Principles of Economics

Marshall, Alfred
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London: Macmillan and Co., Ltd.
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8th edition
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§ 1. As was indicated at the beginning of last chapter, we are now to supplement the study of the influence of demand on distribution, by a study of the reflex influence of remuneration on the supply of different agents of production. We have to combine the two in a preliminary general view of the parts played by cost of production and by utility or desirability in governing the distribution of the national dividend between different kinds of labour and the owners of capital and land.


Ricardo and the able business men who followed in his wake took the operation of demand too much for granted as a thing which did not need to be explained: they did not emphasize it, nor study it with sufficient care; and this neglect has caused much confusion, and has obscured important truths. In the reaction, too much insistence has been laid on the fact that the earnings of every agent of production come from, and are for the time mainly governed by the value of the product which it takes part in producing; its earnings being so far governed on the same principle as the rent of land; and some have even thought it possible to constitute a complete theory of Distribution out of multifold applications of the law of rent. But they will not reach to that end. Ricardo and his followers seem to have been rightly guided by their intuitions, when they silently determined that the forces of supply were those, the study of which is the more urgent and involves the greater difficulty.


When we inquire what it is that governs the [marginal] efficiency of a factor of production, whether it be any kind of labour or material capital, we find that the immediate solution requires a knowledge of the available supply of that factor; for if the supply is increased, the thing will be applied to uses for which it is less needed, and in which it is less efficient. And the ultimate solution requires a knowledge also of the causes that determine that supply. The nominal value of everything, whether it be a particular kind of labour or capital or anything else, rests, like the keystone of an arch, balanced in equilibrium between the contending pressures of its two opposing sides; the forces of demand press on the one side, and those of supply on the other.


The production of everything, whether an agent of production or a commodity ready for immediate consumption, is carried forward up to that limit or margin at which there is equilibrium between the forces of demand and supply. The amount of the thing and its price, the amounts of the several factors or agents of production used in making it, and their prices—all these elements mutually govern one another, and if an external cause should alter any one of them the effect of the disturbance extends to all the others.


In the same way, when several balls are lying in a bowl, they mutually govern one another's positions; and again when a heavy weight is suspended by several elastic strings of different strengths and lengths (all of them being stretched) attached to different points in the ceiling, the equilibrium positions of all the strings and of the weight mutually govern one another. If any one of the strings is shortened, everything else will change its position, and the length and the tension of every other string will be altered also.


§ 2. We have seen that the effective supply of any agent of production at any time depends firstly on the stock of it in existence, and secondly on the willingness of those, in whose charge it is, to apply it in production. This willingness is not decided simply by the immediate return which is expected; though there may be a lower limit, which in some cases may be described as a prime cost, below which no work will be done at all. A manufacturer for instance has no hesitation in declining to put his machinery in motion for an order that will not cover the extra direct money outlay caused by the work, together with the actual wear-and-tear of the machinery; while there are somewhat similar considerations with regard to the wear-and-tear of the worker's own strength and to the fatigue and other discommodities of his work. And, though for the present we are concerned with cost and remuneration under normal conditions rather than with the direct cost to the individual of any particular piece of work that he does; yet it may be well to make a short statement on the subject here in order to avoid misconceptions.


It has already been noticed*22 that when a man is fresh and eager, and doing work of his own choice, it really costs him nothing. For as some socialists have urged with pardonable exaggeration, few people know how much they enjoy moderate work, till something occurs to prevent them from working altogether. But rightly or wrongly, most persons believe that the greater part of the work which they do, when earning their living, yields them no surplus of pleasure; but on the contrary costs them something. They are glad when the hour for stopping arrives: perhaps they forget that the earlier hours of their work have not cost them as much as the last: they are rather apt to think of nine hours' work as costing them nine times as much as the last hour; and it seldom occurs to them to think of themselves as reaping a producer's surplus or rent, through being paid for every hour at a rate sufficient to compensate them for the last, and most distressing hour*23.


The longer a man works, or even is on duty, the greater is his desire for a respite, unless indeed he has become numbed by his work; while every hour's additional work gives him more pay, and brings him nearer to the stage at which his most urgent wants are satisfied; and the higher the pay, the sooner this stage is reached. It depends then on the individual, whether with growing pay new wants arise, and new desires to provide comforts for others or for himself in after years; or he is soon satiated with those enjoyments that can be gained only by work, and then craves more rest, and more opportunities for activities that are themselves pleasurable. No universal rule can be laid down; but experience seems to show that the more ignorant and phlegmatic of races and of individuals, especially if they live in a southern clime, will stay at their work a shorter time, and will exert themselves less while at it, if the rate of pay rises so as to give them their accustomed enjoyments in return for less work than before. But those whose mental horizon is wider, and who have more firmness and elasticity of character, will work the harder and the longer the higher the rate of pay which is open to them; unless indeed they prefer to divert their activities to higher aims than work for material gain. But this point will need to be discussed more fully under the head of the influence of progress on value. Meanwhile we may conclude that increased remuneration causes an immediate increase in the supply of efficient work, as a rule; and that the exceptions to this rule, just noticed, are seldom on a large scale, though they are not devoid of significance*24.


§ 3. When however we turn from the immediate influence exerted by a rise in wages on the work done by an individual to its ultimate effect after a generation or two, the result is less uncertain. It is indeed true that, though a temporary improvement will give a good many young people the opportunity to marry and set up house, for which they have been waiting; yet a permanent increase of prosperity is quite as likely to lower as to raise the birth-rate. But on the other hand, an increase of wages is almost certain to diminish the death-rate, unless it has been obtained at the price of the neglect by mothers of their duties to their children. And the case is much stronger when we look at the influence of high wages on the physical and mental vigour of the coming generation.


For there is a certain consumption which is strictly necessary for each grade of work in this sense, that if any of it is curtailed the work cannot be done efficiently: the adults might indeed take good care of themselves at the expense of their children, but that would only defer the decay of efficiency for one generation. Further there are conventional necessaries, which are so strictly demanded by custom and habit, that in fact people generally would give up much of their necessaries, strictly so called, rather than go without the greater part of these. Thirdly there are habitual comforts, which some, though not all, would not entirely relinquish even when hardly pressed. Many of these conventional necessaries and customary comforts are the embodiment of material and moral progress, and their extent varies from age to age and from place to place. The greater they are, the less economical is man as an agent of production. But if they are wisely chosen they attain in the highest degree the end of all production: for they then raise the tone of human life.


Any increase in consumption that is strictly necessary to efficiency pays its own way and adds to, as much as it draws from, the national dividend. But an increase of consumption, that is not thus necessary, can be afforded only through an increase in man's command over nature: and that can come about through advance in knowledge and the arts of production, through improved organization and access to larger and richer sources of raw material, and lastly through the growth of capital and the material means of attaining desired ends in any form.


Thus the question how closely the supply of labour responds to the demand for it, is in a great measure resolved into the question how great a part of the present consumption of the people at large consists of necessaries, strictly so called, for the life and efficiency of young and old; how much consists of conventional necessaries which theoretically could be dispensed with, but practically would be preferred by the majority of the people to some of those things that were really necessary for efficiency; and how much is really superfluous regarded as a means towards production, though of course part of it may be of supreme importance regarded as an end in itself.


The earlier French and English economists, as we noted at the beginning of the preceding chapter, classed nearly all the consumption of the working classes under the first head. They did so, partly for simplicity, and partly because those classes were then poor in England and very poor in France; and they inferred that the supply of labour would correspond to changes in the effective demand for it in the same way, though of course not quite as fast as that of machinery would. And an answer not very different from theirs must be given to the question with regard to the less advanced countries even now. For throughout the greater part of the world the working classes can afford but few luxuries and not even many conventional necessaries; and any increase in their earnings would result in so great an increase of their numbers as to bring down their earnings quickly to nearly the old level at their mere expenses of rearing. Over a great part of the world wages are governed, nearly after the so-called iron or brazen law, which ties them close to the cost of rearing and sustaining a rather inefficient class of labourers.


As regards the modern western world the answer is materially different; so great has been the recent advance in knowledge and freedom, in vigour and wealth, and in the easy access to rich distant fields for the supply of food and raw material. But it is still true even in England to-day that much the greater part of the consumption of the main body of the population conduces to sustain life and vigour; not perhaps in the most economical manner, but yet without any great waste. Doubtless some indulgences are positively harmful; but these are diminishing relatively to the rest, the chief exception perhaps being that of gambling. Most of that expenditure which is not strictly economical as a means towards efficiency, yet helps to form habits of ready resourceful enterprise, and gives that variety to life without which men become dull and stagnant, and achieve little though they may plod much; and it is well recognized that even in western countries skilled labour is generally the cheapest where wages are the highest. It may be admitted that the industrial development of Japan is tending to show that some of the more expensive conventional necessaries might conceivably be given up without a corresponding diminution of efficiency: but, though this experience may be fruitful of far-reaching results in the future, yet it has little bearing on the past and the present. It remains true that, taking man as he is, and has been hitherto, in the western world the earnings that are got by efficient labour are not much above the lowest that are needed to cover the expenses of rearing and training efficient workers, and of sustaining and bringing into activity their full energies*25.


We conclude then that an increase of wages, unless earned under unwholesome conditions, almost always increases the strength, physical, mental and even moral of the coming generation; and that, other things being equal, an increase in the earnings that are to be got by labour increases its rate of growth; or, in other words, a rise in its demand-price increases the supply of it. If the state of knowledge, and of social and domestic habits be given; then the vigour of the people as a whole if not their numbers, and both the numbers and vigour of any trade in particular, may be said to have a supply-price in this sense, that there is a certain level of the demand-price which will keep them stationary; that a higher price would cause them to increase, and that a lower price would cause them to decrease.


Thus again we see that demand and supply exert coordinate influences on wages; neither has a claim to predominance; any more than has either blade of a pair of scissors, or either pier of an arch. Wages tend to equal the net product of labour; its marginal productivity rules the demand-price for it; and, on the other side, wages tend to retain a close though indirect and intricate relation with the cost of rearing, training and sustaining the energy of efficient labour. The various elements of the problem mutually determine (in the sense of governing) one another; and incidentally this secures that supply-price and demand-price tend to equality: wages are not governed by demand-price nor by supply-price, but by the whole set of causes which govern demand and supply*26.


A word should be said as to the common phrase "the general rate of wages," or "the wages of labour in general." Such phrases are convenient in a broad view of distribution, and especially when we are considering the general relations of capital and labour. But in fact there is no such thing in modern civilization as a general rate of wages. Each of a hundred or more groups of workers has its own wage problem, its own set of special causes, natural and artificial, controlling the supply-price, and limiting the number of its members; each has its own demand-price governed by the need that other agents of production have of its services.


§ 4. Somewhat similar difficulties arise with regard to the phrase "the general rate of interest." But here the chief trouble comes from the fact that the income derived from capital already invested in particular things, such as factories or ships, is properly a quasi-rent and can be regarded as interest only on the assumption that the capital value of the investment has remained unaltered. Leaving this difficulty on one side for the present*27; and recollecting that the phrase "the general rate of interest" applies in strictness only to the anticipated net earnings from new investments of free capital, we may resume briefly the results of our earlier studies of the growth of capital.


We have seen*28 that the accumulation of wealth is governed by a great variety of causes: by custom, by habits of self-control and of realizing the future, and above all by the power of family affection: security is a necessary condition for it, and the progress of knowledge and intelligence furthers it in many ways. But though saving in general is affected by many causes other than the rate of interest: and though the saving of many people is but little affected by the rate of interest; while a few, who have determined to secure an income of a certain fixed amount for themselves or their family, will save less with a high rate than with a low rate of interest: yet a strong balance of evidence seems to rest with the opinion that a rise in the rate of interest, or demand-price for saving, tends to increase the volume of saving.


Thus then interest, being the price paid for the use of capital in any market, tends towards an equilibrium level such that the aggregate demand for capital in that market, at that rate of interest, is equal to the aggregate stock forthcoming there at that rate. If the market, which we are considering, is a small one—say a single town, or a single trade in a progressive country—an increased demand for capital in it will be promptly met by an increased supply drawn from surrounding districts or trades. But if we are considering the whole world, or even the whole of a large country as one market for capital, we cannot regard the aggregate supply of it as altered quickly and to a considerable extent by a change in the rate of interest. For the general fund of capital is the product of labour and waiting; and the extra work, and the extra waiting, to which a rise in the rate of interest would act as an incentive, would not quickly amount to much as compared with the work and waiting, of which the total existing stock of capital is the result. An extensive increase in the demand for capital in general will therefore be met for a time not so much by an increase of supply, as by a rise in the rate of interest; which will cause capital to withdraw itself partially from those uses in which its marginal utility is lowest. It is only slowly and gradually that the rise in the rate of interest will increase the total stock of capital.


§ 5. Land is on a different footing from man himself and those agents of production which are made by man; among which are included improvements made by him on the land itself*29. For while the supplies of all other agents of production respond in various degrees and various ways to the demand for their services, land makes no such response. Thus an exceptional rise in the earnings of any class of labour, tends to increase its numbers, or efficiency, or both; and the increase in the supply of efficient work of that class tends to cheapen the services which it renders to the community. If the increase is in their numbers then the rate of earnings of each will tend downwards towards the old level. But if the increase is in their efficiency; then, though they will probably earn more per head than before, the gain to them will come from an increased national dividend, and will not be at the expense of other agents of production. And the same is true as regards capital: but it is not true as regards land. While therefore the value of land, in common with the values of other agents of production, is subject to those influences which were discussed towards the end of the preceding chapter; it is not subject to those which have been brought into the reckoning in the present discussion.


It is true that land is but a particular form of capital from the point of view of the individual manufacturer or cultivator. And land shares the influences of the laws of demand and of substitution which were discussed in the last chapter, because the existing stock of it, like the existing stock of capital or of labour of any kind, tends to be shifted from one use to another till nothing could be gained for production by any further shifting. And, so far as the discussions of the last chapter are concerned, the income that is derived from a factory, a warehouse, or a plough (allowance being made for wear-and-tear, etc.) is governed in the same way as is the income from land. In each case the income tends to equal the value of the marginal net product of the agent: in each case this is governed for the time by the total stock of the agent and the need that other agents have of its aid.


That is one side of the question. The other is that land (in an old country) does not share the reflex influences, discussed in this chapter, which a high rate of earnings exerts on the supply of other agents of production, and consequently on their contributions to the national dividend, and consequently on the real cost at which their services are purchased by other agents of production. The building an additional floor on one factory or putting an extra plough on one farm, does not generally take a floor from another factory or a plough from another farm; the nation adds a factory floor or a plough to its business as the individual does to his. There is thus a larger national dividend which is to be shared out; and in the long run the increased earnings of the manufacturer or farmer are not as a rule at the cost of other producers. In contrast to this the stock of land (in an old country) at any time is the stock for all time; and when a manufacturer or cultivator decides to take in a little more land to his business, he decides in effect to take it away from someone else's business. He adds a little more land to his business; but the nation adds no land to its business, the change does not in itself increase the national income.


§ 6. To conclude this stage of our argument:—The net aggregate of all the commodities produced is itself the true source from which flow the demand prices for all these commodities, and therefore for the agents of production used in making them. Or, to put the same thing in another way, this national dividend is at once the aggregate net product of, and the sole source of payment for, all the agents of production within the country: it is divided up into earnings of labour; interest of capital; and lastly the producer's surplus, or rent, of land and of other differential advantages for production. It constitutes the whole of them, and the whole of it is distributed among them; and the larger it is, the larger, other things being equal, will be the share of each of them.


It is distributed among them, speaking generally, in proportion to the need which people have for their several services—i.e. not the total need, but the marginal need. By this is meant the need at that point, at which people are indifferent whether they purchase a little more of the services (or the fruits of the services) of one agent, or devote their further resources to purchasing the services (or the fruits of the services) of other agents. Other things being equal, each agent is likely to increase the faster, the larger the share which it gets, unless indeed it is not capable of being increased at all. But every such increase will do something towards filling up the more urgent needs for that agent; and will thus lessen the marginal need for it, and lower the price at which it can find a market. That is to say, an increase in the proportionate share, or rate of remuneration, of any agent is likely to bring into play forces, that will reduce that share, and leave a larger proportionate share of the dividend to be shared among others. This reflex action may be slow. But, if there is no violent change in the arts of production or in the general economic condition of society, the supply of each agent will be closely governed by its cost of production: account being taken of those conventional necessaries, which constantly expand as the growing richness of the national income yields to one class after another an increasing surplus above the mere necessaries for efficiency.


§ 7. In studying the influence which increased efficiency and increased earnings in one trade exert on the condition of others we may start from the general fact that, other things being equal, the larger the supply of any agent of production, the further will it have to push its way into uses for which it is not specially fitted; the lower will be the demand price with which it will have to be contented in those uses in which its employment is on the verge or margin of not being found profitable; and, in so far as competition equalizes the price which it gets in all uses, this price will be its price for all uses. The extra production resulting from the increase in that agent of production will go to swell the national dividend, and other agents of production will benefit thereby: but that agent itself will have to submit to a lower rate of pay.


For instance, if without any other change, capital increases fast, the rate of interest must fall; if without any other change, the number of those ready to do any particular kind of labour increases, their wages must fall. In either case there will result an increased production, and an increased national dividend: in either case the loss of one agent of production must result in a gain to others; but not necessarily to all others. Thus the opening up of rich quarries of slate or the increase in numbers or efficiency of quarrymen, would tend to improve the houses of all classes; and it would tend to increase the demand for bricklayers' and carpenters' labour, and raise their wages. But it would injure the makers of roofing tiles as producers of building materials, more than it benefited them as consumers. The increase in the supply of this one agent increases the demand for many others by a little, and for some others by much; but for some it lessens the demand.


We know that the wages of any worker, say an operative in a boot and shoe factory, tend to equal the net product of his labour. They are not governed by that net product; for net products, like all other incidents of marginal uses, are governed together with value by the general relations of demand and supply*30. But when, (1) the aggregate application of capital and labour to the boot and shoe industry up to that limit, at which the additional products resulting from any further application could barely be made at profitable rates; (2) the distribution of resources between plant, labour, and other agents of production has been appropriately made; (3) we have in view a factory, working with normally good fortune, conducted with normal ability, and where the conditions are such that there is a doubt whether to take on an additional operative of normal ability and energy, who offers himself at the normal wage:—when all these things are done, then we may fairly conclude that the loss of that man's work would be likely to cause a diminution in the net output of that factory, the value of which was about equal to his wages. The inversion of this statement runs that his wages are about equal to that net product: (of course the net product of an individual cannot be separated mechanically from that of others who are working together with him)*31.


The work done by the various classes of operatives in a boot and shoe factory is not all of the same difficulty: but we may ignore differences in industrial rank between the classes, and suppose them to be all of the same rank. (This supposition greatly simplifies the wording of the argument, without affecting its general character.)


Now under the rapidly changing conditions of modern work, one industry or another is apt to be from time to time rather over supplied or rather under supplied with labour: and these inevitable inequalities are apt to be increased by restrictive combinations and other influences. But yet the fluidity of labour is sufficient to make it true that the wages of labour of the same industrial grade or rank tend to equality in different occupations throughout the same western country. Accordingly no considerable inaccuracy is involved in the statement that in general, every worker of the same industrial rank with a normal boot-operative will be able to buy a pair of boots of any kind (after providing the cost of their material), with the wages earned by him, in about the same time as is required by such an operative to contribute a pair of boots of that kind to the net product of his factory. Putting this statement into a more general form we may say that every worker will in general be able with the earnings of a hundred days' labour to buy the net products of a hundred days' labour of other workers in the same grade with himself: he may select them in whatever way he chooses, so as to make up that aggregate sum.


If the normal earnings of workers in another grade are half as high again as his own, the boot-operative must spend three days' wages in order to get the net product of two days' labour of a worker in that grade; and so in proportion.


Thus, other things being equal, every increase in the net efficiency of labour in any trade, including his own, will raise in the same proportion the real value of that part of his wages which the boot-operative spends on the products of that trade; and other things being equal, the equilibrium level of the real wages of the boot-operative depends directly on, and varies directly with, the average efficiency of the trades, including his own, which produce those things on which he spends his wages. Conversely, the rejection by the workers in any industry of an improvement, by which its efficiency could be increased ten per cent., inflicts on the boot-operative an injury measured by ten per cent. of that part of his wages which he spends on the products of that industry. But an increased efficiency on the part of workers, whose products compete with his own, may injure him temporarily at least, especially if he is not himself a consumer of those products.


Again, the boot-operative will gain by anything, that changes the relative positions of different grades in such a way as to raise his grade relatively to others. He will gain by an increase of medical men whose aid he occasionally needs. And he will gain more if those grades which are occupied chiefly with the tasks of managing business, whether manufacturing, trading, or any other, receive a great influx from other grades: for then the earnings of management will be lowered permanently relatively to the earnings of manual work, there will be a rise in the net product of every kind of manual labour; and, other things being equal, the boot-operative will get more of every commodity on which he spends those wages that represent his own net product.


§ 8. The process of substitution, of which we have been discussing the tendencies, is one form of competition; and it may be well to insist again that we do not assume that competition is perfect. Perfect competition requires a perfect knowledge of the state of the market; and though no great departure from the actual facts of life is involved in assuming this knowledge on the part of dealers when we are considering the course of business in Lombard Street, the Stock Exchange, or in a wholesale Produce Market; it would be an altogether unreasonable assumption to make when we are examining the causes that govern the supply of labour in any of the lower grades of industry. For if a man had sufficient ability to know everything about the market for his labour, he would have too much to remain long in a low grade. The older economists, in constant contact as they were with the actual facts of business life, must have known this well enough; but partly for brevity and simplicity, partly because the term "free competition" had become almost a catchword, partly because they had not sufficiently classified and conditioned their doctrines, they often seemed to imply that they did assume this perfect knowledge.


It is therefore specially important to insist that we do not assume the members of any industrial group to be endowed with more ability and forethought, or to be governed by motives other than those which are in fact normal to, and would be attributed by every well-informed person to, the members of that group; account being taken of the general conditions of time and place. There may be a good deal of wayward and impulsive action, sordid and noble motives may mingle their threads together; but there is a constant tendency for each man to select such occupations for himself and his children as seem to him on the whole the most advantageous of those which are within the range of his resources, and of the efforts which he is able and willing to make in order to reach them*32.


§ 9. The last group of questions, which still remain to be discussed, is concerned with the relation of capital in general to wages in general. It is obvious that though capital in general is constantly competing with labour for the field of employment in particular trades; yet since capital itself is the embodiment of labour as well as of waiting, the competition is really between some kinds of labour aided by a good deal of waiting, and other kinds of labour aided by less waiting. When for instance it is said that "capitalistic machinery has displaced much labour that was employed in making boots," what is meant is, that formerly there were many who made boots by hand, and a very few who made awls and other simple implements, aided by a little waiting; while now there are rather fewer persons occupied in boot making; and they make a much larger number of boots than before by aid of powerful machines, made by engineers aided by a good deal of waiting. There is a real and effective competition between labour in general and waiting in general. But it covers a small part of the whole field, and is of small importance relatively to the benefits which labour derives from obtaining cheaply the aid of capital, and therefore of efficient methods in the production of things that it needs*33.


For speaking generally, an increase in the power and the willingness to save will cause the services of waiting to be pushed constantly further; and will prevent it from obtaining employment at as high a rate of interest as before. That is, the rate of interest will constantly fall, unless indeed invention opens new advantageous uses of roundabout methods of production. But this growth of capital will increase the national dividend; open out new and rich fields for the employment of labour in other directions; and will thus more than compensate for the partial displacement of the services of labour by those of waiting*34.


The increase of the national dividend owing to the growth of capital and invention is certain to affect all classes of commodities; and to enable the shoemaker, for instance, to purchase with his earnings more food and clothes, more and better supplies of water, artificial light and heat, travel, and so on. It may be admitted that a few improvements affect only commodities consumed by the rich, in the first instance at least; that no part of the corresponding increase of the national dividend goes directly to the labouring classes; and that they do not at once gain anything to compensate for the probable disturbance of some of their members in particular trades. But such cases are rare, and generally on a small scale: and even in them there is nearly always some indirect compensation. For improvements, designed for the luxuries of the rich, soon spread themselves to the comforts of other classes. And, though it is not a necessary consequence, yet in fact a cheapening of luxuries does generally lead in various ways to increased desires on the part of the rich for things made by hand and for personal services, and increases also the means at their disposal for gratifying those desires. This points to another aspect of the relation between capital in general and wages in general.


§ 10. It is to be understood that the share of the national dividend, which any particular industrial class receives during the year, consists either of things that were made during the year, or of the equivalents of those things. For many of the things made, or partly made, during the year are likely to remain in the possession of capitalists and undertakers of industry and to be added to the stock of capital; while in return they, directly or indirectly, hand over to the working classes some things that had been made in previous years.


The ordinary bargain between labour and capital is that the wage-receiver gets command over commodities in a form ready for immediate consumption, and in exchange carries his employer's goods a stage further towards being ready for immediate consumption. But while this is true of most employees, it is not true of those who finish the processes of production. For instance, those who put together and finish watches, give to their employers far more commodities in a form ready for immediate consumption, than they obtain as wages. And if we take one season of the year with another, so as to allow for seed and harvest time, we find that workmen as a whole hand over to their employers more finished commodities than they receive as wages. There is, however, a rather forced sense in which we may perhaps be justified in saying that the earnings of labour depend upon advances made to labour by capital. For—not to take account of machinery and factories, of ships and railroads—the houses loaned to workmen, and even the raw materials in various stages which will be worked up into commodities consumed by them, represent a far greater provision of capital for their use than the equivalent of the advances which they make to the capitalist, even when they work for a month for him before getting any wages.


In all this then there is nothing to make the relations between capital in general and labour in general differ widely from those between any other two agents of production, in the general scheme of distribution already explained. The modern doctrine of the relations between labour and capital is the outcome to which all the earlier doctrines on the subject were working their way; and differs only in its greater exactness, completeness and homogeneity, from that given by Mill in the third chapter of his fourth book; the only place in which he collects together all the various elements of the problem.


To conclude another stage of the argument:—Capital in general and labour in general co-operate in the production of the national dividend, and draw from it their earnings in the measure of their respective (marginal) efficiencies. Their mutual dependence is of the closest; capital without labour is dead; the labourer without the aid of his own or someone else's capital would not long be alive. Where labour is energetic, capital reaps a high reward and grows apace; and, thanks to capital and knowledge, the ordinary labourer in the western world is in many respects better fed, clothed and even housed than were princes in earlier times. The co-operation of capital and labour is as essential as that of the spinner of yarn and the weaver of cloth: there is a little priority on the part of the spinner; but that gives him no pre-eminence. The prosperity of each is bound up with the strength and activity of the other; though each may gain temporarily, if not permanently, a somewhat larger share of the national dividend at the expense of the other.


In the modern world, private employers and officials of joint-stock companies, many of whom have but little capital of their own, act as the centre of the great industrial wheel. The interests of owners of capital and of workers radiate towards them and from them: and they hold the whole together in a firm grip. They will therefore take a predominant place in those discussions of fluctuations of employment and of wages, which are deferred to the second volume of this treatise; and a prominent, though not predominant, place in those discussions of the secondary features in the mode of action of demand and supply peculiar to labour, capital and land respectively, which will occupy the next eight chapters.


In Appendix J some account will be given of the "Wages-fund" doctrine. Reason will be shown for thinking that it laid excessive stress on the side of demand for labour, to the neglect of the causes which govern its supply; and that it suggested a correlation between the stock of capital and the flow of wages, instead of the true correlation between the flow of the products of labour aided by capital and the flow of wages. But reason will also be given for the opinion that the classical economists themselves—though perhaps not nearly all their followers—if cross examined, would have explained away the misleading suggestions of the doctrine; and thus have brought it into close accord, so far as it went, with modern doctrines. In Appendix K some study will be made of the various kinds of producers' and consumers' surpluses; raising questions of some abstract interest, but of little practical importance.


As has already been intimated, the efficiencies (total and marginal) of the several factors of production, their contributions direct and indirect to the aggregate net product, or national dividend; and the shares of that dividend which accrue to them severally are correlated by a number of mutual interactions so complicated, that it is impossible to comprehend the whole in a single statement. But yet by aid of the terse, compact, precise language of Mathematics it is possible to lead up to a fairly unified general view; though of course it can take no account of differences of quality, except in so far as they can be interpreted more or less crudely into differences of quantity*35.

Notes for this chapter

See II. III. 2; IV. I. 2; IV. IX. 1.
Recent discussions on the eight hours day have often turned very little on the fatigue of labour; for indeed there is much work in which there is so little exertion, either physical or mental, that what exertion there is counts rather as a relief from ennui than as fatigue. A man is on duty, bound to be ready when wanted, but perhaps not doing an hour's actual work in the day; and yet he will object to very long hours of duty because they deprive his life of variety, of opportunities for domestic and social pleasures, and perhaps of comfortable meals and rest.

If a man is free to cease his work when he likes, he does so when the advantages to be reaped by continuing seem no longer to over-balance the disadvantages. If he has to work with others, the length of his day's work is often fixed for him; and in some trades the number of days' work which he does in the year is practically fixed for him. But there are scarcely any trades, in which the amount of exertion which he puts into his work is rigidly fixed. If he be not able or willing to work up to the minimum standard that prevails where he is, he can generally find employment in another locality where the standard is lower; while the standard in each place is set by the general balancing of the advantages and disadvantages of various intensities of work by the industrial populations settled there. The cases therefore in which a man's individual volition has no part in determining the amount of work he does in a year, are as exceptional as the cases in which a man has to live in a house of a size widely different from that which he prefers, because there is none other available. It is true that a man who would rather work eight hours a day than nine at the same rate of tenpence an hour, but is compelled to work nine hours or none, suffers a loss from the ninth hour: but such cases are rare; and, when they occur, one must take the day as the unit. But the general law of costs is not disturbed by this fact, any more than the general law of utility is disturbed by the fact that a concert or a cup of tea has to be taken as a unit: and that a person who would rather pay five shillings for half a concert than ten for a whole, or twopence for half a cup of tea than fourpence for a whole cup, may incur a loss on the second half. There seems therefore to be no good foundation for the suggestion made by v. Böhm-Bawerk (The Ultimate Standard of Value, § IV. published in the Zeitschrift für Volkswirtschaft, vol. II.) that value must be determined generally by demand, without direct reference to cost, because the effective supply of labour is a fixed quantity: for even if the number of hours of work in the year were rigidly fixed, which it is not, the intensity of work would remain elastic.

See ch. XII. Bad harvests, war prices, and convulsions of credit have at various times compelled some workers, men, women and children, to over-work themselves. And cases of ever-increasing exertion in return for a constantly sinking wage, though not as numerous now as is often alleged, have not been very rare in past times. They may be compared with the exertions of a failing firm to secure some return for their outlay by taking contracts at little more than enough to recompense them for their prime, or special and direct cost. And on the other hand almost every age, our own perhaps less than most others, has stories of people who in a sudden burst of prosperity, have contended themselves with the wages to be earned by very little work, and have thus contributed to bring the prosperity to a close. But such matters must be deferred till after a study of commercial fluctuations. In ordinary times the artisan, the professional man or the capitalist undertaker decides, as an individual or as a member of a trade association, what is the lowest price against which he will not strike.
On all locomotives there is some brass or copper work designed partly for ornament, and which could be omitted or displaced without any loss to the efficiency of the steam-engine. Its amount does in fact vary with the taste of the officials who select the patterns for the engines of different railways. But it might happen that custom required such expenditure; that the custom would not yield to argument, and that the railway companies could not venture to offend against it. In that case, when dealing with periods during which the custom ruled, we should have to include the cost of that ornamental metal work in the cost of producing a certain amount of locomotive horse-power, on the same level with the cost of the piston itself. And there are many practical problems, especially such as relate to periods of but moderate length, in which conventional and real necessaries may be placed on nearly the same footing.
The reiteration in this section has seemed to be unavoidable in consequence of the misunderstandings of the main argument of the present Book by various critics; among whom must be included even the acute Prof. v. Böhm-Bawerk. For in the article recently quoted (see especially Section 5), he seems to hold that a self-contradiction is necessarily involved in the belief that wages correspond both to the net product of labour and also to the cost of rearing and training labour and sustaining its efficiency (or, more shortly, though less appropriately, the cost of production of labour). On the other hand the mutual interactions of the chief economic forces are set forth in an able article by Prof. Carver in the Quarterly Journal of Economics for July 1894; see, also his Distribution of Wealth, ch. IV.
See below, VI. VI. 6.
See IV. VII., summarized in § 10.
The argument of this section is put broadly. For a technical and more thorough treatment the reader is referred to V. X.
See V. VIII. 5; and VI. I. 7.
See above pp. 517, 8. The net product of a factory is now commonly taken, as it is in the official Census of Production, to be the work which it puts into its material: thus the value of its net product is the excess of the gross value of its output over the value of the material used by it.
Differences between the adjustments of demand and supply in the case of commodities and in the case of labour are discussed in the following chapters.
We are leaving on one side here the competition for employment between labour in the narrower sense of the term, and the work of the undertaker himself and his assistant managers and foremen. A great part of chs. VII. and VIII. is given to this difficult and important problem.
Capital is here reckoned broadly: it is not confined to trade capital. This point is of secondary interest and is relegated to Appendix J, 4.
Such a survey is focussed in Notes XIV.—XXI. of the Mathematical Appendix: the last of them is easy of comprehension, and shows the complexity of the problems. Most of the rest are developments of details arising out of Note XIV., the substance of part of which is translated into English in V. IV.

End of Notes

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