§ 1. Values of commodities which have a joint cost of production.
The general laws of value, in all the more important cases of the
interchange of commodities in the same country, have now been
investigated. We examined, first, the case of monopoly, in which the value
is determined by either a natural or an artificial limitation of quantity,
that is, by demand and supply: secondly, the case of free competition,
when the article can be produced in indefinite quantity at the same cost;
in which case the permanent value is determined by the cost of production,
and only the fluctuations by supply and demand: thirdly, a mixed case,
that of the articles which can be produced in indefinite quantity, but not
at the same cost; in which case the permanent value is determined by the
greatest cost which it is necessary to incur in order to obtain the
required supply: and, lastly, we have found that money itself is a
commodity of the third class; that its value, in a state of freedom, is
governed by the same laws as the values of other commodities of its class;
and that prices, therefore, follow the same laws as values.
From this it appears that demand and supply govern the fluctuations of
values and prices in all cases, and the permanent values and prices of all
things of which the supply is determined by any agency other than that of
free competition: but that, under the _régime_ of competition, things are,
on the average, exchanged for each other at such values, and sold at such
prices, as afford equal expectation of advantage to all classes of
producers; which can only be when things exchange for one another in the
ratio of their cost of production.
Here, again, is a distinct recognition of the true meaning of cost
of production, and its ruling influence within a competing group,
which has been seen in its full significance by Mr. Cairnes.
It sometimes happens [however] that two different commodities have what
may be termed a joint cost of production. They are both products of the
same operation, or set of operations, and the outlay is incurred for the
sake of both together, not part for one and part for the other. The same
outlay would have to be incurred for either of the two, if the other were
not wanted or used at all. There are not a few instances of commodities
thus associated in their production. For example, coke and coal-gas are
both produced from the same material, and by the same operation. In a more
partial sense, mutton and wool are an example; beef, hides, and tallow;
calves and dairy produce; chickens and eggs. Cost of production can have
nothing to do with deciding the value of the associated commodities
relatively to each other. It only decides their joint value. Cost of
production does not determine their prices, but the sum of their prices. A
principle is wanting to apportion the expenses of production between the
two.
Since cost of production here fails us, we must revert to a law of value
anterior to cost of production, and more fundamental, the law of demand
and supply. The law is, that the demand for a commodity varies with its
value, and that the value adjusts itself so that the demand shall be equal
to the supply. This supplies the principle of repartition which we are in
quest of.
Suppose that a certain quantity of gas is produced and sold at a certain
price, and that the residuum of coke is offered at a price which, together
with that of the gas, repays the expenses with the ordinary rate of
profit. Suppose, too, that, at the price put upon the gas and coke
respectively, the whole of the gas finds an easy market, without either
surplus or deficiency, but that purchasers can not be found for all the
coke corresponding to it. The coke will be offered at a lower price in
order to force a market. But this lower price, together with the price of
the gas, will not be remunerating; the manufacture, as a whole, will not
pay its expenses with the ordinary profit, and will not, on these terms,
continue to be carried on. The gas, therefore, must be sold at a higher
price, to make up for the deficiency on the coke. The demand consequently
contracting, the production will be somewhat reduced; and prices will
become stationary when, by the joint effect of the rise of gas and the
fall of coke, so much less of the first is sold, and so much more of the
second, that there is now a market for all the coke which results from the
existing extent of the gas-manufacture.
Or suppose the reverse case; that more coke is wanted at the present
prices than can be supplied by the operations required by the existing
demand for gas. Coke, being now in deficiency, will rise in price. The
whole operation will yield more than the usual rate of profit, and
additional capital will be attracted to the manufacture. The unsatisfied
demand for coke will be supplied; but this can not be done without
increasing the supply of gas too; and, as the existing demand was fully
supplied already, an increased quantity can only find a market by lowering
the price. Equilibrium will be attained when the demand for each article
fits so well with the demand for the other, that the quantity required of
each is exactly as much as is generated in producing the quantity required
of the other.
When, therefore, two or more commodities have a joint cost of production,
their natural values relatively to each other are those which will create
a demand for each, in the ratio of the quantities in which they are sent
forth by the productive process.
§ 2. Values of the different kinds of agricultural produce.
Another case of value which merits attention is that of the different
kinds of agricultural produce. The case would present nothing peculiar, if
different agricultural products were either grown indiscriminately and
with equal advantage on the same soils, or wholly on different soils. The
difficulty arises from two things: first, that most soils are fitter for
one kind of produce than another, without being absolutely unfit for any;
and, secondly, the rotation of crops.
For simplicity, we will confine our supposition to two kinds of
agricultural produce; for instance, wheat and oats. If all soils were
equally adapted for wheat and for oats, both would be grown
indiscriminately on all soils, and their relative cost of production,
being the same everywhere, would govern their relative value. If the same
labor which grows three quarters of wheat on any given soil would always
grow on that soil five quarters of oats, the three and the five quarters
would be of the same value. The fact is, that both wheat and oats can be
grown on almost any soil which is capable of producing either.
It is evident that each grain will be cultivated in preference on the
soils which are better adapted for it than for the other; and, if the
demand is supplied from these alone, the values of the two grains will
have no reference to one another. But when the demand for both is such as
to require that each should be grown not only on the soils peculiarly
fitted for it, but on the medium soils which, without being specifically
adapted to either, are about equally suited for both, the cost of
production on those medium soils will determine the relative value of the
two grains; while the rent of the soils specifically adapted to each will
be regulated by their productive power, considered with reference to that
one [grain] alone to which they are peculiarly applicable. Thus far the
question presents no difficulty, to any one to whom the general principles
of value are familiar.
[Illustration: Agricultural Produce.]
This may be easily shown by a diagram, in which A represents the
grade of land best adapted for oats; B, C, D, respectively, lands
of diminishing productiveness for oats, until E is reached, which
is, perhaps, equally good for oats or wheat; _a_, _b_, _c_, _d_,
and E likewise represent the wheat-lands, the best beginning with
_a_. The rent of A, or B, is determined by a comparison with
whatever grade of land planted in oats is cultivated at the least
return, as E, for example. So, if all the wheat-lands are
cultivated, land _a_, or _b_, is compared with E, but in regard to
the capacity of E to produce wheat.
It may happen, however, that the demand for one of the two, as for example
wheat, may so outstrip the demand for the other, as not only to occupy the
soils specially suited for wheat, but to engross entirely those equally
suitable to both, and even encroach upon those which are better adapted to
oats. To create an inducement for this unequal apportionment of the
cultivation, wheat must be relatively dearer, and oats cheaper, than
according to the cost of their production on the medium land. Their
relative value must be in proportion to the cost on that quality of land,
whatever it may be, on which the comparative demand for the two grains
requires that both of them should be grown. If, from the state of the
demand, the two cultivations meet on land more favorable to one than to
the other, that one will be cheaper and the other dearer, in relation to
each other and to things in general, than if the proportional demand were
as we at first supposed.
As in the diagram just mentioned, if the demand for wheat forces
its cultivation downward not only on to land E, suited to either
indifferently, but, still farther on, to lands still less adapted
for wheat (although good land for oats), wheat may be pushed down
one stem of the V and up the other to D, or even to C. Then the
value of wheat will be regulated by the cost of production on C,
and the rent will be determined by a comparison between the
productiveness of _a_, _b_, etc. (running downward through E),
with C. The price of wheat will be high relatively to oats, which
are now cultivated only on lands, A, B, better suited to growing
oats, and whose cost of production on C is much less than on D or
E.
Here, then, we obtain a fresh illustration, in a somewhat different
manner, of the operation of demand, not as an occasional disturber of
value, but as a permanent regulator of it, conjoined with, or
supplementary to, cost of production.