From Stanley Jevons, Political Economy, 1881.
Jevons was one of the founders of the 'marginalist' schools of economics which still dominates orthodox thought. Modern academic economics has added all sorts of refinements to the basic ideas presented by Jevons below, but they remain basic.
Jevons is worth reading because he writes simply and with an evident passion to combat socialist ideas, which historically and logically is typical of 'marginalist' economics. Bear in mind, though:
(a) that a great deal of effort and brainpower has been devoted over the last 120 years to sorting out the technicalities of the basic argument presented by Jevons, and that all the more obvious technical problems have indeed been smoothed out, with the creation of an impressive and ingenious mathematical framework for this theory;
(b) that not all 'marginalist' economists have been, or are, right-wing. There have in fact been socialists - such as many of the first Fabians in England - who not only subscribed to 'marginalist' economics, but based their socialist ideas on deductions from 'marginalist' principles.
The Requisites of Production. The first thing in industry, as we now see, is to decide what we want; the next thing is to get it, or make it, or, as we shall say, produce it, and we ought obviously to produce it with the least possible labour. To learn how this may be done, we must inquire what is needful for the production of wealth. There are, as is commonly and correctly said, three requisites of production; before we can, in the present state of society, undertake to produce wealth, we must have the three following things:-
(1) Land, (2) Labour, (3) Capital.
Capital is the result of saving or abstinence, that is, it can only be obtained by working to produce wealth, and then not immediately consuming that wealth. The poor savage who has to labour hard every day for fear that he may have to go without food, has no capital; but when he has food in hand, and can employ himself in making bows and arrows to facilitate the capture of animals, he is investing capital in the bows and arrows.
Whenever we work in this way for a future purpose, we are living on capital and investing it. The abstinence consists in holding off from the enjoyment of sornething which we have produced, or might produce with the same labour. To save is to keep something whole or untouched for future use; we save it as long as we do not consume it. If I have a stock of flour and eat it up, there is an end of the flour, and I cannot be said to save that. But if, while eating the flour, I am engaged in making a plough or a cart, or any other durable thing which will help me in production, I have turned one form of capital into another form. I might have eaten the flour in idleness, in which case it would not have been capital. But, while eating it, I worked for a future purpose. In so doing I am said to invest capital, which means to turn circulating into fixed capital, or less durable into more durable capital. Capital, accordingly, is invested for Ionger or shorter periods according to the durability of the form in which it is invested. A good plough will perhaps last twenty years; all through that time the owner should be getting back by its use the benefit of the labour and capital spent in making it. When it is worn out, he ought to have all the capital it cost paid back, with some increase or interest. Capital invested in railway wagons should pay itself back during the ten years that the wagons last on an average.
The capital invested in any work may always be said to consist of wages or what is bought with wages. Thus the capital invested in railways really consisted of the food, clothes, and other commodities consumed by the labourers who made the railways. It is true that tools also were needed as well as the iron rails, sleepers, bricks, and other materials required for the work. But as these things had previously been made by labour, we may consider that the capital really invested in them was the wages of the labourers who had already made them. Thus, when we go far enough back, we always find that the capital invested consisted of the maintenance of labourers.
Investment of Capital. We have two things to consider with regard to the investment of capital, firstly, the quantity of the capital, and secondly, the length of time for which it is invested. The same quantity of capital will keep more or less men at work, according as it is invested for shorter or longer periods. A man in growing potatoes only needs to wait for the result of his labour during one year on an average. If his food and clothing during one year cost thirty pounds, then capital worth thirty pounds is sufficient to keep him at work in this way. Three men cultivating potatoes will of course require three times as much capital, or ninety pounds worth; ten men will need three hundred pounds worth, and so on in proportion. But in growing vines it is necessary to wait several years after the vines are planted before they begin to bear. Suppose it to require five years waiting, then the labourer will want 5 x 30, or one hundred and fifty pounds worth of capital before he can grow vines. Three vine-growers will want 3 x 5 x 30, or four hundred and fifty pounds worth of capital; ten men, 10 x 5 x 30, or fifteen hundred pounds worth, and so on in proportion. Thus we see clearly that the capital required in any kind of industry is proportional to the number of men employed, and also to the length of time for which the capital remains locked up, or invested on the average. But there is no fixed proportion whatever between the number of labourers and the capital they require - it entirely depends upon the length of time in which the capital is turned over, that is, invested, and got back again. A poor savage manages to live on a few days' capital in hand; a potato grower on one year's capital. On a modern farm in which many durable improvements are made, the quantity of capital required is very much greater. To employ men upon a railway requires immense capital, because so much of it is sunk in a very fixed and durable form in the embankments, tunnels, stations, rails, and engines.
DISTRIBUTION OF WEALTH.
How Wealth is Shared. We have learned what wealth is, how it is to be used, and how it may be produced in the greatest quantities, with the least possible labour, but we have yet to enter on the more difficult parts of our subject. We must now try to make out how wealth is shared among those who have a hand in producing it. The requisites of production, as we have seen, are land, labour, and capital; if these were all supplied by the same person, no doubt the produce ought all to belong to him, with the exception of what is taken by the government as taxes. But, in a state of society such as exists at present. the labourer seldom owns all the land and capital he uses; he goes to work on another man's farm, or in another man's factory; he lives in another man's house, and often eats another man's food; he derives benefits from other men's inventions, and discoveries; and he uses roads, railways, public buildings, &c., furnished at the cost of the community.
The production of wealth, therefore, depends not on the will and exertions of a single man, but on the proper bringing together of land, labour, and capital, by different persons and classes of persons. These different persons must have their several shares of the wealth produced; if they furnish something requisite for producing, they can make a bargain and ask for more or less of the produce. But it is not mere chance or caprice which governs the sharing of wealth, and we have to learn the natural laws according to which the distribution takes place. We must ascertain how it is that many of the population get so little, and some so much. Men work very hard on a farm and raise crops; the landlord comes and takes away a large part as rent, so that the labourers have barely enough to live upon.
When we are able to understand why the labourer gets so little at present, we shall see, perhaps, how he might manage to get more, but in any case we shall see that it is due in great part to the laws of nature.
The part of our subject which we are now going to consider is called the distribution of wealth, because it teaches us how the wealth produced is distributed between the labourers, the owners of land, the owners of capital, and the government. The part which the labourer gets is called wages; the share of the land owner is called rent; that of the capitalist is interest; and the government take taxes. We may say that, as a general rule, the produce of work: is divided into four shares, which may be thus shown: produce = wages + rent + interest + taxes.
39. The Labourer's Share - Wages. It ought to be carefully remembered that the names wages, rent, and interest, as here used, do not exactly agree in meaning with the names as we employ them in common life. The wages paid to workmen are sometimes more than wages, being partly interest; the rent almost always consists partly of interest; and what is called interest may in some degree be really w ages or rent.
By wages we mean, in political economy, nothing but what goes to pay for the trouble of labour. But many workmen own their own tools; masons have a boxful of chisels, mallets, rules, etc.; carpenters often require twenty or thirty pounds' worth of planes and other implements; a pianoforte maker sometimes owns seventy pounds worth of tools; even gardeners require spades, rakes, a barrow, scythe, or perhaps a mowing machine and a roller.
Now, all such tools represent so much invested capital, and a certain amount of interest must be paid for this capital. A pianoforte maker might expect five pounds a year as interest upon the cost of his tools. But true wages, are what remains after allowance has been made for such interest, and it would be proper to subtract also what is paid to the government as taxes.
The Land Owner's Share - Rent, the second part of the produce, means, in political economy, what is paid for the use of a natural agent, whether land, or beds of minerals, or rivers, or lakes. The rent of a house or factory is, therefore, not all rent in our meaning of the word. Capital has been spent in building the house or factory, and interest must be paid on this capital; we must then deduct this interest from what is commonly called the rent, before we can find out what is really rent. The ground rent of a house is the rent paid for the ground on which it stands, and this will be more nearly the true rent, apart from interest. Similarly, the ordinary rent of a farm will usually include interest upon the capital spent on the farm buildings, roads, gates, fences, drains, and other improvements. We shall afterwards learn exactly how true rent arises.
The Capitalist's Share. The proper share of the capitalist is interest; but this is usually a good deal less than what actually remains in the hands of the capitalist. Business is generally carried on by some capitalist who rents a piece of land, builds a factory, purchases machinery, and then employs men to work the machinery, paying them wages.
The capitalist himself often acts as manager, and works every day almost as long as the workmen. When the goods are finished and sold, he keeps the whole of the money he gets for them; but then he has already paid out a large sum as wages, while the goods were being made; another part goes to pay the rent of the land which he has hired. Having struck off these portions, there ought to remain a certain profit, part of which he uses to live upon. :But even this profit consists of more than interest upon his capital. It should include also a payment for his labour in superintending the business. The manager of a factory may seldom touch the cotton, flax, iron, or other material, which is manufactured; nevertheless, he works with his head and his pen, caleulating the prices at which he can produce goods, inquiring where he can buy the materials most cheaply, choosing good workmen, keeping the accounts straight, and so on. Severe mental labour is really far more difficult and exhausting than manual labour; and in raising up a good business, and carrying it through times of danger, a manager has to undergo great anxiety and mental fatigue. Thus, it is necessary that a successful manager should receive a considerable share of the produce, so as to make it worth his while to give this labour. His share is called the wages of superintendence, and, although usually much larger than the share of a common labourer, it is really wages of the same nature.
Another part of the capitalist's so-called profit ought to be laid aside as recompense for risk. There is always more or less uncertainty in trade, and even the most skilful and careful manager may lose money by circumstances over which he has no control. Sometimes, after building a factory, the demand for the goods which he is going to produce falls off; sometimes the materials cannot be bought; perhaps it is discovered, when too late, that the factory has been built in an unsuitable place; occasionally, too, the workmen are discontented, and refuse to work for such wages as the capitalist can afford to pay. Now, whenever any of these mistakes or misfortunes happen, it is the capitalist who mainly suffers, because he loses a great deal of money, on which he might otherwise have lived comfortably. Sometimes men who have worked hard all their lives, and grown rich by degrees, lose all their wealth again in the end, by some error of judgment or by some unfortunate event due to no fault of their own.
A capitalist, then, must have some inducement for running into these disagreeable risks; by lending his capital to the government he might get interest for it, and be nearly sure not to lose. If, then, he puts it into trade, and runs the risk of loss, he must have a recompense for the risk.
This ought to be at least enough to make the profits of the successful business balance the losses of the unfortunate ones, so that on the average capitalists will get the interest of capital and the wages of superintendence free from loss. We may say, then, that:
profit = wages of superintendence + interest + recompense for risk.
About Interest. That which is paid for the use of capital altogether apart from what is due for the trouble and risk of the person conducting the business, is called interest. This interest, of course, will be greater or less according as the amount of capital is greater or less; it will also be greater or less according as the capital. is employed for a longer or shorter time. Thus the rate of interest is always stated in proportion to the capital sum and to the time; five per cent per annum means that, for every hundred pounds of capital, five pounds are paid during every year in which the capital is used, and in the same proportion for longer or shorter times.
The rates of interest actually paid in business vary very much, from one or two per cent. up to fifty per cent. or more. When the rate is above five or six per cent., it will be to some extent not true interest, but compensation for the risk of losing the capital altogether. To learn the true average rate of interest, we must inquire what is paid for money lent to those who are sure to pay it back, and who give property in pledge, so that there may be no doubt about the matter. It seems probable that the true average rate of interest in England is about four per cent, but it varies in different countries, being lower in England and Holland than anywhere else. In the United States it is probably six or seven per cent.
The most important fact about interest is that it is the same in one business as in another. The rates of profit differ very much, it is true, but this is because the labour of superintendence is different, or because there is greater risk, in one trade than another. But the true interest is the same, because capital, being lent in the form of money, can be lent to one trade just as easily as to another. There is nothing in circulating capital which fits it for one trade more than another: accordingly it will be lent to that trade which offers ever so little more interest than other trades. Thus there is a constant tendency to the equality of interest in all branches of industry.
What is value? In exchanging some goods for other goods, there arises the question, How much of one kind shall be given for so much of the other ?
Some things are said to be valuable, as in the case of a gold watch or a diamond ring, because in exchange for them we can get a great quantity of other articles. Ashes are of little or no value, because we cannot get anything in exchange for them. Now this word value is a very difficult one, and is employed to mean different things. We may say that quinine is valuable for curing fevers, that iron is valuable for improving the blood, or that water is valuable for putting out fires. Here we do not mean valuable in exchange, for quinine would cure fevers just as well if it cost a penny an ounce instead of some ten shillings. Water, if we can get it at the right time, puts out a fire whether it costs much or little or nothing.
It is clear, then, that by valuable we often mean valuable in use. The words value and valuable are in fact ambiguous. There is value in use and value in exchange, and many things which would be commonly said to have little value in exchange have much value in use. But of these meanings, 'value in use' is nothing but the utility of a thing to us, that is, the utility of all such portions of it as we can actually employ. Thus, the value in use of water means the utility of the water that we drink, or wash in, or cook with, or water the roads with, and this utility is very great.
But of course it cannot mean the utility of water which is not useful to us, but on the contrary hurtful, as in the case of floods, damp houses, wet mines, and so forth.
We may now see how true was the remark of Genovesi, the Italian economist, that 'Exchange consists in giving the superfluous for the necessary,' or, as I should prefer to say, the comparatively superfluous for the comparatively necessary. He who has more than enough of one article has already enjoyed all the good which that article can do to him, but he probably needs supplies of other articles. The exchange, like an act of mercy, blesses both him who gives and him who receives, because what each receives in exchange is much wanted and has high utility. In England, for instance, we possess a great deal of coal, and France produces plenty of good wine. We could have little or no wine in England unless we got it from France or some foreign country, and France also is much in want of coal. It is obvious that there is a great gain of utility if we give some of our comparatively superfluous coal in exchange for some of the abundant wine of France.
It has been objected to commerce that it is sterile and produces no new goods. There exist neither more nor less coal and wine after they are exchanged than before. But in political economy we treat of utility and wealth; the question is whether things are usefully consumed or not. Now that which is not wealth if it were consumed by one person, becomes wealth when handed over to another person for consumption. Though exchange cannot create the material of wealth, it creates wealth because it gives utility to the material.
Value means Proportion in Exchange. When we speak of the value of a thing in exchange, we mean how much of some other thing we can get for it. This of course will depend upon the nature of that other thing. Obviously, I can get for a shilling much more potatoes than bread, and bread than beef, and beef than essence of beef. Therefore, when we speak of the value of a thing, we ought always to say what it is to be valued by. The word value only means that so much of one thing is given for so much of the other, and it is the proportion of these quantities which measures the values of the thing. A ton of pig-iron can usually be got for a quarter of corn; here the
proportion is one to one. To get a ton of copper, we should probably have to give thirty quarters of corn; here the proportion is that of one to thirty. There cannot be such a thing as value in exchange, unless there be proportion -so much of one commodity for so much of another.
Usually, indeed, we measure the values of things by their prices. The price is the quantity of money which we give for a thing; in this case the proportion is between the quantity of money and the quantity of goods we
get for it, as when we give sixty shillings for ten yards of carpet. We shall learn later on that money is a kind of commodity, which has utility and value like other commodities. But there is great convenience in always thinking and speaking of values in money, because we can then readily compare the value of one thing with that of any other. If a pound of potatoes costs one penny, a pound of bread threepence, and a pound of beef ninepence, we can see at once that a pound of beef is of the same value as three pounds of bread and nine pounds of potatoes, and we can judge how much of each to use.
Laws of Supply and Demand. In the next place, we must try to understand how the values of things are governed, and made to change from time to time.
The principal laws which govern values are called the laws of supply and demand, and they are very important indeed. Supply means the quantity of any goods which people are willing to give in exchange at a certain value, and demand means similarly the quantity of goods which people are willing to take in exchange; but, before a person can judge how much he wishes to buy of a particular kind of goods, he must know its price, that is, its proportion in exchange for money. If bread, instead of being threepence per pound, becomes fourpence, a poor person would perhaps decide to take less bread, and to buy more potatoes. If beef, instead of being ninepence should rise to a shilling, or fourteenpence a pound, some people would refuse to buy it altogether, and others would buy less than before. The supply of things varies similarly; if the price of meat rises high, farmers who own cattle bring them to market, in order to get a good profit by selling them; if the price falls low, they keep their cattle to sell at another time.
The Laws of Supply and Demand may be thus stated: a rise of price tends to produce a greater supply and a less demand; a fall of price tends to produce a less supply and a greater demand. Conversely, an increase of supply or a decrease of demand tends to lower price, and a decrease of supply or an increase of demand to raise price.
We can now understand how the price of any kind of goods is decided. The price must be such that the quantity demanded at any time is equal to the quantity supplied. If those who want goods at a certain price, cannot get them, they will have to offer a higher price, so that they may induce other people to sell. The higher the price the greater the supply, as we have seen; moreover, if some people in a market are offering a higher price, it soon becomes known to other dealers. When a farmer's wife carries a basket of butter to sell at the Butter Cross in the neighbouring market town, she soon learns whether the supply is greater or less than usual. If the purchasers are few and slow in buying, she begins to fear that she may have to carry her butter back unsold, and go without the crockery and calico and other things which she intended to buy with the money. Then she begins to ask a penny or twopence a pound less, and the other sellers of butter are obliged to lower their prices also, since no one would buy butter from one woman at 1s. 6d., if he could get it as good from the next person at 1s.
4d. But, if few people bring butter to market, or if there are many purchasers with money in their pockets, the scene is quite changed. Those who have brought butter, find that they will have no difficulty in selling all they have; it is the purchasers who now become anxious to buy before all is gone, and their eagerness soon shows the sellers that they may ask higher prices. It is by this higgling of the market, by sellers asking the highest price they think they can get, and buyers trying to buy at the lowest price which they think will be taken-that the market price of any commodity is settled.
The market price will be such that the demand at that price will equal the supply at that price The quantity of butter or any other commodity that is sold must equal what is bought, because it is not sold until it is bought; but the price will settle itself accordingly.
How Value depends upon Labour. We now come to the great question whether value is produced by labour, or how it is connected with labour. Some economists, observing that, when a thing like gold is very valuable, men spend a great deal of labour in getting it, have said that the labour spent upon it is the cause of the high value. This is quite wrong; for if it were true, anything, upon which great labour has been spent, ought to be very valuable; everybody knows that such is not the case. Great labour may be expended in writing, printing, and binding a book; but, if nobody wants the book, it is valueless, except as waste paper. A vast amount of labour was spent on building the Thames Tunnel, but, as few people wished to go through it, the tunnel was of small value, until it was required for a railway. Thus it is quite certain that we cannot make a thing valuable by simply labouring at it; we must labour in such a way as to make the thing useful.
On the other hand, substances may be very valuable which have cost little or no labour. When a shepherd in Australia happens to pick up a nugget of gold on the mountain side, it takes no labour worth mentioning to pick it up, yet the gold is just as valuable in proportion to its weight as any other gold. Some gold mines produce a great quantity of gold: others which have cost quite as much to sink, produce little; nevertheless the gold out of the one mine is sold at the same price in proportion to its weight and fineness as that out of the other mine. Thus it is quite certain that labour is not the cause of value. Gold is valuable because a great many people want more gold than they have already got, and whenever a thing is valuable it is because somebody wants it.
But we may look at this matter in another way. If it were possible to get a valuable thing like gold with little labour, many people would become gold miners. Much gold would then be produced; if this were wanted as much as what was already in use, it would be as valuable. But no one wants an unlimited quantity of any substance. Wealth, as we saw, must be limited in supply; if gold became as plentiful as lead or iron, it could not possibly remain as valuable as it is now. People would have far more than they could employ for ornaments, watches, gilding and so forth; there would be a large surplus to be used in making pots and pans, for which it is less needed.
Now we can see through the whole subject of value. When much of a substance can usually be produced with little labour, the substance becomes so plentiful that people are satisfied with the supplies of it which they have; they do not want more or at least do not want it so urgently. It follows that they are unwilling to give much wealth for it. Thus the labour spent upon producing a commodity does not affect the value of that commodity, unless it alters the quantity of it which people can get, and thus makes a further supply of the commodity more or less useful than before.
Why Pearls are valuable. To make this still more plain, let us endeavour to answer this difficult question, 'Do men dive for pearls because pearls fetch a high price, or do pearls fetch a high price because men must dive in order to get them ?' Pearl-diving is a very dangerous and laborious kind of work. The divers have to jump into the deep sea with heavy weights to carry them down, and they must hold their breath a long time while they are engaged in collecting the oyster shells at the bottom. The number of good pearls which they generally get is small compared with the great toil of getting them. It follows that, on the average, they must receive a high price for what they do find, otherwise they would not have adequate wages for such work. But this alone is not a sufficient reason for the pearls being so valuable, otherwise the mother of pearl shells, in which the pearls are found, and brought up, would as valuable as the pearls. But mother of pearl is a very cheap substance. Again, if it were merely a question of labour, a diver might go down anywhere, and, bringing up the first stone or shell he found, insist on selling it for a high price, because he had dived for it. The truth is, that pearls are valuable because there are many ladies who have not got pearl necklaces, and who would like to have them, and those who have some pearls would like to get more and finer ones. In short, then, pearls are valuable because they are useful to ladies who want more pearl ornaments: they are thus useful because the ladies have not hitherto been able to get as many as they would like; and they have not been able to get many, because it is so difficult to fish them up from the bottom of the sea. Here we have the whole theory of value and labour. The labour which is required to get more of a commodity governs the supply of it; the supply determines whether people do or do not want more of it eagerly; and this eagerness of want or demand governs value.