COST OF PRODUCTION
We have, now to compare the law of Value at which we have arrived with
that most dwelt on by English economists. It is a matter of common
experience that, in the case of articles manufactured on a large
scale—“freely produced,” or reproducible at will—the price always
tends towards equality with the cost of their production. On this
experience is founded the familiar statement that the value of a good
is determined by its cost. Speaking generally, Costs of Production
are all the productive goods consumed in the making of a product,—raw
and auxiliary materials, machinery, power, and labour. To speak more
accurately, we should substitute the term Expenses of Production, thus
indicating that the naturally incommensurable “efforts and abstinences”
are measured by the money paid for them. On this theory, the value of a
good comes from its _past_.
Now, on the theory above explained, we have to show that the causal
connection runs the other way, from Product to Cost. Human want, as
was shown, is the very first consideration in the Theory of Value. The
relation of each man’s resources to his varied wants determines what
is the last want satisfied in each class of want, and so the Marginal
Utility and subjective value of goods. The figures which buyers and
sellers respectively put on their goods determine the competitors,
determine the marginal pair or the last buyer, and so determine price.
Through price, the subjective valuations are carried back to means of
production. As the typical labourer, the peasant, measures the value
of his labour by the produce he raises, or the value of his implements
by the additional crop they procure, so is all value reflected back
from goods to that which makes them. Thus value comes, not from the
past of goods but from their future; that is to say, from the side of
consumption in satisfying want. Goods stand midway between production
and consumption. In the old reading it was the former term that gave
value: in the new, it is the latter.
Before going further, it is necessary more exactly to define the
connection between production and consumption goods.
All goods find their goal in satisfying the want of man. As Roscher
finely says, _Ausgangspunkt, wie Zielpunkt unserer Wissenschaft ist
der Mensch_. The consumption-good then—the good which is to find its
destiny, and its life-work, in ministering to human want—is that
for which and towards which we set in motion the whole machinery
of industry. From the soil or the mine downward, every productive
instrument is, economically, a consumption-good _in the making_. This
Menger has put in terms which are now classical. He calls consumption
goods, goods of the first or lowest rank. The goods which co-operate
in immediately producing these—the group of productive instruments
used in the last stage of production—he calls goods of second rank.
The factors of this second group, again, are goods of third rank, and
so on. Thus, if a loaf is the consumption-good or the good of first
rank, the flour, the oven, and the baker’s labour form the group of
second rank; the wheat, the mill, the labour, and the material that
makes the oven, the group of third rank; the land, the agricultural
implements, the materials of the mill, etc., the group of fourth rank,
and so on. Now, as we have seen, consumption goods receive their
value from the dependence of some want upon them—from their being the
condition of some satisfaction. Take, then, the good, a loaf of bread.
The value of the loaf in the baker’s shop is determined subjectively
by its marginal utility to the consumers, and the valuations (based
on this marginal utility) of buyers and sellers decide the market
price at which the bread is put on the market. Looking back now at the
continuity of production and consumption goods, we see that the last
group of productive goods which issues in the bread is really the _loaf
in the making_. If the baker had not that group he would not have the
bread, and we should lose our marginal utility—the satisfaction of the
want. What, then, depends on the having or losing the group of second
rank? Simply the marginal utility of the finished good. Tracing back
the loaf to more and more remote groups, we find, similarly, that what
depends upon them all is, at different points of time, the marginal
utility of the finished consumption-good: that is to say, they are
all, economically, the loaf in the making. In short, value depends
on a relation to human wellbeing as indicated by the satisfaction of
want; and productive goods only come into contact with human wellbeing
through the final member of the chain, the consumption-good. No one
values the iron ore, or the ragged “pig,” for what it is in itself.
Ingenious and delicate as may be the machine, no one puts together
these cunning arrangements of wheels and pulleys and rollers for the
sake of showing the machinist’s skill, or the working of mechanical
powers. Even the smooth and gossamer yarn is not a thing which can
satisfy any human want. All these goods are only “good” because they
are cloth, or some other consumption-good, in the making. We “value”
them, not because we see the iron fabrics passing, by wear and tear
of the machine, into the warp, or the threads of human life being
woven into the weft, but because, with prophetic eyes, we see the web
covering the otherwise bare backs of men and women, and giving up its
life in ministering to theirs.
The conduction of value, then, would seem to be, from product[19] to
means of production; and this would, probably, be generally recognised
if every product were connected immediately with only one group of
means of production. In the case of a wine grower it is easy enough
to see that the value of the grapes is derived from the wine, and the
value of the vineyard from the grapes; that the price, for instance,
at which he would let his land to a third party, or the number of
labourers he could, economically, hire to assist him, is determined
by average productiveness. Or suppose we value a good subjectively,
say, at £100, there seems a very good reason why we should be willing
to pay, say, £50 for the labour of raising raw material, £40 for
manufacturing it, and £10 for delivering it. But in modern divided
industry it is, of course, impossible for most of the intermediate
producers to know anything about the marginal utility, or the price
which the goods will obtain when finished. The labourer paid 20/ a
week for lumbering will scarcely connect his wage with the price of
the delicately carved cabinet which, among other final products,
is the ultimate goal of his labour. Even the timber merchant, as a
rule, will not make his calculations of the price he can pay for wood
with any better knowledge of its final destiny. But each branch of
production has an immediate product as well as an ultimate one, and,
in the marginal utility and price of this intermediate product, it
finds its value and price. Thus though the conduction of value from
anticipated final product back to intermediate product, and from that
back to the very first product of all, may remain hidden from each
and every producer, the organisation of industry practically carries
the information from stage to stage. The weaver finds a market value
already attached to yarn, and, measuring by that, he puts a value upon
his labour and the raw material for which he offers. But the cloth he
weaves is the means of production for the next intermediate product,
and gets its value from it again. And so the line of communication goes
on down the ranks till it comes to the final consumption-good.
[19] It need scarcely be said that it is _anticipated_ product; in
modern circumstances it is of course impossible for the fore producers
to wait on final sales, even if makers and merchants did not regularly
anticipate demand; but this does not affect the logical connection.
The proof of this conduction is not far to seek: it is found in the
common phenomenon of Dead Stock. However great the cost expended on an
article, if the public will not have it, all the costs in Christendom
will not give it a value; and, if the good continues “dead,” all the
machinery and buildings by which it would have been made lose their
value, except in as far as they can be turned to other uses, and get
another value from another product. Even labour suffers. Whatever the
expense of his special training, the labourer can give no value to his
work, and loses his wage to the extent that he cannot adapt his skill
to other employments. Suppose that an article of which there is a
stock, goes out of fashion, the value and the price of it fall at once.
The first thing the immediate manufacturer does is to ask himself if he
can reduce his costs to suit the new price: if he cannot, he abandons
the manufacture, and it passes probably to some man who is able to
produce more cheaply, it may be by reducing wages and salaries, by new
processes and more complicated machinery, or, perhaps, by employing
women instead of men. In any case the cost must conform to the value.
A striking proof of this is given in the case of silver. Most people
have a dim idea that silver, as one of the precious metals, has a value
almost innate. Yet after 1873 mine after mine was abandoned although
the ores were as rich and the reefs as plentiful as ever. What was
the cause?—Simply that silver was discarded as currency in certain
countries: that is to say, silver fell in the estimation of great
communities, and the loss of value was carried back till the price
realised by the virgin silver was not enough to pay for the mining of
it.
Of course the identity of value between final product and groups of
higher and higher rank is not absolute. It would be strange if it were;
for where all the groups get their value from the last product, and
this gets its value from a thing so inconstant as human want and so
elastic as human provision, it is to be expected that the calculation
which conducts value back and back, will, often enough, be mistaken.
Builders tempted, by high freights at a time of sudden demand, to lay
down a ship, must reckon with the possibility that, ere it be finished,
the tide of prosperity may have ebbed, and that the price realised for
the ship may scarce repay the wages and prices paid in anticipation.
And, besides these fluctuations which cannot be reduced to law, and
are often the chances on which the employer (as distinguished from the
capitalist) makes his great profits—and losses—there is one constant
difference between the value of the productive groups and that of
the final product; that is, Interest. With this, however, we have no
concern here.