of labour and of capital, and let out or exchange what they have for as much money as the demanders are willing to give them for it.

The three conditions, therefore, above specified, must necessarily be fulfilled in every society, in order to obtain the continued supply of by far the greater part of the commodities which it wants; and the compensation which fulfils these conditions, or the ordinary price of any exchangeable commodity, may be considered as consisting of three parts; that which pays the wages of the labourers employed in its prouction; that which pays the profits of the capital, including the advances to the labourers, by which such production has been facilitated; and that which pays the rent of land,^[2] or the compensation for the use of those powers attached to the soil which are in the possession of the landlord; the price of each of these component parts being determined exactly by the same causes as those which determine the price of the whole.

The price which fulfills these conditions is precisely what Adam Smith calls the natural price; and when a commodity is sold at this price, he says it is sold for precisely what it is worth. But here I think he has used the term worth in an unusual and improper sense. Commodities are continually said to be worth more than they have cost, ordinary profits included; and according to the customary and proper use of the term worth, we could never say that a given quantity of claret, of corn, or of any other article, was not worth more when it was scarce, although the cost of its production, on the supposition of ordinary profits, had remained the same. The worth of a commodity, in the place where it is estimated, is its market price, not its natural price. It is its intrinsic value in exchange, determined by the state of the supply compared with the demand at the time, and not its ordinary cost. It need hardly be observed, that the payment of taxes of any kind, where required, is an incidental condition of the supply of commodities which contributes to increase their cost of production and limit their quantity.

But if it appear generally that the ordinary cost of production only determines the usual prices of commodities, as the payment of this cost is the necessary condition of their supply; and that the component parts of this cost are themselves determined by the same causes which determine the whole, it is obvious that we cannot get rid of the principle of demand and supply, by referring to the cost of production.^[3] Natural and necessary prices appear to be regulated by this principle, as well as market prices; and the only difference is, that the former are regulated by the ordinary and average relation of the supply to the demand; and the latter, when they differ from the former, are determined by the extraordinary and accidental relations of the supply to the demand.

It has sometimes been said that there is no such thing as natural price; but explained as Adam Smith has explained it, it is not only a very intelligible, but a very useful term. If the natural price of a commodity be considered as made up of all the money wages which have been paid in the various parts of the process of its production for the specific kinds of labour required, of all the ordinary money profits of the other capitals employed during the periods of various lengths for which they have been advanced, and of all the money rent concerned in the necessary materials and food obtained by the assistance of those powers of nature which are attached to the soil, then supposing things to be in their ordinary and average state and untaxed, it is quite certain that this price, and the ordinary and average prices of commodities, will be found to agree. To this price, which may fairly and usefully be called the natural, necessary, or ordinary price, the market prices are always tending. And this price determines the rate at which commodities usually exchange for each other. So understood, nothing can be more simple, or more generally applicable. The natural price of an acre of copse wood, or of a hundred sheep from the highlands of Scotland, which in a country generally well cultivated must be composed chiefly of rent, is as easily explicable as the natural price of corn on the last land taken into cultivation, where rent is quite inconsiderable. And the natural price of those sorts of goods where a large proportion of fixed capital is employed, and the returns of the circulating capital are unusually slow, and where consequently the price must consist chiefly of profits, may be as satisfactorily accounted for as the price of a straw bonnet, or piece of Brussels lace. Where the materials are of scarcely any value, the capital required is quite inconsiderable, and the expense of production must consist almost entirely of labour.

It is obvious that when, from any cause whatever, the money cost of producing a commodity increases, without some increased facility of obtaining money, the estimation in which such a commodity is ordinarily held, or its exchangeable value arising from intrinsic causes, proportionally increases.

In explaining the effects of demand and supply on the values of commodities, whether arising from temporary causes, or from the ordinary costs of production, I have thought that the subject would be best illustrated by referring first to those periods in which the value of money is practically considered as constant; and it is allowed that during such periods, it is the uniform practice of society to represent demand by money. But it is evident that we cannot extend these periods to any considerable length. We well know, that although the precious metals, from their durability, and the consequent steadiness of their supply, are subject to slow changes of value; yet that at distant periods, and in different countries, their value has been, and is, essentially different.

It is absolutely necessary, therefore, to consider how a demand may be represented and measured under any changes which may take place in the value of money.

An effectual demand for a commodity, is such a demand as will fulfill the natural and necessary conditions of the supply; or, as it has been defined, it is the sacrifice which the demanders must make in order to effectuate the continued supply of the commodity in the quantity required under the actual circumstances.

Now it is obvious, that if money varies essentially, as compared with the natural and necessary conditions of the supply of commodities, a given amount of money cannot possibly represent a given demand, or a given sacrifice.

In every country there are a few commodities obtained by labour alone; and, if the advance of a certain quantity of labour be the necessary condition of the supply of a particular commodity, then the money which will command such labour will represent the effectual demand for the commodity; that is, a demander able and willing to make such a sacrifice as will effectuate the supply. But if, subsequently, money falls in value in relation to the required labour, the same quantity of money obviously ceases to represent the same demand. No one, I apprehend, would venture to affirm that an ounce of pure silver, applied as a demand, would at the present time effectuate the supply of the same quantity of a commodity produced by labour alone, as an equal weight of silver would have effectuated under similar circumstances in the reign of Edward III.; since which period the value of silver, as compared with labour, has fallen five or six times.

Under any changes, however, which may take place in money, if the conditions of the supply of any commodity, or the elementary costs of its production, require a certain quantity of labour of a given description, the power of setting to work that quantity of labour, whether paid for by a larger or smaller quantity of produce or money, will be an effectual demand for it. Now it is obvious that this cannot be said of any product of labour whatever.

In the first place, there is no product of labour which is the sole condition of the supply of any one commodity. Consequently, while the necessary conditions of the supply of any commodity are a given quantity of labour of a certain description, no given quantity of any product of labour can continue, like a given quantity of labour itself, always to represent the same effectual demand for such commodity.

Secondly, there is no product of labour, which, applied directly, enters, as labour itself does, into the composition of all commodities that have value, and constitutes the chief element in the conditions of their supply. Consequently there is no product of labour which can represent the most important condition of the supply of all commodities, namely the quantity of labour absolutely necessary to their production; and we cannot say that a definite quantity of money, a definite quantity of corn, a definite quantity of cloth, or a definite quantity of any product of labour, subject, as they all are, to variations in their relation to labour, can continue to afford an effectual demand for that definite quantity of labour, without which the mass of commodities cannot by possibility be produced.

But if, when commodities are selling at their natural prices, the quantity of labour directly applied to the production of a particular article were to absorb exactly one half, three fourths, or any definite proportion of the whole value, as the demand for this proportion, whatever it might be, the half we will suppose, might be represented and measured by an amount of labour equal in quantity and quality to that which had been actually employed upon the commodity, it is obvious that an equivalent to double the quantity of such labour would be an effectual demand for the whole article produced, involving profits, rent, taxes, or any other accession to the difficulty of bringing the commodity to market, besides that which is occasioned by the necessary quantity of labour to be advanced.

Having this πȣ στω, this foundation to go upon, in all commodities, namely, the quantity of immediate labour actually worked up in them, the above conclusion seems to follow necessarily; that is, if a certain quantity of labour will represent and measure the demand for an aliquot part of the value of a commodity, the proper multiple of that quantity of labour must represent and measure the demand for the whole; and as there is no object but labour which can represent and measure the demand for that aliquot of the value of a commodity which consists of immediate labour, it follows necessarily that there is no object but labour which can represent and measure the demand for the whole of a commodity, the value of which is made up of various ingredients besides labour.

When, therefore, owing to changes in the value of money, relatively to labour, we can no longer represent a given demand by a given quantity of money, it appears that we may with accuracy represent such demand by a given quantity of labour.

It follows, therefore, that the power of commanding a given quantity of labour of a given character, together with the will to advance it, represents a given demand. It should be particularly observed, however, that this power is never possessed by the labourers themselves, but by those employers of labour who are both able and willing to pay the quantity of money or of commodities, whether great or small, which is necessary in the actual circumstances of the society to command the required quantity of labour.

 

1. Wealth of Nations, B. I. ch. vi. p. 74, 6th edit.
2. Though it is quite true, as will appear in the next chapter, that rent has little effect in determining the prices of raw produce, yet, in almost all commodities, a part of the price is resolvable into rent. The reason is, that the same kinds of products which sell for exactly the same prices, have a very different quantity and value of rent in them; but the greater is the value of the rent, the less is the value of the labour and profits; and therefore the varying value of rent in commodities has but little effect on their prices.
3. One of the two main elements of the cost of production, namely, the rate of profits, is peculiarly variable and pre-eminently dependent on supply and demand. Under the greatest variations in the rates of wages, we may suppose many commodities still to require in their production the same quantities of labour of the same kind; but under great variations in the rate of profits, we cannot suppose that any commodities should still require for their production the same amount of profits.