§ 2. The values of foreign commodities depend, not upon Cost of Production, but upon Reciprocal Demand and Supply.

It has been previously explained that the conditions called. “international” are those, either within a nation, or those existing between two separate nations, which are such as to prevent the free movement of labor and capital from one group of industries to another, or from one locality to another distant one. Even if woolen cloth could be made cheaper in England than in the United States, we know that neither capital nor labor would easily leave the United States for England, although it might go from Rhode Island to Massachusetts under similar inducements. If shoes can be made with less advantage in Providence than in Lynn, the shoe industry will come to Lynn; but it does not follow that the English shoe industry would come to Lynn, even if the advantages of the latter were greater than those in England. If there be no obstacle to the free movement of labor and capital between places or occupations, and if some place or occupation can produce at a less cost than another place or occupation, then there will be a migration of the instruments of production. Since there is no free movement of labor and capital between one country and another, then two countries stand in the same relation as that of two “non-competing groups” within the same country, as before explained. When this fact is once fully grasped, the [pg 393] subject of international values becomes very simple. It does not differ from the question of those domestic values for which we found269that the dependence on cost of production would not hold, but that their values were governed by reciprocal demand and supply.

Attention should be drawn to the real nature of the present inquiry. It is not here a question as to what causes international trade between two countries: that has been treated in the preceding chapter, and has been found to be a difference in the comparative cost. The question now is one of exchange value, that is, for how much of other commodities a given commodity will exchange. The reasons for the trade are supposed to exist; but we now want to know what the law is which determines the proportions of the exchange. Why does one article exchange for more or less of another? Not, as we have seen, because one costs more or less to produce than the other.

In the trade between the United States and England in iron and corn, formerly referred to (p. 383), it was seen that a 100 days' labor of corn buys from England iron which would have cost the United States 125 days' labor. England sends 150 days' labor of iron and buys from the United States corn which would have cost her 200 days' labor. But what rule fixes the proportions between 100 and 125 for the United States, and between 150 and 200 for England, at which the exchanges will take place? The trade increases the productiveness of both countries, but in what ratio will the two countries share this gain? The answer is, briefly, in the ratio set by reciprocal demand and supply, that is, the relative strength, as compared with each other, of the demands of the two countries respectively for iron and corn. This, however, may be capable of explanation in a simple form.

A has spades, and B has oats, to dispose of; and each wishes to get the article belonging to the other. Will A give one spade for one bushel of oats, or for two? Will B give two bushels of oats for one spade? That depends upon how strong a desire A has for oats; the intensity of his demand may induce him to give two spades for one bushel. But the exchange also depends upon B. If he has no great need for spades, and A has a strong desire for oats, B will get more spades for oats than otherwise, possibly two spades for one bushel of oats; that is, oats will have a larger exchange value. If, on the other hand, A cares less for oats than B does for spades, then the exchange will result in an increased value of spades relatively to oats. When two commodities exchange against each other, their exchange values will depend entirely upon the relative intensity of the demand [pg 394] on each side for the other commodity. And this simple form of the statement of reciprocal demand and supply is also the law of international values.

If instead of spades and oats we substitute iron and corn, and let the trade be between England and the United States, the quantity of corn required to buy a given quantity of iron will depend upon the relative demands of England for corn and of the United States for iron. Something may cut off England's demand for our breadstuffs, and they will then have a less exchange value relatively to iron (if we keep up our demand), and their prices will fall. But if, on the other hand, England has poor harvests, and consequently a great demand for corn, and if our demand for iron is not excessive at the same time, then our breadstuffs will rise in value. And this was precisely what happened from 1877 to 1879. Now, in the above illustration of corn and iron, how can we know whether or not x bushels of corn (the produce of 100 days' labor in the United States) will exchange for exactly y tons of English iron? That, again, will depend upon the reciprocal demands of the two countries for corn and iron respectively. Moreover, it will have been already observed that the ratio of exchange is not capable of being ascertained exactly, since it varies with changing conditions, namely, the desires of the people of the two countries, together with their means of purchase.

But yet these variations are capable of ascertainment as regards their extreme limits. The reciprocal demand can not carry the exchange value in either country beyond the line set by the cost of production of the article. For instance, an urgent need in England for corn (if the United States has a light demand for English iron) can not carry the ratio of exchange to a point such that England will offer so much more than 150 days' labor in iron for x bushels of American corn that it will go beyond 200 days' labor in iron. It will be seen at once, then, if that were the case, that England would produce the corn herself; and that she would then have no gain whatever from the trade. The ratio of exchange will thus be limited by the reciprocal demand on one side to the cost of production (200 days' labor) of English corn. On the other hand, if the supposition were reversed, and the United States had a great demand for iron, but England had little need for our corn, then we would not offer more than 125 days' labor of corn for y tons of iron, because for that expenditure of labor we could produce the iron ourselves.

In the above examples we have considered the case of a trade in corn and iron only. If corn were to typify all our goods wanted by England, and iron all English goods wanted by the United States, the conclusions would be exactly the [pg 395] same. The ratios of a myriad of things, each governed by its particular reciprocal demand, exchanging against each other, give a general result by which the goods sent out exchange against the goods brought back at such rates as are fixed by the reciprocal demands acting on all the goods. Goods are payments for goods; the ratio of exchange depends on reciprocal demand and supply. If we now add more countries to the example, we simply increase the number of persons (although in different countries) wanting our goods, as set off against our demands for the goods of this greater number of persons. If France, Germany, and England all want our corn, we must have some demand for the goods of France, Germany, and England also; and the same law of reciprocal demand gives the ratio of interchange. That this explanation is consistent with the facts is to be seen when we notice how eagerly the exporters of American staples watch the conditions which increase or diminish the foreign demand for these commodities, looking at them as the causes which directly affect their exchange value, or price.

When cost of carriage is added, it will increase the price of corn to England and of iron to the United States. But, as every one knows, an increase of price affects the demand; and, as the demand on each side is affected, a new ratio of exchange will finally be reached consistent with the strength of desires on each side. Who, therefore, will pay the most of the cost of carriage England or the United States? That will, again, depend on whether England has the greatest relative demand for American goods, as compared with the demand of the United States for English goods.

No absolute rule, therefore, can be laid down for the division of the cost, no more than for the division of the advantage; and it does not follow that, in whatever ratio the one is divided, the other will be divided in the same. It is impossible to say, if the cost of carriage could be annihilated, whether the producing or the importing country would be most benefited. This would depend on the play of international demand.

Cost of carriage has one effect more. But for it, every commodity would (if trade be supposed free) be either regularly imported or regularly exported. A country would make nothing for itself which it did not also make for other countries. But in consequence of cost of carriage there are many things, especially bulky articles, which every, or almost [pg 396] every, country produces within itself. After exporting the things in which it can employ itself most advantageously, and importing those in which it is under the greatest disadvantage, there are many lying between, of which the relative cost of production in that and in other countries differs so little that the cost of carriage would absorb more than the whole saving in cost of production which would be obtained by importing one and exporting another. This is the case with numerous commodities of common consumption, including the coarser qualities of many articles of food and manufacture, of which the finer kinds are the subject of extensive international traffic.