Principles of Political Economy · John Stuart Mill
Chapter XXI. Of Distribution, As Affected By Exchange.
In regard to manufactures, as opposed to raw products, it is to be remarked “that, as the course of price in the field of raw products is, on the whole, upward, so in that of manufactured goods the course is, not less strikingly, in the opposite direction. The reasons of this are exceedingly plain. In the first place, _division of labor_—the first and most powerful of all cheapeners of production, but for which there is in extractive industry but very limited scope—finds in manufacturing industry an almost unbounded range for its application; and, secondly, it is in manufacturing industry also that _machinery_, the other great cheapener of production, admits of being employed on the largest scale, and has, in fact, been employed with the most signal success. It follows at once from these facts, taken in connection with the further fact that industrial invention does not take place _per saltum_, but gradually—one invention ever treading on the heels of another—and that its advance seems to be subject to no limitation; it follows, I say, from these considerations, that that portion of the cost of manufactured goods which properly belongs to the manufacturing process must, with the progress of society, undergo constant diminution.... In all the great branches of manufacturing industry the portion of the cost incurred in the manufacturing process bears in general a large proportion to that represented by the raw material, while the influence of industrial invention, in reducing this portion of the cost, is, as every one knows, great and unremitting in its action.”
As has been said, “the two great cheapeners of production are division of labor and machinery, and the degree in which these admit of being applied to manufacture is mainly dependent upon the scale on which the manufacturing process is carried on. Those manufactures, therefore, that are produced upon a large scale are the sort of manufactures in which we may expect the greatest reduction in cost; in which, therefore, the fall in price, with the progress of society, will be most marked. But the manufactures which are produced upon the largest scale are those for which there exists the largest demand—that is to say, are those which enter most extensively into the consumption of the great mass of people. They are also, I may add, those in which a fall in price is apt to stimulate a great increase of demand. All the common kinds of clothing, furniture, and utensils fall within the scope of this remark; and it is in these, rather than in the commodities consumed exclusively or mainly by the richer classes, that we should, accordingly, expect to find the greatest marvels of cheapening.” But the articles of common consumption are those in which “the amount of manufacture bestowed upon them bears a smaller proportion to the raw material than is the case with the more elaborate manufactures. Such coarser manufactures, therefore, would feel the effects of the advancing cost of the raw material more sensibly than the refined sorts. Nevertheless, it can not be supposed to compensate the advantages due to the causes I have pointed out which fall to the share of the commoner sorts. It is in this class of goods that the most remarkable reductions in price have been accomplished in the past, and it is in them, probably, that we shall witness in the future the greatest results of the same kind.”
Moreover, the cheapened cost of transportation has admitted to England and the Continent the wheat supplies of our Western States at a low price even after having been carried to transatlantic markets. New methods of getting food-supplies from foreign countries act equally with improvements at home. § 5. Effect of the Progress of Society in moderating fluctuations of Value. Thus far, of the effect of the progress of society on the permanent or average values and prices of commodities. It remains to be considered in what manner the same progress affects their fluctuations. Concerning the answer to this question there can be no doubt. It tends in a very high degree to diminish them. In poor and backward societies, as in the East, and in Europe during the middle ages, extraordinary differences in the price of the same commodity might exist in places not very distant from each other, because the want of roads and canals, the imperfection of marine navigation, and the insecurity of communications generally, prevented things from being transported from the places where they were cheap to those where they were dear. The things most liable to fluctuations in value, those directly influenced by the seasons, and especially food, were seldom carried to any great distances. In most years, accordingly, there was, in some part or other of any large country, a real dearth; while a deficiency at all considerable, extending to the whole world, is [now] a thing almost unknown. In modern times, therefore, there is only dearth, where there formerly would have been famine, and sufficiency everywhere when anciently there would have been scarcity in some places and superfluity in others.
The same change has taken place with respect to all other articles of commerce. The safety and cheapness of communications, which enable a deficiency in one place to be supplied from the surplus of another, at a moderate or even a small advance on the ordinary price, render the fluctuations of prices much less extreme than formerly. This effect is much promoted by the existence of large capitals, belonging to what are called speculative merchants, whose business it is to buy goods in order to resell them at a profit. These dealers naturally buying things when they are cheapest, and storing them up to be brought again into the market when the price has become unusually high, the tendency of their operations is to equalize price, or at least to moderate its inequalities. The prices of things are neither so much depressed at one time, nor so much raised at another, as they would be if speculative dealers did not exist. Mr. Mill uses the term “speculative” in a different sense from that which is customary in this country. Merchants who buy outright and store up grain are not speculators in the sense in which the word is used with us; but those gamblers who purchase, “for future delivery,” grain which they never see, and which they sell in the same way, are here known as speculators.
It appears, then, that the fluctuations of values and prices arising from variations of supply, or from alterations in real (as distinguished from speculative) demand, may be expected to become more moderate as society advances. With regard to those which arise from miscalculation, and especially from the alternations of undue expansion and excessive contraction of credit, which occupy so conspicuous a place among commercial phenomena, the same thing can not be affirmed with equal confidence. Such vicissitudes, beginning with irrational speculation and ending with a commercial crisis, have not hitherto become either less frequent or less violent with the growth of capital and extension of industry. Rather they may be said to have become more so, in consequence, as is often said, of increased competition, but, as I prefer to say, of a lower rate of profits and interest, which makes capitalists dissatisfied with the ordinary course of safe mercantile gains. The connection of this low rate of profit with the advance of population and accumulation is one of the points to be illustrated in the ensuing chapters. Mr. Cairnes also adds some investigations as to the fluctuations of value: “Hitherto I have examined the derivative laws of value in so far only as they are exemplified in the movements of _normal_ prices. It will be interesting now to consider whether it is possible to discover in the movements of _market_ prices any corresponding phenomena.
“Taking manufactures first, it is evident at once that, as regards conditions of protection, the circumstances of the case are such as to secure, in general, (1.) great rapidity and great certainty in bringing commodities to market. A deal table may be made in a few hours, a piece of cloth in a few weeks, and a moderate-sized house in a month or little more. Tables, cloth, and houses may be produced with certainty in any quantity required. It results from this that it is scarcely possible that, under ordinary circumstances, the selling price of a product of manufacture should for any long time much exceed its normal price. (2.) The nature of manufactures is, in general, such as to fit them admirably for distant transport. Any considerable elevation of price, therefore, is pretty certain to attract supplies from remote sources. (3.) Further, considered in their relation to human needs, I think it may be said of manufactured goods, that either the need for them is not very urgent, or, where it happens to be so, substitutes ... may easily be found. From all these circumstances it results that an advance in the price ... either attracts supplies, or deters purchasers, ... preventing any great departure from the usual terms of the market.
“Turning now to the products of agricultural, pastoral, or, more generally, ‘extractive’ industry, we find the circumstances under which this class of goods is brought to market in all respects extremely different from those which we have just examined, and such as to permit a much wider margin of deviation for the market from the normal price. Here the period of production is longer, the result of the process much more uncertain, the commodity at once more perishable and less portable, and human requirements in relation to it are mostly of a more urgent kind: (1.) The shortest period within which additions can be made to the supply of food and raw material of the vegetable kind is in general a year, and, if the commodity be of animal origin, the minimum is considerably larger. (2.) Again, the farmer may decide upon the breadth of ground to be devoted to a particular crop, or upon the number of cattle he will maintain; but the actual returns will vary according to the season, and may prove far in excess or far in defect of his calculations. These circumstances all present obstacles to the adjustment of supply and demand, and consequently tend to produce frequent and extensive deviations of the market from the normal price.
Nor are the other conditions of the case such as to neutralize the influence of such disturbing agencies. (3.) The nature, indeed, of some of the principal agricultural products fits them sufficiently well for distant transport, and so far tends to correct fluctuations of price. But, on the other hand, (4.) the relation of these products to human wants is such as greatly to enhance that tendency to violent fluctuation incident to the conditions of their production. More especially is this the case with the commodity, whatever it may be, which forms the staple food of a people. For observe the peculiar nature of human requirements with reference to such a commodity. They are of this kind, that, given the number of a population, the quantity of the staple food required is nearly a fixed quantity, and this almost irrespective of price. Except among the poorest, increased cheapness will not stimulate a larger consumption; while, on the other hand, all, at any cost within the range of their means, will obtain their usual supply. The consequence is that, when even a moderate deficiency or excess occurs in the supply of the staple food of a people, in the one case (_a_), the competition of consumers for their usual quantum of food rapidly forces up the price far out of proportion to the diminution in the supply; in the other (_b_), no one being inclined to increase his usual consumption, the competition of sellers, in their eagerness to find a market for the superfluous portion of the supply, is equally powerful to depress it.”
I. (1.) Wages fall. (2.) Profits rise (less if rents rise). (3.) Rents rise. II. We will now take up the second supposition under A, that while Capital is advancing Population remains stationary. Then, of course (1), wages will rise; and, as there is no improvement to cheapen the cost of their real wages, there will be an increase in cost of labor to the capitalist, and (2) profits will fall. If, now, the laborers, being better off, demand more food, the new food would cost more, as the margin of cultivation was pushed down, and (3) rents would inevitably rise. But not only have the laborers received more real wages, but since that change the cost, as just described, of these real wages has increased. Therefore (2), profits would fall still more than by the rise of real wages. In this supposition, consequently, while the laborer gains, so does the landlord: II. (1.) Wages rise. (2.) Profits fall (more if rents rise). (3.) Rents rise.
A. It is easy for us now to take into our view the total effects under A, and see what the combined action of I and II would be. That is, if both Capital and Population (improvements remaining stationary) increase, what will be the effect on Wages, Profits, and Rent? Of course, we must suppose that Capital and Population just keep pace with each other; and in that case (1) real wages remain the same, each laborer receiving the same quantity and same quality of commodities as before. Hence, if each laborer receives the same quantity as before, and there are many more laborers, there will be an increased demand put upon the soil for food, poorer soils will be cultivated, and the cost of the products will rise. So (3) rents rise. But if each laborer receives the same quantity of real wages as before, and the cost of them has risen, as just explained, an increased cost of labor will result which must come out of profits. (2) Profits will fall. So that the results of A upon distribution, taken separately from B, are that the owner of capital loses; but the owner of land again gains. A. (1.) Wages the same. (2.) Profits fall. (3.) Rents rise. § 3. The arts of production advancing, capital and population stationary.
Now, let us go back to our first general group of causes, B—an advance in the arts of production (while capital and population remain stationary). We can now study by themselves the effect of improvements on wages, profits, and rent. The general effects arising from the extended introduction of machinery into agriculture and manufactures, the lowered cost of transportation by steam, have been to lessen the value of articles consumed chiefly by the laboring-classes. For the sake of clearness, imagine that the improvement comes suddenly. The first effect will be to lower the value and price of articles entering into the real wages of the laborers; and, if those consist mostly of food, there will be a rise in the margin of cultivation and a fall in rents (3). It has been previously shown(299) that improvements retard, or put back, the law of diminishing returns from land (or in manufactures compensate for it), and so lower rents. The poorest soil cultivated is now of a better grade than before, and the produce is yielded at a less cost and value; so that the land with which the best grades are compared, to determine the rent, is not separated from the best grades by so wide a gap. It would at first blush seem, then, that the interests of the landlord were antagonistic to improvements, since they lower rents; but, in practice, it is not so, as we shall soon see.
We have seen that improvements cheapen the price of articles entering into the real wages of the laborer. Having had a given sum as money wages before the change, then, when the sudden change of improvements came, it lowered prices to the laborer, and the same money wages bought more (1) real wages. If nothing more happened, we could see that improvements raised real wages—without lowering (2) profits (because cost of labor remains the same, since the lowered cost of the articles consumed was exactly in proportion to the increase of real wages). And, if the laborers chose to retain this higher standard, this would be the situation. Sadly enough, however, in practice they are apt to be satisfied with the old standard; and the amount of real wages to give the old standard of living can be had now for less money wages. While only the same number, without any increase, can live at the new (higher) standard, a larger number can live at the old (lower) standard. In short, the obstacles to an increase of population will be removed by the possession of higher money wages. After a generation, it is very probable that a larger number of laborers will be in existence living at the same (or possibly a slightly higher) standard of real wages, and money wages will have fallen.
Now we can understand better than before what would be the practical result of the causes under B. (3.) Rent has fallen; money wages have fallen (even if (2) real wages have not); and, since real wages have not fallen in the proportion that their cost has been reduced, (2) profits will have risen. The general result of the causes under B alone, acting as just described, will then be: B. (1.) Real wages remain the same; money wages less. (2.) Profits rise. (3.) Rents fall. § 4. Theoretical results, if all three Elements progressive. We have considered, on the one hand, under A, the manner in which the distribution of the produce into rent, profits, and wages is affected by the ordinary increase of Population and Capital; and on the other, under B, how it is affected by improvements in production, and more especially in agriculture, as follows: A. (1.) Wages the same. B. (1.) Real wages the same, money wages less. A. (2.) Profits fall. B. (2.) Profits rise. A. (3.) Rents rise. B. (3.) Rents fall. The effects are clearly contrasted. Under A, we see a tendency to a rise of rents (3), an increased cost of labor, and a fall of profits (2); under B, a fall of rents (3), a diminished cost of labor, and a rise of profits (2). We have, therefore, analyzed the forces belonging to the progress of industry, and found two distinct and antagonistic forces, working against each other. If, at any period, improvements (B) advance faster than population and capital (A), rent and money wages will tend downward and profits upward. If, on the other hand, population advances faster than improvements (B) either the laborers will submit to a reduction in the quantity or quality of their food, or, if not, rent and money wages will progressively rise, and profits will fall.
In the United States the worst land in cultivation is of a high quality (except sometimes in the immediate vicinity of markets or means of conveyance, where a bad quality is compensated by a good situation); and even if no further improvements were made in agriculture or locomotion, cultivation would have many steps yet to descend, before the increase of population and capital would be brought to a stand; but in Europe five hundred years ago, though so thinly peopled in comparison to the present population, it is probable that the worst land under the plow was, from the rude state of agriculture, quite as unproductive as the worst land now cultivated, and that cultivation had approached as near to the ultimate limit of profitable tillage in those times as in the present. What the agricultural improvements since made have really done is, by increasing the capacity of production of land in general, to enable tillage to extend downward to a much worse natural quality of land than the worst which at that time would have admitted of cultivation by a capitalist for profit; thus rendering a much greater increase of capital and population possible, and removing always a little and a little further off the barrier which restrains them; population meanwhile always pressing so hard against the barrier that there is never any visible margin left for it to seize, every inch of ground made vacant for it by improvement being at once filled up by its advancing columns. Agricultural improvement may thus be considered to be not so much a counter-force conflicting with increase of population as a partial relaxation of the bonds which confine that increase.
(1.) Real wages, probably higher. (2.) Profits fall. (3.) Rents rise. It is possible that a different combination from the above may sometimes occur in the causes which underlie the progress of society: (1.) There may be a period in which capital is increasing more rapidly than population, and when there seems to be an era of industrial improvements also. Then both wages and profits will be high, and it will be a period of general satisfaction. (2.) If capital goes on increasing, but improvements are few, wages will rise; but profits must suffer a fall. In this country, where population has not yet increased so as to press seriously against subsistence, and where capital increases with incredible swiftness, these cases are often exemplified. The extraordinary resources of the newer States have permitted an unlimited increase of population, and capital has found no difficulty in finding an investment. But yet those States which have been burdened with the disabilities of the old slave _régime_ are far behind the others. The changes in the rank of the States, in respect of population, at each decade, as seen in Chart No. XVI, are suggestive. Chart XVI. _Changes of the Rank of the States in the Scale of Relative Population, from 1790 to 1880._
Text from Project Gutenberg, public domain in the United States.