Principles of Economics
By Alfred Marshall
Economic conditions are constantly changing, and each generation looks at its own problems in its own way. In England, as well as on the Continent and in America, Economic studies are being more vigorously pursued now than ever before; but all this activity has only shown the more clearly that Economic science is, and must be, one of slow and continuous growth. Some of the best work of the present generation has indeed appeared at first sight to be antagonistic to that of earlier writers; but when it has had time to settle down into its proper place, and its rough edges have been worn away, it has been found to involve no real breach of continuity in the development of the science. The new doctrines have supplemented the older, have extended, developed, and sometimes corrected them, and often have given them a different tone by a new distribution of emphasis; but very seldom have subverted them…. [From the Preface to the First Edition]
First Pub. Date
London: Macmillan and Co., Ltd.
The text of this edition is in the public domain.
- Appendix A
- Appendix B
- Appendix C
- Appendix D
- Appendix E
- Appendix F
- Appendix G
- Appendix H
- Appendix I
- Appendix J
- Appendix K
MARGINAL COSTS IN RELATION TO AGRICULTURAL VALUES.
BOOK V, CHAPTER X
§ 1. We now pass from general considerations to those relating to land; and we begin with those specially applicable to agricultural land in an old country.
Suppose, that a war, which was not expected to last long, were to cut off part of the food supplies of England. Englishmen would set themselves to raise heavier crops by such extra application of capital or labour as was likely to yield a speedy return; they would consider the results of artificial manures, of the use of clod-crushing machines, and so on; and the more favourable these results were, the less would be the rise in the price of produce in the coming year which they regarded as necessary to make it worth their while to incur additional outlay in these directions. But the war would have very little effect on their action as to those improvements which would not bear fruit till it was over. In any inquiry then as to the causes that will determine the prices of corn during a short period, that fertility which the soil derives from slowly made improvements has to be taken for granted as it then is, almost in the same way as if it had been made by nature. Thus, the income derived from these permanent improvements gives a surplus above the
special costs needed for raising extra produce. But it is not a true surplus, in the same sense that rent proper is;
i.e. it is not a surplus above the
total costs of the produce: it is needed to cover the general expenses of the business.
To speak more exactly:—If the extra income derived from improvements that have been made in the land by its individual owner is so reckoned as not to include any benefit which would have been conferred on the land by the general progress of society independently of his efforts and sacrifices; then, as a rule, the whole of it is required to remunerate him for those efforts and sacrifices. He may have underestimated the gains which will result from them; but he is about equally likely to have made an overestimate. If he has estimated them rightly, his interest has urged him to make the investment as soon as it showed signs of being profitable: and in the absence of any special reason to the contrary we may suppose him to have done this. In the long run, then, the net returns to the investment of capital in the land, taking successful and unsuccessful returns together, do not afford more than an adequate motive to such investment. If poorer returns had been expected than those on which people actually based their calculations, fewer improvements would have been made.
That is to say:—for periods which are long in comparison with the time needed to make improvements of any kind, and bring them into full operation, the net incomes derived from them are but the price required to be paid for the efforts and sacrifices of those who make them: the expenses of making them thus directly enter into marginal expenses of production, and take a direct part in governing long-period supply price. But in short periods, that is, in periods short relatively to the time required to make and bring into full bearing improvements of the class in question, no such direct influence on supply price is exercised by the necessity that such improvements should in the long run yield net incomes sufficient to give normal profits on their cost. And therefore when we are dealing with such periods, these incomes may be regarded as quasi-rents which depend on the price of the produce
We may conclude then:—(1) The amount of produce raised, and therefore the position of the margin of cultivation (
i.e. the margin of the profitable application of capital and labour to good and bad land alike) are both governed by the general conditions of demand and supply. They are governed on the one hand by demand; that is, by the numbers of the population who consume the produce, the intensity of their need for it, and their means of paying for it; and on the other hand by supply; that is, by the extent and fertility of the available land, and the numbers and resources of those ready to cultivate it. Thus cost of production, eagerness of demand, margin of production, and price of the produce mutually govern one another: and no circular reasoning is involved in speaking of any one as in part governed by the others. (2) That part of the produce which goes as rent is of course thrown on the market, and acts on prices, in just the same way as any other part. But the general conditions of demand and supply, or their relations to one another, are not affected by the division of the produce into the share of rent and the share needed to render the farmer’s expenditure profitable. The amount of that rent is not a governing cause; but is itself governed by the fertility of land, the price of the produce, and the position of the margin: it is the excess of the value of the total returns which capital and labour applied to land do obtain, over those which they would have obtained under circumstances as unfavourable as those on the margin of cultivation. (3) If the cost of production were estimated for parts of the produce which do not come from the margin, a charge on account of rent would of course need to be entered in this estimate; and if this estimate were used in an account of the causes which govern the price of the produce; then the reasoning would be circular. For that, which is wholly an effect, would be reckoned up as part of the cause of those things of which it is an effect. (4) The cost of production of the marginal produce can be ascertained without reasoning in a circle. The cost of production of other parts of the produce cannot. The cost of production on the margin of the profitable application of capital and labour is that to which the price of the whole produce tends, under the control of the general conditions of demand and supply: it does not govern price, but it focusses the causes which do govern price.
§ 2. It has sometimes been suggested that if all land were equally advantageous and all were occupied, the income derived from it would partake of the nature of a monopoly rent: but this seems to be an error. Of course the landowners might conceivably combine to stint production, whether their properties were of equal fertility or not; the raised prices which would thus be obtained for the produce would be monopoly prices; and the incomes of the owners would be monopoly revenues rather than rents. But, with a free market, the revenues from land would be rents, governed by the same causes and in the same way in a country where the land was all of equal advantage, as in those where good and bad land were intermingled
It is, indeed, true that if there were more than enough land, all of about the same fertility, to enable everyone to have as much of it as was needed to give full scope to the capital he was prepared to apply to it, then it could yield no rent. But that merely illustrates the old paradox that water, when abundant, has no market value: for though the services of some part of it are essential to support life, yet everyone can get without effort to that margin of satiety at which any further supplies would be of no service to him. When every cottager has a well from which he can draw as much water as he needs, with no more labour than is required at his neighbour’s well, the water in the well has no market value. But let a drought set in, so that the shallow wells are exhausted, and even the deeper wells are threatened, then the owners of those wells can exact a charge for every bucket which they allow anyone to draw for his own use. The denser population becomes, the more numerous will be the occasions on which such charges can be made (it being supposed that no new wells are developed): and at last every owner of a well may find in it a permanent source of revenue.
In the same way the scarcity value of land in a new country gradually emerges. The early settler exercises no exclusive privilege, for he only does what anyone else is at liberty to do. He undergoes many hardships, if not personal dangers; and perhaps he runs some risks that the land may turn out badly, and that he may have to abandon his improvements. On the other hand, his venture may turn out well; the flow of population may trend his way, and the value of his land may soon give as large a surplus over the normal remuneration of his outlay on it as the fishermen’s haul does when they come home with their boat full. But in this there is no surplus above the rewards needed for his venture. He has engaged in a risky business which was open to all, and his energy and good fortune have given him an exceptionally high reward: anyone else might have taken the same chance as he did. Thus the income which he expects the land to afford in the future enters into the calculations of the settler, and adds to the motives which determine his action when in doubt as to how far to carry his enterprise. He regards its “discounted value
*90” as profits on his capital, and as earnings of his own labour, in so far as his improvements are made with his own hands.
A settler often takes up land with the expectation that the produce which it affords while in his possession, will fall short of an adequate reward for his hardships, his labour and his expenditure. He looks for part of his reward to the value of the land itself, which he may perhaps after a while sell to some new-comer who has no turn for the life of a pioneer. Sometimes even, as the British farmer learns to his cost, the new settler regards his wheat almost as a by-product; the main product for which he works is a farm, the title-deeds to which he will earn by improving the land: he reckons that its value will steadily rise, not through his own efforts so much as through the growth of those comforts and resources, and of those markets in which to buy and in which to sell, that are the product of the growing
This may be put in another way. People are generally unwilling to face the hardships and isolation of pioneer agriculture, unless they can look forward with some confidence to much higher earnings, measured in terms of the necessaries of life, than they could get at home. Miners cannot be attracted to a rich mine, isolated from other conveniences and varied social opportunities of civilization, except by the promise of high wages: and those who superintend the investment of their own capital in such mines expect very high profits. For similar reasons pioneer farmers require high aggregate gains made up of receipts for the sale of their produce, together with the acquisition of valuable title-deeds, to remunerate them for their labour and endurance of hardships. And the land is peopled up to that margin at which it just yields gains adequate for this purpose, without leaving any surplus for rent, when no charge is made for the land. When a charge is made, immigration spreads only up to that margin, at which the gains will leave a surplus, of the nature of rent, to cover such charges, in addition to rewarding the pioneer’s endurance.
§ 3. With all this it is to be remembered that land is but a particular form of capital from the point of view of the individual producer. The question whether a farmer has carried his cultivation of a particular piece of land as far as he profitably can; and whether he should try to force more from it, or to take in another piece of land; is of the same kind as the question whether he should buy a new plough, or try to get a little more work out of his present stock of ploughs, using them sometimes when the soil is not in a very favourable condition, and feeding his horses a little more lavishly. He weighs the net product of a little more land against the other uses to which he could put the capital sum that he would have to expend in order to obtain it: and in like manner he weighs the net product, to be got by working his ploughs under unfavourable circumstances, against that got by increasing his stock of ploughs, and thus working under more favourable conditions. That part of his produce which he is in doubt whether to raise by extra use of his existing ploughs, or by introducing a new plough, may be said to be derived from a marginal use of the plough. It pays nothing
i.e. nothing beyond a charge for actual wear-and-tear) towards the net income earned by the plough.
So again a manufacturer or trader, owning both land and buildings, regards the two as bearing similar relations to his business. Either will afford him aid and accommodation at first liberally; and afterwards with diminishing return, as he endeavours to force more and more from them: till at last he will doubt whether the overcrowding of his workshops or his storerooms is not so great a source of trouble, that it would answer his purpose to obtain more space. And when he comes to decide whether to obtain that space by taking in an extra piece of land or by building his factory a floor higher, he weighs the net income to be derived from further investments in the one against that to be derived from the other. That part of his production which he just forces out of his existing appliances (being in doubt whether it would not be better worth his while to increase those appliances than to work so intensively those which he has), does not contribute to the net income which those appliances yield him. This argument says nothing as to whether the appliances were made by man, or part of a stock given by nature; it applies to rents and quasi-rents alike.
But there is this difference from the point of view of society. If one person has possession of a farm, there is less land for others to have. His use of it is not in addition to, but in lieu of the use of a farm by other people: whereas if he invests in improvements of land or in buildings on it, he will not appreciably curtail the opportunities of others to invest capital in like improvements. Thus there is likeness amid unlikeness between land and appliances made by man. There is unlikeness because land in an old country is approximately (and in some senses absolutely) a
permanent and fixed stock: while appliances made by man, whether improvements in land, or in buildings, or machinery, etc., are a flow capable of being increased or diminished according to variations in the effective demand for the products which they help in raising. So far there is unlikeness. But on the other hand there is likeness, in that, since some of them cannot be produced quickly, they are a practically
fixed stock for short periods: and for those periods the incomes derived from them stand in the same relation to the value of the products raised by them, as do true rents
§ 4. Let us apply these considerations to the supposition that a permanent tax is to be levied on “corn,” in the sense in which it was used by the classical economists as short for all agricultural produce. It is obvious that the farmer would try to make the consumer pay some part at least of the tax. But any rise in the price charged to the consumer would check demand, and thus react on the farmer. In order to decide how much of this tax would be shifted on to the consumer, we must study the
margin of profitable expenditure, whether that be the margin of a little expenditure applied to poor land and land far removed from good markets, or the margin of a large expenditure applied to rich land, and land near to dense industrial districts.
If only a little corn had been raised near the margin, a moderate fall in the net price received by the farmer would not cause a great check to the supply of corn. There would therefore be no great rise in the price paid for it by the consumer; and the consumer would bear very little of the tax. But the surplus value of the corn over its expenses of production would fall considerably. The farmer, if cultivating his own land, would bear the greater part of the tax. And, if he were renting the land, he could demand a great reduction of his rent.
If, on the other hand, a great deal of corn had been raised near the margin of cultivation, the tax would tend to cause a great shrinkage of production. The consequent rise of price would arrest that shrinkage, leaving the farmer in a position to cultivate nearly as intensively as before: and the landlord’s rent would suffer but little
Thus, on the one hand, a tax which is so levied as to discourage the cultivation of land or the erection of farm buildings on it, tends to be shifted forward on to the consumers of the produce of land. But, on the other hand, a tax on that part of the (annual) value of land, which arises from its position, its extension, its yearly income of sunlight and heat and rain and air, cannot settle anywhere except on the landlord; a lessee being, of course, landlord for the time. This (annual) value of the land is commonly called its “original value” or its “inherent value”; but much of that value is the result of the action of men, though not of its individual holders. For instance, barren heath land may suddenly acquire a high value from the growth of an industrial population near it; though its owners have left it untouched as it was made by nature. It is, therefore, perhaps more correct to call this part of the annual value of land its ”
public value“; while that part which can be traced to the work and outlay of its individual holders may be called its “private value.” The old terms “inherent value” and “original value” may however be retained for general use, with a note of caution as to their partial inaccuracy. And, using another term that has precedent in its favour, we may speak of this annual public value of the land as “true rent.”
A tax on the public value of land does not greatly diminish the inducements to cultivate the land highly, nor to erect farm buildings on it. Such a tax therefore does not greatly diminish the supply of agricultural produce offered on the market, nor raise the price of produce; and it is not therefore shifted away from the owners of land.
This assumes that the true rent of land on which the tax is levied is assessed with reference to its general capabilities, and not to the special use which the owner makes of it: its net product is supposed to be that which could be got by a cultivator of normal ability and enterprise, turning it to good account to the best of his judgment. If an improved method of cultivation develops latent resources of the soil, so as to yield an increased return much in excess of what is required to remunerate the outlay with a good rate of profits; this excess of net return above normal profits belongs properly to true rent: and yet, if it is known, or even expected, that a very heavy special tax on true rent will be made to apply to this excess income, that expectation may deter the owner from making the improvement
§ 5. A little has been said incidentally of the competition between different branches of industry for the same raw material or appliances for production. But now we have to consider the competition between various branches of agriculture for the same land. This case is simpler than that of urban land, because farming is a single business so far as the main crops are concerned; though the rearing of choice trees (including vines), flowers, vegetables etc. affords scope for various kinds of specialized business ability. The classical economists were therefore justified in provisionally supposing that all kinds of agricultural produce can be regarded as equivalent to certain quantities of corn; and that all the land will be used for agricultural purposes, with the exception of building sites which are a small and nearly fixed part of the whole. But when we concentrate our attention on any one product, as for instance, hops, it may seem that a new principle is introduced. That is however not the case. Let us look into this.
Hops are grown in varying rotations with other crops; and the farmer is often in doubt whether he shall grow hops or something else on one of his fields. Thus each crop strives against others for the possession of the land; and if any one crop shows signs of being more remunerative than before relatively to others, the cultivators will devote more of their land and resources to it. The change may be retarded by habit, or diffidence, or obstinacy, or limitations of the cultivator’s knowledge; or by the terms of his lease. But it will still be true in the main that each cultivator—to recall once more the dominant principle of substitution—”taking account of his own means, will push the investment of capital in his business in each several direction until what appears in his judgment to be the margin of profitableness is reached; that is, until there seems to him no good reason for thinking that the gains resulting from any further investment in that particular direction would compensate him for his outlay.”
Thus in equilibrium, oats and hops and every other crop will yield the same net return to that outlay of capital and labour, which the cultivator is only just induced to apply. For otherwise he would have miscalculated; he would have failed to get the
maximum reward which his outlay can be made to yield: and it would still be open to him to increase his gains by redistributing his crops, by increasing or diminishing his cultivation of oats or some other crop
This brings us to consider taxation in reference to the competition of different crops for the use of the same land. Let us suppose that a tax is imposed on hops, wherever grown; it is not to be a mere local rate or tax. The farmer can evade a part of the pressure of the tax by lessening the intensity of his cultivation of the land which he plants with hops; and a yet further part by substituting another crop on land which he had proposed to devote to hops. He will have recourse to this second plan in so far as he considers that he would get a better result by growing another crop, and selling it free from the tax, than by growing hops and selling them in spite of the tax. In this case the surplus which he could obtain from the land by growing, say, oats upon it would come into his mind when deciding where to set the limit to his production of hops. But even here there would be no simple numerical relation between the surplus, or rent, which the land would yield under oats, and the marginal costs which the price of hops must cover. And a farmer whose land produced hops of exceptionally high quality, and which happened to be in good condition at the time for hops, would have no doubt at all that it was best to grow hops on the land; though in consequence of the tax he might decide to curtail a little his expenditure on it
Meanwhile the tendency towards a general restriction in the supply of hops would tend to raise their price. If the demand for them were very rigid, and hops of adequate quality could not easily be imported from beyond the range of this special tax, the price might rise by nearly the full amount of the tax. In that case the tendency would be checked, and very nearly as much hops would be grown as before the tax had been levied. And here, as in the case of a tax on printing, recently discussed, the effect of a local tax is in strong contrast to that of a general tax. For unless the local tax covered most of the ground in the country on which good hops could be grown, its effect would be to drive them beyond its boundary: very little revenue would be got from it, local farmers would suffer a good deal, and the public would pay a rather higher price for their hops.
§ 6. The argument of the last section applies, so far as short periods are concerned, to the earning power of farm-buildings and to other quasi-rents. When existing farm-buildings, or other appliances which could be used in producing one commodity are diverted to producing another because the demand for that is such as to enable them to earn a higher income by producing it, then
for the time the supply of the first will be less, and its price higher than if the appliances had not been able to earn a higher income by another use. Thus, when appliances are capable of being used in more than one branch of agriculture, the marginal cost in each branch will be affected by the extent to which these appliances are called off for work in other branches. Other agents of production will be pushed to more intensive uses in the first branch, in spite of a diminishing return; and the value of its product will rise, because only at a higher value will the price be in equilibrium. The increased earning power of the appliances due to the external demand will appear to be the cause of this increase in value: for it will cause a relative scarcity of the appliances in that branch of production, and therefore raise marginal costs. And from this statement it appears superficially to be a simple transition to the statement that the increased earning power of the appliances enter into those costs which govern value. But the transition is illegitimate. There will be no direct or numerical relation between the increase in the price of the first commodity and the income that the appliances can earn when they have been transferred to the second industry and adapted for service in it.
Similarly, if a tax be put on factories used in one industry, some of them will be diverted to other industries; and consequently the marginal costs and therefore the values of the products in those industries will fall; simultaneously with a temporary fall in net rental values of factories in all uses. But these falls will vary in amount, and there will be no numerical relation between the fall in the prices of the product and in these rents, or rather quasi-rents.
These principles are not applicable to mines, whether for short periods or for long. A royalty is
not a rent, though often so called. For, except when mines, quarries, etc., are practically inexhaustible, the excess of their income over their direct outgoings has to be regarded, in part at least, as the price got by the sale of stored-up goods—stored up by nature indeed, but now treated as private property; and therefore the marginal supply price of minerals includes a royalty in addition to the marginal expenses of working the mine. Of course the owner desires to receive the royalty without undue delay; and the contract between him and the lessee often provides, partly for this reason, for the payment of a rent as well as a royalty. But the royalty itself on a ton of coal, when accurately adjusted, represents that diminution in the value of the mine, regarded as a source of wealth in the future, which is caused by taking the ton out of nature’s storehouse
It may be noted, however, that rent proper is estimated on the understanding that the original properties of the soil are unimpaired. And when the income derived from improvements is regarded as a quasi-rent, it is to be understood that they are kept up in full efficiency: if they are being deteriorated, the equivalent of the injury done to them must be deducted from the income they are made to yield before we can arrive at that
Net income which is to be regarded as their quasi-rent.
That part of the income which is required to cover wear-and-tear bears some resemblance to a royalty, which does no more than cover the injury done to a mine by taking ore out of it.
Political Economy, p. 129), “for all useful purposes the distinction of profits from rent ceases as soon as the capital from which a given revenue arises has become, whether by gift or by inheritance, the property of a person to whose abstinence and exertions it did not owe its creation.” Again, Mill says,
Political Economy, Book III. ch. V. § 4, “Any difference in favour of certain producers or in favour of production in certain circumstances is the source of a gain, which though not called rent unless paid periodically by one person to another, is governed by laws entirely the same with it.”
It has been well observed that a speculator, who, without manipulating prices by false intelligence or otherwise, anticipates the future correctly; and who makes his gains by shrewd purchases and sales on the Stock Exchange or in Produce Markets, generally renders a public service by pushing forward production where it is wanted, and repressing it where it is not: but that a speculator in land in an old country can render no such public service, because the stock of land is fixed. At the best he can prevent a site with great possibilities from being devoted to inferior uses in consequence of the haste, ignorance, or impecuniosity of those in control of it.
Principles, III. XVI. 2), when discussing “joint products,” observed that all questions relating to the competition of crops for the possession of particular soils are complicated by the rotation of crops and similar causes; an intricate debit and credit account by double entry needs to be kept between the various members of the rotation. Practice and shrewd instinct enable the farmer to do this fairly well. The whole problem might be expressed in simple mathematical phrases. But they would be tedious, and perhaps unfruitful. They would therefore not be serviceable, so long as they remained abstract; though they belong to a class which may ultimately be of good use in the higher science of agriculture, when that has advanced far enough to fill in realistic details.
The ordinary man is offended by the old phrase that rent does not enter into the price of oats; when he sees that an increase in the demand for land for other uses, manifests itself in a rise of the rental value of all land in the neighbourhood; leaves less land free for growing oats; consequently makes it worth while to force larger crops of oats out of the remaining oat-land and thus raises the marginal expenses of oats and their price. A rise in rent does serve as a medium through which the growing scarcity of land available for hops and other produce obtrudes itself on his notice; and it is not worth while to try to force him to go behind these symptoms of the change in conditions to the truly operative causes. It is therefore inexpedient to say that the rent of land does not enter into their price. But it is worse than inexpedient to say that the rent of the land does enter into their price: that is false.
Jevons asks (Preface to
Theory of Political Economy, p. liv): “If land which has been yielding £2 per acre rent, as pasture, be ploughed up and used for raising wheat, must not the £2 per acre be debited against the expenses of production of wheat?” The answer is in the negative. For there is no connection between this particular sum of £2 and the expenses of production of that wheat which only just pays its way. What should be said is:—”When land capable of being used for producing one commodity is used for producing another, the price of the first is raised by the consequent limitation of its field of production. The price of the second will be the expenses of production (wages and profits) of that part of it which only just pays its way, that which is produced on the margin of profitable expenditure. And if for the purposes of any particular argument we take together the whole expenses of the production on that land, and divide these among the whole of the commodity produced; then the rent which we ought to count in is not that which the land would pay if used for producing the first commodity, but that which it does pay when used for producing the second.”
Wealth of Nations, I. XI.) In this, as in many other instances, he anticipated in one part of his writings truths which in other parts he has seemed to deny.
Adam Smith discusses the “price at which coals can be sold for any considerable time”; and contends that “the most fertile mine regulates the price of coals at all other mines in the neighbourhood.” His meaning is not clear; but he does not appear to be referring to any temporary underselling; and he seems to imply that the mines are leased at so much a year. Ricardo, following on apparently the same lines, comes to the opposite conclusion that it “is the least fertile mine which regulates price”; which is perhaps nearer the truth than Adam Smith’s doctrine. But in fact when the charge for the use of a mine is mainly in the form of a royalty, neither proposition seems to be applicable. Ricardo was technically right (or at all events not definitely wrong) when he said that rent does not enter into the marginal cost of production of mineral produce. But he ought to have added that if a mine is not practically inexhaustible, the income derived from it is partly rent and partly royalty; and that though the rent does not, the minimum royalty does enter directly into the expenses incurred on behalf of every part of the produce, whether marginal or not.
The royalty is of course calculated in regard to those seams in the mine, which are neither exceptionally rich and easy of working, nor exceptionally poor and difficult. Some seams barely pay the expenses of working them; and some which run short, or have a bad fault, do not even nearly pay the wages of the labour spent on them. The whole argument however implicitly assumes the conditions of an old country. Professor Taussig is probably right when, having in view the circumstances of a new country (
Principles, II. p. 96), he “doubts whether any payment at all can be secured by the owner of the very poorest mine, assuming he has done nothing to develop it.”