An Introduction to the Theory of Value

on the Lines of Menger, Wieser, and Böhm-Bawerk

Second Edition – 1910

by William Smart (1853-1915)

Chapter XIV
From Cost of Production to Product

ITV-E2-14.1 If, finally, we take the case of those most many-sided productive goods, Iron and Labour, the proof of our theory may be considered fully tested.
ITV-E2-14.2 Leaving out complementary factors, which do not disturb the action of the law and would complicate our statement, suppose that iron is the sole productive good in the making of those various iron wares we find selling at different prices in the ironmongers’ shops. The general opinion is that it is the price of iron – disregarding other factors – that determines the price of iron wares, from nails to kitchen ranges. And what we have to prove is that the conduction of value really runs in the opposite direction – from nails and ranges to raw iron.
ITV-E2-14.3 Suppose for the moment that the prices obtainable for these products range from 40/ to 48/ for a given unit. That is to say: the ton of iron, when manufactured into, say, nails fetches 40/, when manufactured into other articles, it fetches respectively 42/, 44/, 46/, 48/. These prices are the result of the condition of the market at the moment. The manufacturers of these products – we shall call them respectively A, B, C, and D – represent the demand for iron, and the price they will be able to offer for iron depends on the prices obtained by these articles.
ITV-E2-14.4 On the other hand, the supply of raw iron held in store will naturally pass to the most capable buyers – the most capable manufacturers of iron wares – at the valuation of the last buyer. Suppose the stocks of iron are sufficient to meet the demand of E, D, and C, the valuation of C, the last buyer, will determine the price of iron at 44/ per ton. So far all has gone to show that it is the iron wares – through the marginal product – which determine the price of the productive good, iron.
ITV-E2-14.5 But now we come to a feature which gives countenance to the old theory. So long as the prices of iron wares – always assuming that iron is the sole productive group employed in the manufacture – range from 40/ to 48/, while the market price of iron stands at 44/, it is a proof that competition has not done its work. What naturally follows? Producers D and E who are getting respectively 2/ and 4/ advantage over costs will increase the output of their particular iron wares till over-supply brings down the price to 44/. On the other hand, producers A and B, who get respectively 4/ and 2/ less than cost, will curtail their production, till decrease of supply raises their prices to 44/. Thus, from above and from below, competition is always levelling prices to the cost of production. Here it is quite true that cost of production imposes itself on product. What is forgotten is that the cost of production is itself first determined by the marginal product.
ITV-E2-14.6 There is, however, a stronger argument for the old theory. Stocks of iron are not a fixed quantity. If new and productive mines are opened, or new processes discovered, the supply of iron increases, and prices of all iron products will certainly fall. Does this not prove that the value of iron wares is regulated by the cost of producing iron?
ITV-E2-14.7 Here we have a difficult subject to disentangle, and it will be as well to simplify it. Suppose a farmer is supplying a small village with potatoes, and by a new method of cultivation manages to double his crop for the former expenses of labour. What will happen as regards the price of potatoes? From our knowledge of what competition does in large production we are apt to say: “prices of potatoes will fall 50%.” This may be the final result, but not necessarily so, and at any rate the movement of price is instructive. The farmer is now able to sell at half the price if he wishes, but it is his interest to keep up the price as long as he can. What, however, will certainly happen, in normal circumstances, is that he will increase his production of potatoes. But it is not the case that, whatever nature and man produce, men will desire: it is, rather, that what man wants he usually sets nature and men to produce. To take off the extra supply of potatoes, then, the farmer must find a wider circle of demand than before; but there is nothing to lead us to suppose that there is any wider circle of demand at the old price. What we may safely suppose is that a great many housewives will buy extra potatoes if they can get them cheaper, but, in any case, the decision lies absolutely with them whether they will take more or not. It is easy to fall into the mistake of thinking that there will be a demand for everything produced if it is sold at a reasonable price, but this idea simply arises from the fact that producers anticipate desire and tempt demand. In the present case, demand must come from some level of want which was not satisfied at the former price, and is ready waiting to take up the extra supply if the price is brought down.
ITV-E2-14.8 If, however, as may very well happen – not in the case of potatoes probably, but in large articles of limited consumption – there is no such circle of demand at lower levels, what will happen is that the farmer will dismiss half the hired labour, produce the same quantity of potatoes as before, and maintain the former high price. For farmers, like other business men, do not put themselves on “salaries,” and give the public the benefit of all cheapening of production. It is characteristic of the capitalist employer in all departments that he speculates on having a profit, and thinks no profit too high, just because, as a speculative gain, it may be balanced any year by as great a loss. It is contrary, then, to all experience to think that employers will voluntarily reduce prices – any more than they will voluntarily raise wage or pay higher interest – because costs have decreased. They only do so under the compulsion of fear that their rivals will cut the feet from under them. Where competition is active, it will often seem as if reduction of costs were almost immediately followed by fall in prices of products, but, in the last resort – and that is what concerns us in seeking for a universal law of value – the new prices are determined by the lower and wider levels of want which are ready to take up increased supply of the majority of ordinary commodities.
ITV-E2-14.92 Transfer the argument now to the production of iron. If new mines are opened the first phenomenon is not a fall in the price of iron, but an increase of supply. If the demand from the side of iron wares has hitherto been met at the price – as we must assume – the new extra supply will not be taken off at the price, and there is, for the moment, over-supply. At this point, the lower level of demand for iron wares hitherto unsatisfied asserts itself, and offers its subjective valuation. This is accepted: a new marginal employment is found for iron. The price of this marginal product now determines the price of the productive good iron; and in time it is possible for competition to impose this marginal value on all iron products, and the price of iron wares generally falls.
ITV-E2-14.10 Lastly, take the case of Labour. Here we have a productive good of the same nature as iron in that it is capable of employment in an infinite number of ways. The labouring power of a nation, like all its other productive goods, goes steadily into the most remunerative employments one after another. But, of all productive goods, labour shows most evidently that it has no predetermined value, but gets its value entirely from what it produces. Consequently, the price of labour is, naturally, as variable as the price of its products. Some products of labour will for the time fetch a price equal to 10/ a day of wage; others, prices equal to 9/; and so on down the scale, perhaps, to 3/ per day. If the available labour as a whole is taken up at that wage, those products of labour which pay 3/ per day of price to labour will assert themselves as the marginal products, and that wage will seem in its turn to determine the value of other products. But if population goes on increasing, other things remaining the same, and a new supply of labour comes forward, this labour will inevitably seek lower levels of demand – for, of all goods, labour is the one that will not “keep.” On the other hand, there are at any time endless wants waiting on satisfaction, but not able to pay the marginal cost of satisfaction, the 3/ per day. Consequently, as buyers with a lower valuation than the marginal one, they do not affect price. But now the new surplus supply of labour and the unsatisfied layer of wants come together. Labour is set to satisfy wants that offer, say, 2/6 per day of wage for their satisfaction, and the products thus resulting become the marginal products. Happily for the labourer, competition cannot do its perfect work where the commodity bought and sold is human life: but, if labour were entirely mobile, it would only be a question of time till the marginal product fixed the wage of labour generally, and wages fell in harmony with the new marginal costs – the low wage for what the labourers produced being, let us hope, more than recouped by the universal fall in prices of what the labourers consumed.

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