Cyclopædia of Political Science, Political Economy, and the Political History of the United States

Edited by: Lalor, John J.
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New York: Maynard, Merrill, and Co.
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Includes articles by Frédéric Bastiat, Gustave de Molinari, Henry George, J. B. Say, Francis A. Walker, and more.
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COST OF PRODUCTION. Every economic theory has a value independent of its truth. It has a place in the history of philosophy, in addition to the claims it may possess for the light it throws on phenomena and their laws. No economist could now deny that writers on political economy have for the most part overestimated the adequacy of their method and the certainty of their conclusions. Yet some of the doctrines that have the least claim to unconditional acceptance contain elements of practical truth, and are replete with instruction in relation to the course of philosophical thought, and the causes which have governed the development of economic science in particular. Of these few better deserve attention than the theory of cost of production, which fills so large a space in the systems of Ricardo and J. S. Mill. The main principle of that theory is that the products of equal exertion and sacrifices, or of equal labor and capital, under free competition, are ordinarily, or on the average, of equal unchangeable value. Ricardo further held that capital is but the accumulated product of labor, and that cost of production resolves itself into quantity and quality of labor; a doctrine in which he has been followed in substance by J. S. Mill and other eminent writers. Four questions, then, arise for consideration: Is cost of production resolvable simply into labor? In other words, are no other important agents besides human labor employed in production, and properly included in its cost? Is the value of things produced under free competition determined by their cost of production? If not, what is the real relation between cost of production, in the true meaning of the phrase, and exchangeable value? And what was the origin of the theory that the natural, and on the average the actual, value of things is determined by the cost of producing them?


—The doctrine that all industrial products, including capital itself, are the produce of labor, has furnished the German "social-democrat" with his chief argument for the claim of the working class to all the wealth produce in the country. The elaborate sophistry of Karl Marx and Lassalle rests on the assumption that labor is the sole productive agent, and that the laborers are therefore entitled in equity to the whole annual produce, but that, under the modern structure of society, they are defrauded by capitalists of a great part of it as profit. It must be confessed that the language of J. S. Mill gives countenance to this proposition. The two elements, he says in his "Principles of Political Economy," on which, and on which alone, the gains of the capitalist depend, are, first, the productive power of labor, and secondly, the proportion of the produce obtained by the laborers themselves. The cause of profit, he states again, is that labor produces more than is required for its support, and the general profit of the country is always what the productive power of labor makes it: if the laborers collectively produce 20 per cent. more than their wages, profits will be 20 per cent., whatever prices may be. Yet it does not appear that Mr. Mill, in analyzing profit into remuneration of superintendence, interest and insurance—a faulty analysis, it may be observed, in respect of insurance, which forms part of the cost of production, not of profit—regarded the direction or management of industrial enterprise simply as a species of labor, in the economic sense of the word; and in one of his essays he has pointed out that its remuneration is governed by different laws. The German social-democrat at any rate ignores this element, although it is often the chief factor employed in a business. Mind, not muscle or manual labor, is the principal agent in modern economy. The water power of Niagara will one day be utilized for industrial and commercial purposes, not by the hands of myriads of laborers, but by the thought of a single brain. The steam engine is now the prime instrument of production, and its inventor, Watt, often complained that the main difficulty of constructing it arose from the ineptitude of the workmen. Would it not be ungrateful, too, on the part of mankind, to say that they owe no part of their wealth to the productive powers of the lower animals? Has the horse contributed nothing to it by his strength, activity and patience? Do cows and sheep produce nothing for men? Adam Smith has in one passage expressly included the work of animals under the head of labor; and when he speaks of "the annual labor" of every country as the source of its wealth, he manifestly means to comprehend all the productive agencies that are briefly summed up in the three terms, land, capital and labor. Can a capitalist diminish any part of his outgoings without diminishing his returns, or augment his returns without increasing his outlay? his profit will be raised, and he may accomplish both without any change in the quantity, efficiency or price of the human labor he employs, by economy and improvements in the use of his other auxiliaries. Given the gross produce of a country, the total amount, according to Ricardo's and Mill's theory of cost of production and profit, ought to be divisible between laborers and capitalists, and the share of the laborers would thus determine both the outlay of the capitalists and their rate of profit. But the outgoings essential to production, and by consequence the total returns, include many other elements—animals and their food, fuel, artificial light, seed, manure, materials, machines, buildings; all of which make demands, over and above wages, to sustain production, on the gross returns to industry. Wages remaining the same, capitalists may augment the proportion of the returns to the outgoings, by diminishing the expense or augmenting the efficiency of any of the other elements. There is no machine at present moved by steam that does not waste the greater part of the power given out by the fuel, and a signal economy in the cost of production, with an immense and simultaneous increase in efficiency and result, might be obtained by mechanical improvements in this respect, without of necessity cheapening in any degree the and of manual labor. Capitalists who employ horses for draught, or raise cattle or dairy produce for the market, may so breed, feed, house and manage their animals as to get a higher rate of profit, while paying the same price as before for human labor. It is curious that J. S. Mill, who so strenuously contended that a demand for commodities is not equivalent to a demand for labor, should have overlooked the fact that commodities may be produced with little or no co-operation on the part of hired laborers. In the sixteenth century it was the cry in England that the land fed sheep and herds instead of men, because wool and meat could be grown without the help of the peasant's arm. By skillful precautions the managers of industrial enterprises might greatly diminish the accidents and losses which form a large item in their outgoings, and reduce the outlay on insurance, which often forms a considerable part of the cost of production, not, as J. S. Mill's analysis represents, of profit. The capitalists of a fertile country might obtain an immense quantity of produce, and reap an enormous profit, with no aid from human labor, by the skillful use of mechanical, chemical and other natural powers, and the help of horses and other animals. In a new region, where only the best soils and sites for production yield rent, the cost of production may be considerably less than in an old country where every acre bears a high price.


—The doctrine that cost of production, in its ultimate analysis, is resolvable into the cost of labor, in the ordinary sense of the term labor, thus falls to the ground; and with it falls the claim made by the German socialist, on behalf of the class of hired laborers, to the entire produce of enterprise, sacrifice, forethought, invention, science, and all the powers of nature that knowledge and skill can call to the aid of the capitalists.


—The question follows, whether, under free competition, the value of commodities depends on their cost of production. An affirmative answer is based by a great school of economists on the argument that competition equalizes the remuneration of equal exertions and sacrifices; since, it is argued, the supply of things which yield less, will decline, while the production of things whose price is more than ordinarily remunerative will increase. Hence, prices on the average, it is inferred, must yield wages and profit proportionate to the amount of labor and capital employed; or, in other words, must correspond with cost of production. The argument, it should be noted, assumes not only free competition but full information. It assumes that every man in business, or about to enter it, knows the cost at which everything is produced, the mode of its production, the profit or loss of producing it, the improvements impending, and the manner in which the market will be affected by fluctuations in trade, credit and speculation. The truth is, that in a country at an advanced stage of industrial progress, the immense area of commerce, the multitude of employments, the incessant changes in the processes of manufacture, and in the channels of trade, together with the violent oscillations of prices, make a survey of the whole field, and a comparison of the probable gains of each occupation, impossible. Hundreds of new trades come into existence every year, and no man in a great industrial city knows so much as the names, or even the number, of its different employments, much less their condition and prospects. In an age of constant improvement in the instruments of production, and of frequent invention of new methods and new products, it is obvious that articles which have been the result of a great outlay may suddenly sink in value, or be superseded altogether by a discovery, or a cheaper or inferior commodity. The eminent English economist, W. Nassau Senior, though an adherent to the doctrine that value depends on cost of production, remarked that there was, in all probability, some iron in use that had been produced before the Norman conquest. Did cost of production govern value, we should see iron selling at a number of widely different prices, according to the expense of producing it by different processes at different periods.


—The answer attempted to such arguments is, that doubtless there are occasional and temporary divergences of price from the standard of cost, but the "tendency" "on the average" and "in the long run" is to a scale of prices which yield average profits and wages to the producers, and so conform to the rule. The use made by writers on political economy of such loose equivocal phrases as "tendency," "on the average," "in the long run," "in the absence of disturbing causes," has been justly protested against as inaccurate, misleading and unscientific. But in fact a great superstructure has been built by its advocates on the doctrine that cost of production determines value, without qualification of any sort; and, in truth, the foundation was laid for the sake of the superstructure. A long chain of deductions could be sustained if the first link could anyhow be made to hold together. A great part of the theory of taxation set forth in most economic treatises rests on the assumption that any additional burden on a special class of producers must add to the cost of production and therefore be compensated in prices. Whereas prices conform so slightly to cost of production in many cases that a fall may follow a tax; or the tax may be the last load that breaks the back of the camel, and may ruin some of the traders who have to advance it—The doctrine of Carey with respect to the cost of reproduction makes a closer approximation to the real relation between value and cost, yet it can not be accepted as an adequate formula, or as containing the true law of value. The price of iron, coal, corn, cotton and many other commodities may deviate widely from the cost of obtaining a new supply. A change, too, in demand, or the invention of a new article, may supersede altogether the use of a thing, and render its reproduction unprofitable. It is, moreover, the cost of production, not of reproduction, that acts on supply; and it is the relation between demand and supply that ordinarily governs value. The element of truth contained in J. S. Mill's theory is simply that cost of production, by affecting supply does indirectly affect value, but its influence in that respect is uncertain and irregular, and no rigorous deductions can be drawn from it.


—The theory of "natural" values and prices, conforming to cost of production, originated in a comparatively early and stationary industrial world, in which employments for the most part were simple and well known, and few changes in the methods or cost of manufacture, or in prices, took place in a generation. Adam Smith, indeed, expressly and emphatically limited the doctrine that competition equalizes the wages and profits of different employments to well-known trades in the same neighborhood, and unaffected by speculation, novelty or accident. The idea of "natural" value and price, "natural" wages and profits, harmonizes with the dominant conception of a "natural" order of things which pervaded the philosophy of Adam Smith's age. In the relation of the theory of cost of production, as shaped by Ricardo and J. S. Mill, to an ideal system of nature which had come down from ancient Greece and Rome, we discover an instructive example of the causes that govern the course of human philosophy. The instance illustrates, too, the advantage of the historical method, which examines how theories grew up, and what is their relation to the condition of society and the dominant modes of thought in the age which gave them birth.


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