A Treatise on Political Economy
OF THE DISTRIBUTION OF WEALTH
BOOK II, CHAPTER I
OF THE BASIS OF VALUE; AND OF SUPPLY AND DEMAND.
The principal phenomena of production have been investigated in the first book; wherein I have shown how human industry, with the aid of capital and of natural agents and properties, creates every kind of utility, which is the primary source of value; and in what way social institutions and public authority operate to the benefit or the prejudice of production. This second book will be devoted to the consideration of the distribution of wealth: to which end it will be necessary, first, to analyze the nature of value, the object of distribution; secondly, to ascertain the laws, which regulate the distribution of value, when once created amongst the various members of society, so as to constitute individual revenue.
The valuation of an object is nothing more or less than the affirmation, that it is in a certain degree of comparative estimation with some other specified object; and any other object possessed of value may serve as the point of comparison. A house, for instance, may be valued in corn or in money. To say that it is worth 4000 dollars conveys a more accurate notion of its value, than to say that it is worth 4000 bushels of wheat, solely because the habit of reckoning the value of all commodities in coin makes it easier for the mind to form an idea of the value of 4000 dollars in other commodities, that is to say, of the quantity of other commodities obtainable for that sum, than of that obtainable for 4000 bushels of wheat. Yet, if wheat be 1 dollar a bushel, the degree of value expressed by each is the same.
In every act of valuation, the object valued is the fixed datum. In the instance first given, the house is the datum: it is a definite amount of materials, put together in a definite manner, upon a definite site. But the point of comparison is variable in amount, according to the degree of estimation in the mind of the valuer. If valued at 4000 dollars, the house is reckoned to be equivalent to so many pieces of silver coin of the weight of 416 grains, with a mixture of 179-1664 parts of alloy; if at 4500 dollars, or 3500 dollars, it is but a variation of the quantity of the commodity, that is the specific point of comparison. So likewise, if that point be wheat, the variable quantity of that commodity would express the degree of value.
Valuation is vague and arbitrary, when there is no assurance that it will be generally acquiesced in by others. The owner of the house may reckon it worth 4500 dollars, while an indifferent person would value it at no more than 3500 dollars, and probably neither would be right. But if another, or a dozen other persons be willing to give for it a specific amount of other commodities, say 4000 dollars, or 4000 bushels of wheat, we may conclude the estimate to be a correct one. A house that will fetch 4000 dollars in the market is worth that sum.*1 But if one bidder only will give that price, and he is unable to re-sell it without loss, he will give more than it is worth. The only fair criterion of the value of an object is, the quantity of other commodities at large, that can be readily obtained for it in exchange, whenever the owner wishes to part with it; and this, in all commercial dealings, and in all money valuations, is called the current price.*2
What is it, then, that determines this current price of commodities?
The want or desire of any particular object depends upon the physical and moral constitution of man, the climate he may live in, the laws, customs, and manners of the particular society, in which he may happen to be enrolled. He has wants, both corporeal and intellectual, social and individual; wants for himself and for his family. His bear-skin and reindeer are articles of the first necessity to the Laplander; whilst their very name is unknown to the lazzarone of Naples, who cares for nothing in the world if he get but his meal of macaroni. In Europe, courts of justice are considered indispensable to the maintenance of social union; whereas the Indian of America, the Tartar, and the Arab, feel no want of such establishments. It is not our business here to inquire, wherein these wants originate; we must take them as existing data, and reason upon them accordingly.
Of these wants, some are satisfied by the gratuitous agency of natural objects; as of air, water, or solar light. These may be denominated natural wealth, because they are the spontaneous offering of nature; and, as such, mankind is not called upon to earn them by any sacrifice or exertion whatever; for which reason, they are never possessed of exchangeable value. Other wants there are, that can only be satisfied by the employment of objects possessed of an utility, which they could not have been invested with without some modification by human agency,—without having undergone some change of condition, and without some difficulty having been surmounted for the purpose. Of this kind are the products of agriculture, commerce, and manufacture, in all their infinite ramifications. To them alone is any value attached; and for a very obvious reason; because the very act of production implies an act of mutual exchange, in which the producer has given his personal agency for the product obtained by its exertion. Wherefore, he will hardly resign it without receiving what is, in his estimation, an equivalent. These may be called social wealth, both because an act of exchange is in itself a social act, and because exclusive property in the product obtained by personal exertion, or by an act of exchange, can only be secured by social institutions. Social wealth, it is to be observed, is the only part of human wealth, that can form the subject of scientific research. 1. Because it is the only part that is the object of human estimation, or at least of such estimation, as is not altogether arbitrary and mental. 2. Because it is the only one which is created, distributed, and destroyed, according to any rules that can be assigned by human science.
The knowledge of the ground-work of the quality, value, or rather exchangeable value, leads to the perception of its origin. The items of social wealth are invested with value by the necessity of giving something to obtain them; and that something is productive exertion. When once obtained, when this sacrifice has been made in the attainment, the party is really more wealthy; he has wherewithal to satisfy more wants; and, if the object obtained by this sacrifice be unsuited to the personal wants of the owner, he may make use of it for the attainment of some object of personal desire, by the way of exchange for some other product; which other product will itself be the result of similar productive exertion; so that, in fact, the exchange will be a mere mutual transfer of the productive exertion on either side, whereof the two products respectively are the result. When a bushel of wheat is given for seven pounds of coffee, there is a mere transfer of the productive agency exerted in creating the one, for that exerted in the creation of the other.*3
Wherefore, there is a current value or price established for productive service as well as for products. For, if the agency exerted in the creation of a bushel of wheat can obtain, as its reward, in the way of exchange, either a bushel of wheat or seven pounds of coffee indifferently, what is there to prevent its obtaining in the same way any other equivalent product, say a yard of cotton cloth, 5 yards of ribbon, a dozen plates, or any thing else? Should the bushel of wheat be exchangeable for a less amount of any of these commodities respectively, the productive agency exerted in the creation of wheat would be proportionately less rewarded, than that exerted in the creation of the specific commodity; and a portion of the former would be attracted to the latter branch of production, until the recompense of labour in each department should find its fair level.
Each class of productive agency has a current price peculiar to itself. If the productive agency exerted in the production of a bushel of wheat can obtain for itself but 1-15 of its own product, it will be entitled to no more than 1-15 of the value of any other product obtainable by exchange for that quantity of wheat; for instance to 1-15 of a dollar: and so of other products.
Thus it is obvious, that the current value of productive exertion is founded upon the value of an infinity of products compared one with another;*4 that the value of products is not founded upon that of productive agency, as some authors have erroneously affirmed;*5 and that since the desire of an object, and consequently its value, originates in its utility, it is the ability to create the utility wherein originates that desire, that gives value to productive agency; which value is proportionate to the importance of its co-operation in the business of production, and forms, in respect to each product individually, what is called, the cost of its production.
The utility of a product is not confined to one human being, but applies to a whole class of society at the least, as in the case of particular articles of clothing; or to a whole community, as in that of most of the articles of food that are adapted to human consumption in general, without distinction of sex or age. For this reason, the demand for a specific object, or product, or act of productive exertion, has a certain degree of extent. The aggregate demand for sugar in France is said to exceed 500,000 quintals per annum. Even the individual demand of a specific product for individual consumption may be more or less urgent. Whatever be its intensity, it may be called by the general name of demand; and the quantity attainable at a given time, and ready for the satisfaction of those who are in want of the specific article, may be called the supply or amount in circulation.
But this must be understood with some limitation; for there is no object of pleasure or utility, whereof the mere desire may not be unlimited, since every body is always ready to receive whatever can contribute to his benefit or gratification. There must, therefore, be some bounds to demand; and the most effectual limitation is, the ability to give some other equivalent product for the object of desire. All the porters in a commercial city might desire to have a coach and six for the more comfortable execution of their business, without raising the price of horses and carriages a tittle. The objects, which each individual has to give as an equivalent for the object of his desire, are no other than the products of his own productive means, which are limited even in the case of the most wealthy member of society.
Wealth is, in all countries, distributed in every degree of gradation, from the populous level of mediocrity to the solitary pinnacle of extreme affluence. Accordingly, the products most generally desirable are really demanded by a limited number only, because they alone have wherewithal to obtain them; and even their ability may be more or less according to circumstances. Whence it may be further concluded, that the same product or products may be in greater demand at a lower scale of price, and when attainable by less productive exertion, although nowise increased in utility, merely because accessible to a greater number of consumers; and, on the contrary, less in demand at a higher scale of price, because accessible to a smaller number.
Suppose that, in a severe winter, a method should be hit upon of manufacturing knit-waistcoats of woollen at 2 dollars each; probably all who should have 2 dollars left, after satisfying more urgent wants, would provide themselves with these waistcoats; but those who should have but a dollar and a half left must still go without. If the same article could be produced at one dollar and a half, these latter also might all be provided and become consumers; and the consumption would be still further extended, if they should be produced at one dollar only. In this manner, products formerly within reach of the rich alone have been made accessible to almost every class of society, as in the case of stockings.
When a product is raised in price, whether by taxation or otherwise howsoever, the contrary effect is experienced; the number of its consumers is reduced; for it can only be obtained by such as can afford to pay for it; and the ability to purchase is not increased by the same causes, that operate to raise the price. Thus, in England, the great majority of the population is wholly precluded from the consumption of vinous liquors, and of many other articles; for their attainment involves so large a sacrifice of products, or of productive agency, that those only can attempt it, who have a great deal of either to spare. In such cases, not only is the number of consumers diminished, but the consumption of each consumer is reduced also. Though a consumer of coffee may not be compelled, by a rise of its price, to relinquish that beverage altogether, he must at all events curtail the amount of his consumption; which is then like that of two individuals, of whom one discontinues, and the other remains able and willing to continue the use of the article.
In commercial speculation, as the purchaser does not buy for his own consumption, he proportions his purchases to what he expects to sell. Since, then, the quantity he can sell depends upon the price he can afford to sell at, he will buy less according as the price rises, and more according as it falls.
In poor countries, objects of even the commonest use, and of inferior price, frequently exceed the means of a great proportion of the population. There are countries, where shoes, though cheap, are out of reach of most of the inhabitants. The price of this commodity does not fall to a level with the means of the people; because that level is still below the bare cost of production. But, shoes of leather not being absolutely necessary to existence, those who are unable to procure these, wear wooden shoes, (sabots) or go barefoot. When this is unhappily the case with an article of primary necessity, part of the population must perish, or at least cease to be renewed. These are the causes of a general nature, that limit the demand for each product, and for all products in general.
In respect to supply, it consists of the whole of any commodity which the owners for the time being are disposed to part with for an equivalent, in other words, to sell at the current rate, and not merely of what is actually on sale at the time. The whole of this is also called the circulating or floating stock. Yet, strictly speaking, no commodity is in circulation, except during the act of transit from the seller to the purchaser, which is almost instantaneous. But the bare act of transit has no influence on the terms of the bargain, to which it is commonly subsequent; it is a mere matter of executive detail. The point of real importance is, the inclination of the owner to part with the object of property. A commodity is in circulation, whenever it is in quest of a purchaser, which it may be in the most urgent need of, without altering its locality in the least. Thus, the stock in a shop or warehouse is in circulation; thus too, lands, rent-charges, houses, and the like, are said to be in circulation, and the expression is intelligible enough. Even industry is sometimes in circulation and sometimes not, according as it is either in quest of employment, or already employed.
For the same reason, an object ceases to be in circulation, the moment it is set apart, either for consumption or for export to another market, or accidentally destroyed, or withdrawn by the caprice of its owner, or held back at a price, which amounts to a refusal to sell.
Inasmuch as supply consists of those commodities only, which are to be had at the current price or ordinary rate of the market, a commodity raised by the cost of production above that level, will cease to be produced, or to form part of the supply. Wherefore, the supply will be more abundant, when the current price is high, and more scanty when that price has declined.
Besides these universal and permanent limitations of supply and demand, there are others of a casual and transient nature, which always operate concurrently with the former.
The prospect of an abundant vintage will lower the price of all the wine on hand, even before a single pipe of the expected vintage has been brought to market; for the supply is brisker, and the sale duller, in consequence of the anticipation. The dealers are anxious to dispose of their stock in hand, in fear of the competition of the new vintage; while the consumers, on the other hand, retard their fresh purchases, in the expectation of gaining in price by the delay. A large arrival and immediate sale of foreign articles all at once, lowers their price, by the relative excess of supply above demand. On the contrary, the expectation of a bad vintage, or the loss of many cargoes on the voyage, will raise prices above the cost of production.
Moreover, there are some particular products, which nature or human institutions have subjected to monopoly, and thus prevented from being supplied in equal abundance with those of a similar description. Of this kind are the wines of particular and celebrated vineyards, the soil of which cannot be extended by the extended demand. So the postage of letters is, in most countries, charged at a monopoly-price.
Finally, whatever be the general or particular causes, that operate to determine the relative intensity of supply and demand, it is that intensity, which is the ground-work of price on every act of exchange; for price, it will be remembered, is merely the current value estimated in money. The demand for all objects of pleasure, or utility, would be unlimited, did not the difficulty of attainment, or price, limit and circumscribe the supply. On the other hand, the supply would be infinite, were it not restricted by the same circumstance, the price, or difficulty of attainment: for there can be no doubt, that whatever is producible would then be produced in unlimited quantity, so long as it could find purchasers at any price at all. Demand and supply are the opposite extremes of the beam, whence depend the scales of dearness and cheapness; the price is the point of equilibrium, where the momentum of the one ceases, and that of the other begins.
This is the meaning of the assertion, that, at a given time and place, the price of a commodity rises in proportion to the increase of the demand and the decrease of the supply, and vice versâ; or in other words, that the rise of price is in direct ratio to the demand, and inverse ratio to the supply.
The utility of an object, or, what is the same thing, the desire to obtain it, may possibly be unable to raise its price to a level with its cost of production. In this case it is not produced, because its production would cost more than the product would be worth. Probably the price that caviar*6 would fetch at Paris would hardly equal the charge of producing it there; for it is so little in request there, that it scarcely would bring the lowest price that it could be procured for, and consequently it is not produced; but elsewhere, it is both produced and consumed in great quantities.
When the price of any object is legally fixed below the charges of its production, the production of it is discontinued, because nobody is willing to labour for a loss: those, who before earned their livelihood by this branch of production, must die of hunger, if they find no other employment; and those, who could have purchased the product at its natural price, are obliged to go without it. The establishment of the fixed rate, or maximum, is a suppression of a portion of production and consumption; that is to say, a diminution of the prosperity of the community, which consists in production and consumption. Even the produce already existing is not so properly consumed as it should be. For, in the first place, the proprietor withholds it as much as possible from the market. In the next, it passes into the hands, not of those who want it most, but of those who have most avidity, cunning, and dishonesty; and often with the most flagrant disregard of natural equity and humanity. A scarcity of corn occurs; the price rises in consequence; yet still it is possible, that the labourer, by redoubling his exertions, or by an increase of wages, may earn wherewithal to buy it at the market price. In the mean time, the magistrate fixes corn at half its natural price: what is the consequence? Another consumer, who had already provided himself, and consequently would have bought no more corn had it remained at its natural price, gets the start of the labourer, and now, from more superfluous precaution, and to take advantage of the forced cheapness, adds to his own store that portion, which should have gone to the labourer. The one has a double provision, the other none at all. The sale is no longer regulated by the wants and means, but by the superior activity of the purchasers. It is, therefore, not surprising, that a maximum of price on commodities should aggravate their scarcity.
A law, that simply fixes the price of commodities at the rate they would naturally obtain, is merely nugatory, or serves only to alarm producers and consumers, and consequently to derange the natural proportion between the production and the demand; which proportion, if left to itself, is invariably established in the manner most favourable to both.
Hope, fear, malevolence, benevolence, in short, every human passion or virtue may influence the scale of price. But it is the province of moral science to estimate the intensity of their effect upon actual price in every instance, which is the only thing we are here to attend to. Neither need we advert to the operation of the causes of a nature purely political, that may operate to raise the price of a product above the degree of its real utility. For these are of the same class with actual robbery and spoliation, which come under the department of criminal jurisprudence, although they may intrude themselves into the business of the distribution of wealth. The functions of national government, which is a class of industry, whose result or product is consumed by the governed as fast as it is produced, may be too dearly paid for, when they get into the hands of usurpation and tyranny, and the people be compelled to contribute a larger sum than is necessary for the maintenance of good government. This is a parallel case to that of a producer without competitors, whether he have got rid of them by force, or by accidental circumstances. He may raise his product to what price he will, even to the extreme limit of the consumer's ability, if his monopoly be seconded by authority. But it is the province of the political philosopher, and not of the political economist, to teach us how this evil may be avoided. In like manner, although it be the province of ethics, or of the knowledge of the moral qualities of man, to teach the means of ensuring the good conduct of mankind, in their mutual relations, yet, whenever the intervention of a superhuman power appears necessary to effect this purpose, those who assume to be the interpreters of that power must be paid for their service. If their labour be useful, its utility is an immaterial product, which has a real value; but, if mankind be nowise improved by it, their labour not being productive of utility, that portion of the revenues of society, devoted to their maintenance, is a total loss; a sacrifice without any return.
With the most earnest wish to confine myself within my subject it is impossible to avoid sometimes touching upon the confines of policy and morality, were it only for the purpose of marking out their points of contact.
Notes for this chapter
My brother, Louis Say, of Nantes, has attacked this position in a short tract entitled, Principles Causes de la Richesse et de la Misère des Peuples et des Particuliers, 8vo. Paris. Déterville. He lays down the maxim, that objects are items of wealth, solely in respect of their actual utility, and not of their admitted or recognised utility. In the eye of reason, his position is certainly correct; but in this science relative value is the only guide. Unless the degree of utility be measured by the scale of comparison, it is left quite indefinite and vague, and, even at the same time and place, at the mercy of individual caprice. The positive nature of value was to be established, before political economy could pretend to the character of a science, whose province it is to investigate its origin, and the consequences of its existence.
In the earlier editions of this work, I had described the measure of value to be the value of the other product, that was the point of comparison, which was incorrect. The quantity and not the value of that other product, is the measure of value in the object of valuation. This mistake gave rise to much ambiguity of demonstration, which the severity of criticism, both fair and unfair, has taught me to correct. Fas est et ab hoste doceri.
It is scarcely necessary to mention, that when commodities are exchanged, not for one another, but for money, the case is nowise varied. No seller ever takes money for his own consumption, or for any other purpose, than as an object of a second exchange; so that, in reality, the product sold is exchanged for the product bought with the price. When a bushel of wheat has been sold for dollar, and 7 lbs. of coffee bought with that dollar, the wheat has actually been bartered for the coffee, and the money that has intervened has withdrawn itself as completely, as if it had never appeared at all in the transaction. Wherefore it is quite correct to say, that relative value is determined by the relation of commodities one to another, and not solely by that of each commodity to money.
It must not be inferred from this passage, that I mean to say, that the productive agency exerted in raising a product, whose charges of production have amounted to a dollar, although it is saleable for 75 cents only, is therefore worth but 75 cents. My position merely implies, that this amount of productive service has, in such case, raised a value of 75 cents only, though it might have raised a value of a dollar.
Ricardo, Prin. Pol. Econ. and Taxation.
A pickle made of the roe of sturgeons, a favourite condiment of Russian diet.
Book II, Chapter II
End of Notes
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