§ 4. Cost of Production properly represented by sacrifice, or cost, to the Laborer as well as to the Capitalist; the relation of this conception to the Cost of Labor.

In discussing Cost of Labor (supra, pp. 225, 226), Mr. Mill found that the advances of the immediate producer consisted [pg 268] not only of wages, but also of tools, materials, etc., in the price of which he was including the profits of an auxiliary capitalist who advanced the capital for making these tools, etc. But, then, if a line of division were to be passed down through all these advances, separating wages from profits, he urged that, if all the capitalists (auxiliary and immediate both) were one, all the advances of the capitalist might be considered as wages. Profits did not form a part of the outlay to the capitalists in the former analysis. And this seems correct enough. Now, however, he suggests that the outlay of the immediate producers should include the profit of the auxiliary capitalist. More than this, Mr. Mill now includes in cost to the capitalist the profit of the immediate capitalist. For example, in his illustration of the manufacture of linen, he includes not merely the profit of the auxiliary capital engaged in spinning and weaving, but the profit of the immediate and last capitalist, the linen-manufacturer, also. This includes in the cost of producing an article a profit not realized until after the commodity is produced.

It is now time to give a more correct idea of cost of production. Every one admits, for example, that the “cost of production” of wheat is less in the United States than in England. If, for instance, three men with a capital of one hundred dollars may on a plot of ground, A, in the United States produce one hundred bushels of wheat, it will happen that the same men and capital will only produce sixty bushels on ground, B, in England.

In ordinary language, then, we say that the cost of production is greater in England than in the United States, because the same labor and capital here produce one hundred bushels for sixty in England; or, what amounts to the same thing, that less labor and capital could produce sixty bushels in the United States than sixty bushels in England. If we suppose that one fourth of the crop is profit, and three fourths is assigned to wages in both countries, then in the United States the one hundred dollars of capital receives twenty-five bushels of profit, while in England it receives only fifteen; and the three men receive as wages in the United States twenty-five bushels each, while in England they receive only fifteen bushels each. The first important induction to be made is that where cost of production [pg 269] is low, wages and profits are high. The high productiveness of extractive industries in the United States is the reason why wages and profits are higher here than in older countries.

Now the second important question is, Is cost of production made up of wages and profits, and is it true that the cost rises with a rise of wages and profits? Certainly not. Wages and profits are both higher in the United States than in England, but no one is so absurd as to say that the cost of production of wheat (as above explained) is higher here than there. It is exactly because cost of production of wheat is lower in the United States that wages and profits measured in wheat are higher here than in England. Therefore, it can not be granted, as Mr. Mill expounds the doctrine, that cost of production is made up of wages and profits. When we speak of an increased cost of production of a given article, we mean that its production requires more labor and capital than before; and of a decrease in cost of production, that it requires less labor and capital than before; meaning by “more labor” that a given quality of labor is exerted for a longer or shorter time, and by “more capital” that a greater or less quantity of wealth abstained from is employed for a longer or shorter time; or, in other words, that laborers and capitalists undergo more or less sacrifice in exertion and abstinence, respectively, to attain a given result. This is the contribution to cost of production made by Mr. Cairnes, and briefly defined as follows: “In the case of labor, the cost of producing a given commodity will be represented by the number of average laborers employed in its production—regard at the same time being had to the severity of the work and the degree of risk it involves—multiplied by the duration of their labors. In that of abstinence, the principle is analogous; the sacrifice will be measured by the quantity of wealth abstained from, taken in connection with the risk incurred, and multiplied by the duration of the abstinence.”216

This view of cost of production takes into consideration, in the act of production, what Mr. Mill does not include, the cost, or real sacrifice, to the laborer as well as to the capitalist. It may, then, be well to state the relations of cost of production, taken in this better sense, to value.

Within competing groups, where there is free choice for labor and capital to select the most remunerative occupations, the hardest and most disagreeable employments will be best paid, and the wages and profits will be in proportion to the sacrifice involved in each case. If so, the amount paid in wages and profits represents the sacrifices in each case. [pg 270] Now, the aggregate product of an industry is the source from which is drawn its wages and profits: the aggregate wages and profits, therefore, must vary with the value of the total product. If the total value depart from the sum hitherto sufficient to pay the given wages and profits, then some will be paid proportionally less than their sacrifice. The value of a commodity, therefore, within the competing group, must conform to the costs of production. If, for example (a), the value at any time were such as not to give the laborer the usual equivalent for his sacrifice, he would change his employment to another within the group where he could get it; if (b) the share of the capitalist were at any time insufficient to give him the usual reward for his abstinence, he would change the investment of his capital. Therefore, within such limits as allow a free competition of labor and capital, value must conform itself to cost of production.

Not so, however, with the products of non-competing industrial groups. As shown by Mr. Mill, labor does not pass freely from one employment to another; and it must be said that capital does not either, although vastly more ready to move than labor. In a large and thinly settled country capital does not move freely over the whole area of industry; if it did, different rates of profit would not prevail, as we all know they do, in the United States. Now, as before stated, the total value of the commodities resulting from the exertions of each group of producers is the source from which wages and profits are drawn. The aggregate wages and profits in each industry will vary with the value of the aggregate products. But this total value depends upon what it will exchange for of the products of other groups; that is, this value depends on the reciprocal demand of one group for the commodities of the other groups, as compared with the demand of the other groups for its products. For example, although cost of production is low in group A, if the demand from outside groups were to be strong, the exchange value of A's products would rise, and A would get more of other goods in exchange; that is, the total produce is large, but a second increment, arising from a higher exchange value, is to be shared among A's laborers and capitalists. A few years ago, about 1878-1879, the value of wheat in the United States rose because of the increased demand from Europe, where the harvests had been unusually deficient. There had been no falling off in the productiveness of the farming industry of the United States to cause the increased price; but the relative demand of other industrial groups for wheat, the product of the farming industry, raised the exchange value of wheat, and so increased the industrial rewards of those engaged as laborers and capitalists in farming. So [pg 271] it is to be concluded that since there is no free movement of labor and capital between non-competing groups, wages and profits may constantly remain at rates which are not in correspondence with the actual sacrifice, or cost, to labor and capital in different groups; hence, their products do not exchange for each other in proportion to their costs of production. Reciprocal demand is the law of their value.

It will be said, at once, that the foregoing conception of cost of production is entirely opposed to the language of practical men of affairs. They constantly speak of higher or lower wages as increasing their cost of production, or as affecting their ability to compete with foreigners. So universal a usage implies a foundation of truth which demands attention. Wages do represent cost to the capitalist, that is, the chief part of the outlay he makes in order to get a given return; but we have already seen this, and, in the language of Political Economy, termed it “cost of labor” to the capitalist. When the business world use the phrase cost of production, they use it in the sense of cost of labor, as hitherto explained. When they are obliged by strikers to pay more wages, they say that it increases their “cost of production,” meaning the cost to them of getting their product, and that it affects their profits. This, then, will show that there is no objection to be urged, in its true sense, against the phrase cost of production, arising from its misuse in the common language of business.

The real connection between the proper conception of cost of production and cost of labor is, however, worth attention. It touches cost of labor through that one of its elements called “efficiency of labor.” The more productive an industry is, the higher its wages and profits may be, and it is exactly at this point that more attention should be given to the relations of labor and capital. If productiveness can be increased, higher wages as well as higher profits are possible. The proper understanding of the idea that where cost of production is low wages and profits are high, throws a flood of light on many industrial questions in the United States. In the connection in which it stands, as I have shown, to cost of labor, it means that if commodities can be produced at a less sacrifice to labor and capital by the use of machinery and new processes, higher wages are consistent with a lower price of the given product. It explains the fact that, owing to skill or natural resources, labor, although paid much higher rates, can produce articles cheaper than laborers who are less highly paid. Mr. Brassey217has pointed out that English wages are higher than on the Continent; and yet England, through low cost of production, [pg 272] owing to skill, natural resources, etc., can produce so much more of commodities for a given outlay that (while keeping her usual rate of profit) she can generally undersell her competitors who employ cheaper labor. The same observations apply to the United States; but the question of foreign competition will be further discussed (Book III, Chap. XX) after we have studied international trade and values.

“And here it may be well to state precisely what is to be understood by a ‘fluctuation of the market,’ as distinguished from those changes of normal price which we have been considering. Normal price, as we have seen, is governed, according to the circumstances of the case [as to whether there is free industrial competition or not], by one or other of two causes—cost of production and reciprocal demand. A change in normal price, therefore, is a change which is the consequence of an alteration in one or other of these conditions. So long as the determining condition—be it cost of production or reciprocal demand—remains constant, the normal price must be considered as remaining constant; but, the normal price remaining constant, the market price (which, as we have seen, depends on the opinion of dealers respecting the state of supply and demand in relation to the particular article) may undergo a change—may deviate, that is to say, either upward or downward from the normal level. Such changes of price, occurring while the permanent conditions of production remain unaffected, can only be temporary, calling into action, as they do, forces which at once tend to restore the normal state of things: they may therefore be properly described as ‘fluctuations of the market.’ ”218