BOOK V

GENERAL RELATIONS OF DEMAND, SUPPLY AND VALUE

CHAPTER 6

JOINT AND COMPOSITE DEMAND. JOINT AND COMPOSITE SUPPLY

1. Bread satisfies man's wants directly: and the demand for it is said to be direct. But a flour mill and an oven satisfy wants only indirectly, by helping to make bread, etc., and the demand for them is said to be indirect. More generally: --

The demand for raw materials and other means of production is indirect and is derived from the direct demand for those directly serviceable products which they help to produce.

The services of the flour mill and the oven are joined together in the ultimate product, bread: the demand for them is therefore called a joint demand. Again, hops and malt are complementary to one another; and are joined together in the common destination of ale: and so on. Thus the demand for each of several complementary things is derived from the services which they jointly render in the production of some ultimate product, as for instance a loaf of bread, a cask of ale. In other words there is a joint demand for the services which any of these things render in helping to produce a thing which satisfies wants directly and for which there is therefore a direct demand: the direct demand for the finished product is in effect split up into many derived demands for the things used in producing it.(1*)

To take another illustration, the direct demand for houses gives rise to a joint demand for the labour of all the various building trades, and for bricks, stone, wood, etc. which are factors of production of building work of all kinds, or as we may say for shortness, of new houses. The demand for any one of these, as for instance the labour of plasterers, is only an indirect or derived demand.

Let us pursue this last illustration with reference to a class of events that are of frequent occurrence in the labour market; the period over which the disturbance extends being short, and the causes of which we have to take account as readjusting demand and supply being only such as are able to operate within that short period.

This case has important practical bearings, which give it a special claim on our attention; but we should notice that, referring as it does to short periods, it is an exception to our general rule of selecting illustrations in this and the neighbouring chapters from cases in which there is time enough for the full long-period action of the forces of supply to be developed.

Let us then suppose that the supply and demand for building being in equilibrium, there is a strike on the part of one group of workers, say the plasterers, or that there is some other disturbance to the supply of plasterers' labour. In order to isolate and make a separate study of the demand for that factor, we suppose firstly that the general conditions of the demand for new houses remain unchanged (that is, that the demand schedule for new houses remains valid); and secondly we assume that there is no change in the general conditions of supply of the other factors, two of which are of course the business faculties and the business organizations of the master builders; (that is, we assume that their lists of supply prices also remain valid). Then a temporary check to the supply of plasterers' labour will cause a proportionate check to the amount of building: the demand price for the diminished number of houses will be a little higher than before; and the supply prices for the other factors of production will not be greater than before.(2*) Thus new houses can now be sold at prices which exceed by a good margin the sum of the prices at which these other requisites for the production of houses can be bought; and that margin gives the limit to the possible rise of the price that will be offered for plasterers' labour, on the supposition that plasterers' labour is indispensable. The different amounts of this margin, corresponding to different checks to the supply of plasterers' labour, are governed by the general rule that: The price that will be offered for any thing used in producing a commodity is, for each separate amount of the commodity, limited by the excess of the price at which that amount of the commodity can find purchasers, over the sum of the prices at which the corresponding supplies of the other things needed for making it will be forthcoming.

To use technical terms, the demand schedule for any factor of production of a commodity can be derived from that for the commodity by subtracting from the demand price of each separate amount of the commodity the sum of the supply prices for corresponding amounts of the other factors.(3*)

2. When however we come to apply this theory to the actual conditions of life, it will be important to remember that if the supply of one factor is disturbed, the supply of others is likely to be disturbed also. In particular, when the factor of which the supply is disturbed is one class of labour, as that of the plasterers, the employers' earnings generally act as a buffer. That is to say, the loss falls in the first instance on them; but by discharging some of their workmen and lowering the wages of others, they ultimately distribute a great part of it among the other factors of production. The details of the process by which this is effected are various, and depend on the action of trade combinations, on the higgling and bargaining of the market, and on other causes with which we are not just at present concerned.

Let us inquire what are the conditions, under which a check to the supply of a thing that is wanted not for direct use, but as a factor of production of some commodity, may cause a very great rise in its price. The first condition is that the factor itself should be essential, or nearly essential to the production of the commodity, no good substitute being available at a moderate price.

The second condition is that the commodity in the production of which it is a necessary factor, should be one for which the demand is stiff and inelastic; so that a check to its supply will cause consumers to offer a much increased price for it rather than go without it; and this of course includes the condition that no good substitutes for the commodity are available at a price but little higher than its equilibrium price. If the check to house building raises the price of houses very much, builders, anxious to secure the exceptional profits, will bid against one another for such plasterers' labour as there is in the market.(4*)

The third condition is that only a small part of the expenses of production of the commodity should consist of the price of this factor. Since the plasterers' wages are but a small part of the total expenses of building a house, a rise of even 50 per cent in them would add but a very small percentage to the expenses of production of a house and would check demand but little.(5*)

The fourth condition is that even a small check to amount demanded should cause a considerable fall in the supply prices of other factors of production; as that will increase the margin available for paying a high price for this one.(6*) If, for instance, bricklayers and other classes of workmen, or the employers themselves cannot easily find other things to do, and cannot afford to remain idle, they may be willing to work for much lower earnings than before, and this will increase the margin available for paying higher wages to plasterers. These four conditions are independent, and the effects of the last three are cumulative.

The rise in plasterers' wages would be checked if it were possible either to avoid the use of plaster, or to get the work done tolerably well and at a moderate price by people outside the plasterers' trade: the tyranny, which one factor of production of a commodity might in some cases exercise over the other factors through the action of derived demand, is tempered by the principle of substitution.(7*)

Again, an increased difficulty in obtaining one of the factors of a finished commodity can often be met by modifying the character of the finished product. Some plasterers' labour may be indispensable; but people are often in doubt how much plaster work it is worth while to have in their houses, and if there is a rise in its price they will have less of it. The intensity of the satisfaction of which they would be deprived if they had a little less of it, is its marginal utility; the price which they are just willing to pay in order to have it, is the true demand price for plasterers' work up to the amount which is being used.

So again there is a joint demand for malt and hops in ale. But their proportions can be varied. A higher price can be got for an ale which differs from others only in containing more hops; and this excess price represents the demand for hops.(8*)

The relations between plasterers, bricklayers, etc., are representative of much that is both instructive and romantic in the history of alliances and conflicts between trades-unions in allied trades. But the most numerous instances of joint demand are those of the demand for a raw material and the operatives who work it up; as for instance cotton or jute or iron or copper, and those who work up these several materials. Again, the relative prices of different articles of food vary a good deal with the supply of skilled cooks' labour: thus for instance many kinds of meat and many parts of vegetables which are almost valueless in America, where skilled cooks are rare and expensive, have a good value in France, where the art of cooking is widely diffused.

3. We have already(9*) discussed the way in which the aggregate demand for any commodity is compounded of the demands of the different groups of people who may need it. But we now may extend this notion of composite demand to requisites of production which are needed by several groups of producers.

Nearly every raw material and nearly every kind of labour is applied in many different branches of industry, and contributes to the production of a great variety of commodities. Each of these commodities has its own direct demand; and from that the derived demand for any of the things used in making it can be found, and the thing is "distributed between its various uses" in the manner which we have already discussed.(10*) The various uses are rivals, or competitors with one another; and the corresponding derived demands are rival or competitive demands relatively to one another. But in relation to the supply of the product, they co-operate with one another; being "compounded" into the total demand that carries off the supply: in just the same way as the partial demands of several classes of society for a finished commodity are aggregated, or compounded together into the total demand for it.(11*)

4. We may now pass to consider the case of joint products: i.e. of things which cannot easily be produced separately; but are joined in a common origin, and may therefore be said to have a joint supply, such as beef and hides, or wheat and straw.(12*) This case corresponds to that of things which have a joint demand, and it may be discussed almost in the same words, by merely substituting "demand" for "supply," and vice versa. As there is a joint demand for things joined in a common destination: so there is a joint supply of things which have a common origin. The single supply of the common origin is split up into so many derived supplies of the things that proceed from it.(13*)

For instance, since the repeal of the Corn Laws much of the wheat consumed in England has been imported, of course without any straw. This has caused a scarcity and a consequent rise in the price of straw, and the farmer who grows wheat looks to the straw for a great part of the value of the crop. The value of straw then is high in countries which import wheat, and low in those which export wheat. In the same way the price of mutton in the wool-producing districts of Australia was at one time very low. The wool was exported, the meat had to be consumed at home; and as there was no great demand for it, the price of the wool had to defray almost the whole of the joint expenses of production of the wool and the meat. Afterwards the low price of meat gave a stimulus to the industries of preserving meat for exportation, and now its price in Australia is higher.

There are very few cases of joint products the cost of production of both of which together is exactly the same as that of one of them alone. So long as any product of a business has a market value, it is almost sure to have devoted to it some special care and expense, which would be diminished, or dispensed with if the demand for that product were to fall very much. Thus, for instance, if straw were valueless, farmers would exert themselves more than they do to make the ear bear as large a proportion as possible to the stalk. Again, the importation of foreign wool has caused English sheep to be adapted by judicious crossing and selection so as to develop heavy weights of good meat at an early age, even at the expense of some deterioration of their wool. It is only when one of two things produced by the same process is valueless, unsaleable, and yet does not involve any expense for its removal, that there is no inducement to attempt to alter its amount; and, it is only in these exceptional cases that we have no means of assigning its separate supply price to each of the joint products. For when it is possible to modify the proportions of these products, we can ascertain what part of the whole expense of the process of production would be saved, by so modifying these proportions as slightly to diminish the amount of one of the joint products without affecting the amounts of the others. That part of the expense is the expense of production of the marginal element of that product; it is the supply price of which we are in search.(14*)

But these are exceptional cases. It more frequently happens that a business, or even an industry finds its advantage in using a good deal of the same plant, technical skill, and business organization for several classes of products. In such cases the cost of anything used for several purposes has to be defrayed by its fruits in all of them: but there is seldom any rule of nature to determine either the relative importance of these uses, or the proportions in which the total cost should be distributed among them: much depends on the changing features of markets.(15*)

5. We may pass to the problem of composite supply which is analogous to that of composite demand. A demand can often be satisfied by any one of several routes, according to the principle of substitution. These various routes are rivals or competitors with one another; and the corresponding supplies of commodities are rival, or competitive supplies relatively to one another. But in relation to the demand they co-operate with one another; being "compounded" into the total supply that meets the demands.(16*)

If the causes which govern their production are nearly the same, they may for many purposes be treated as one commodity.(17*) For instance, beef and mutton may be treated as varieties of one commodity for many purposes; but they must be treated as separate for others, as for instance for those in which the question of the supply of wool enters. Rival things are however often not finished commodities, but factors of production: for instance, there are many rival fibres which are used in making ordinary printing paper. We have just noticed how the fierce action of derived demand for one of several complementary supplies, as e.g. for the supply of plasterers' labour, was liable to be moderated, when the demand was met by the competitive supply of a rival thing, which could be substituted for it.(18*)

6. All the four chief problems which have been discussed in this chapter have some bearing on the causes that govern the value of almost every commodity: and many of the most important cross connections between the values of different commodities are not obvious at first sight.

Thus when charcoal was generally used in making iron, the price of leather depended in some measure on that of iron; and the tanners petitioned for the exclusion of foreign iron in order that the demand on the part of English iron smelters for oak charcoal might cause the production of English oak to be kept up, and thus prevent oak bark from becoming dear.(19*) This instance may serve to remind us of the way in which an excessive demand for a thing may cause its sources of supply to be destroyed, and thus render scarce any joint products that it may have: for the demand for wood on the part of the ironmakers led to a relentless destruction of many forests in England. Again, an excessive demand for lamb was assigned as a cause of the prevailing scarcity of sheep some years ago; while some argued on the contrary that the better the price to be got for spring lamb sold to the rich, the more profitable would be the production of sheep, and the cheaper would mutton be for the people. The fact is that an increase of demand may have opposite effects according as it does or does not act so suddenly as to prevent producers from adapting their action to it.

Again, the development of railways and other means of communication for the benefit of one trade, as for instance wheat growing in some parts of America and silver mining in others, greatly lowers some of the chief expenses of production of nearly every other product of those districts. Again, the prices of soda, and bleaching materials and other products of industries, the chief raw material of which is salt, move up and down relatively to one another with almost every improvement in the various processes which are used in those industries; and every change in those prices affects the prices of many other goods, for the various products of the salt industries are more or less important factors in many branches of manufacture.

Again, cotton and cotton-seed oil are joint products, and the recent fall in the price of cotton is largely due to the improved manufacture and uses of cotton-seed oil: and further, as the history of the cotton famine shows, the price of cotton largely affects that of wool, linen and other things of its own class; while cotton-seed oil is ever opening up new rivalries with things of its own class. Again, many new uses have been found for straw in manufacture; and these inventions are giving value to straw that used to be burnt in the West of America, and tend to hinder the rise in the marginal cost of producing wheat.(20*)

NOTES:

1. Compare III, III, section 6. It will be recollected that the things in a form ready for immediate use have been called goods of the first order, or consumers' goods; and that things used as factors of production of other goods have been called producers' goods, or goods of the second and higher orders or intermediate goods: also that it is difficult to say when goods are really finished; that many things are commonly treated as finished consumers' goods before they are really ready for consumption, e.g. flour. See II, iii, section I. The vagueness of the notion of instrumental goods, regarded as things the value of which is derived from that of their products, is indicated in Appendix E, section 3.

2. This is at any rate true under all ordinary conditions: there will be less extra charges for overtime; and the price of the labour of carpenters, bricklayers and others is likely rather to go down than to go up, and the same is true of brick and other building materials.

3. The broad account given in the text may suffice for most purposes; and the general reader should perhaps omit the remaining footnotes to this chapter.

It must be remembered that this Derived schedule has no validity except on the suppositions that we are isolating this one factor for separate study; that its own conditions of supply are disturbed; that there is at the time no independent disturbance affecting any other element in the problem; and that therefore in the case of each of the other factors of production the selling price may be taken to coincide always with the supply price.

In illustrating this by a diagram, it will be well, for the sake of shortness of wording, to divide the expenses of production of a commodity into the supply prices of two things of which it is made; let us then regard the supply price of a knife as the sum of the supply prices of its blade and handle, and neglect the expense of putting the two together. Let ss' be the supply curve for handles and SS' that for knives; so that M being any point on Ox, and MqQ being drawn vertically to cut ss'. in q and SS' in Q, Mq is the supply price for OM handles, qQ is the supply price for OM blades and MQ the supply price for OM knives. Let DD' the demand curve for knives cut SS' in A, and AaB be drawn vertically as in the figure. Then in equilibrium OB knives are sold at a price BA of which Ba goes for the handle and aA for the blade.

(In this illustration we may suppose that sufficient time is allowed to enable the forces which govern supply price to work themselves out fully; and we are at liberty therefore to make our supply curves inclined negatively. This change will not affect the argument; but on the whole it is best to take our typical instance with the supply curve inclined positively.)

Now let us suppose that we want to isolate for separate study the demand for knife handles. Accordingly we suppose that the demand for knives and the supply of blades conform to the laws indicated by their respective curves: also that the supply curve for handles still remains in force and represents the circumstances of normal supply for handles, although the supply of handles is temporarily disturbed. Let MQ cut DD' in P, then MP is the demand price for OM knives and Qq is the supply price for OM blades. Take a point p in MP such that Pp is equal to Qq, and therefore Mp is the excess of MP over Qq; then Mp is the demand price for OM handles. Let dd' be the locus of p obtained by giving M successive positions along Ox and finding the corresponding positions of p; then dd' is the derived demand curve for handles. Of course it passes through a. We may now neglect all the rest of the figure except the curves dd', ss'; and regard them as representing the relations of demand for and supply of handles, other things being equal, that is to say, in the absence of any disturbing cause which affects the law of supply of blades and the law of demand for knives. Ba is then the equilibrium price of handles, about which the market price oscillates, in the manner investigated in the preceding chapter, under the influence of demand and supply, of which the schedules are represented by dd' and ss' It has already been remarked that the ordinary demand and supply curves have no practical value except in the immediate neighbourhood of the point of equilibrium. And the same remark applies with even greater force to the equation of derived demand.

[Since Mp Mq = MP - MQ; therefore A being a point of stable equilibrium, the equilibrium at a also is stable. But this statement needs to be somewhat qualified if the supply curves are negatively inclined: see Appendix H.]

In the illustration that has just been worked out the unit of each of the factors remains unchanged whatever be the amount of the commodity produced; for one blade and one handle are always required for each knife; but when a change in the amount of the commodity produced occasions a change in the amount of each factor that is required for the production of a unit of the commodity, the demand and supply curves for the factor got by the above process are not expressed in terms of fixed units of the factor. They must be translated back into fixed units before they are available for general use. (See Mathematical Note XIV bis.)

4. We have to inquire under what conditions the ratio pM to aB will be the greatest, pM being the demand price for the factor in question corresponding to a supply reduced from OB to OM, that is reduced by the given amount BM. The second condition is that PM should be large; and since the elasticity of demand is measured by the ratio which BM bears to the excess of PM over AB, the greater PM is, the smaller, other things being equal, is the elasticity of demand.

5. The third condition is that when PM exceeds AB in a given ratio, pM shall be caused to exceed Ba in a large ratio: and other things being equal, that requires Ba to be but a small part of BA.

6. That is, if Qq had been smaller than it is, Pp would have been smaller and Mp would have been larger. See also Mathematical Note XV .

7. It is shown in Böhm Bawerk's excellent Grundzüge der Theorie des wirtschaftlichen Güterwerts (Jahrbuch für Natoonaiökonomie und Statistik, vol. XIII, p. 59) that if all but one of the factors of production of a commodity have available substitutes in unlimited supply, by which their own price is rigidly fixed, the derived demand price for the remaining factor will be the excess of the demand price for the finished product over the sum of the supply prices thus fixed for the remaining factors. This is an interesting special case of the law given in the text .

8. See Mathematical Note XVI.

9. See above, III, IV, sections 2, 4.

10. See III, v.

11. Thus, let a factor of production have three uses. Let d1d1' be the demand curve for it in its first use. From N any point on Oy draw Np1 horizontally to cut d1d1' in p1; then Np1 is the amount that is demanded for the first use at price ON . Produce Np1 to p2, and further on to P making p1p2 and p2P of such lengths as to represent the amounts of the factor demanded at price ON for the second and third uses respectively. As N moves along Oy let p2 trace out the curve d2d2' and let P trace out the curve DD'. Thus d2d2' would be the demand curve for the factor if it had only its first and second uses. DD' is its demand curve for all three uses. It is immaterial in what order we take the several uses. In the case represented, the demand for the second use begins at a lower price and that for the third use begins at a higher price than does the demand for the first use. (See Mathematical Note XVII.)

12. Professor Dewsnup (American Economic Review, Supplement 1914, p. 89) suggests that things should be described as joint products, when their "total costs of production by a single plant are less than the sum of the costs of their production by separate plants." This definition is less general than that reached at the end of this section; but it is convenient for some special uses.

13. If it is desired to isolate the relations of demand and supply for a joint product, the derived supply price is found in just the same way as the derived demand price for a factor of production was found in the parallel case of demand. Other things must be assumed to be equal (that is, the supply schedule for the whole process of production must be assumed to remain in force and so must the demand schedule for each of the joint products except that to be isolated). The derived supply price is then found by the rule that it must equal the excess of the supply price for the whole process of production over the sum of the demand prices of all the other joint products; the prices being taken throughout with reference to corresponding amounts.

We must again illustrate by a simple example in which it is assumed that the relative amounts of the two joint products are unalterable. Let SS' be the supply curve for bullocks which yield meat and leather in fixed quantities; dd' the demand curve for their carcases, that is, for the meat derived from them. M being any point on Ox draw Mp vertically to cut dd' in p, and produce it to P so that pP represents the demand price for OM hides. Then MP is the demand price for OM bullocks, and DD' the locus of P is the demand curve for bullocks: it may be called the total demand curve. Let DD' cut SS' in A; and draw AaB as in the figure. Then in equilibrium OB bullocks are produced and sold at the price BA of which Ba goes for the carcase and aA for the hide.

Let MP cut SS' in Q. From QM cut off Qq equal to Pp; then q is a point on the derived supply curve for carcases. For if we assume that the selling price of OM hides is always equal to the corresponding demand price Pp, it follows that since it costs QM to produce each of OM bullocks there remains a price QM Pp, that is qM, to be borne by each of the OM carcases. Then ss' the locus of q, and yy' are the supply and demand curves for carcases. (See Mathematical Note XVIII.)

14. See Mathematical Note XIX.

15. A little more is said on this subject in the next chapter: it is discussed fully in the forthcoming work on Industry and Trade.

16. The latter phrase "competing commodities" is used by Prof. Fisher in his brilliant Mathematical Investigations in the Theory of Value and Prices, which throw much light on the subjects discussed in the present chapter.

17. Comp. Jevons, l. c. pp. 145-6. See also above, footnotes on pp. 100, 105.

18. The want which all the rivals tend to satisfy is met by a composite supply, the total supply at any price being the sum of the partial supplies at that price.

Thus, for instance, N being any point on Oy draw Nq1q2Q parallel to Ox such that Nq1' q1q2 and q2Q are respectively the amounts of the irst, second and third of those rivals which can be supplied at the price ON. Then NQ is the total composite supply at that price, and the locus of Q is the total supply curve of the means of satisfying the want in question. Of course the units of the several things which are rivals must be so taken that each of them satisfies the same amount of the want. In the case represented in the figure small quantities of the first rival can be put on the market at a price too low to call forth any supply of the other two, and small quantities of the second at a price too low to call forth any of the third. (See Mathematical Note XX.)

Continued rivalry is as a rule possible only when none of the rivals has its supply governed by the law of increasing return. The equilibrium is stable only when none of them is able to drive the others out; and this is the case when all of them conform to the law of diminishing return; because then if one did obtain a temporary advantage and its use increased, its supply price would rise, and then the others would begin to undersell it. But if one of them conformed to the law of increasing return, the rivalry would soon cease; for whenever it happened to gain a temporary advantage over its rivals its increased use would lower its supply price and therefore increase its saleits supply price would then be further lowered, and so on: thus its advantage over its rivals would be continually increased until it had driven them out of the field. It is true that there are apparent exceptions to this rule; and things which conform to the law of increasing return do sometimes seem to remain for a long time in the field as rivals: such is the case perhaps with different kinds of sewing machines and of electric lights. But in these cases the things do not really satisfy the same wants, they appeal to slightly different needs or tastes; there is still some difference of opinion as to their relative merits; or else perhaps some of them are patented or in some other way have become the monopoly of particular firms. In such cases custom and the force of advertising may keep many rivals in the field for a long time; particularly if the producers of those things which are really the best in proportion to their expenses of production are not able effectively to advertise and push their wares by travellers and other agencies.

19. Toynbee (Industrial Revolution, p. 80).

20. Again, since sheep and oxen compete for the use of land, leather and cloth compete in indirect demand for the use of a factor of production. But also in the upholsterer's shop they compete as supplying means for meeting the same want. There is thus a composite demand on the part of upholsterer and shoemaker for leather. and also for cloth when the upper part of a shoe is made of cloth: the shoe offers a joint demand for cloth and leather, they offering complementary supplies: and so on, in endless complications. See Mathematical Note XXI. The Austrian doctrine of "imputed value" has something in common with that of derived value given in this chapter. Whichever phrase be used, it is important that we should recognize the continuity between the old doctrine of value and the new; and that we should treat imputed or derived values merely as elements which take their place with many others in the broad problem of distribution and exchange. The new phrases merely give the means of applying to the ordinary affairs of life, some of that precision of expression which is the special property of mathematical language. Producers have alw.ays to consider how the demand for any raw material in which they are interested is dependent on the demand for the things in making which it is used, and how it is influenced by every change that affects them; and this is really a special case of the problem of ascertaining the efficient strength of any one of the forces, which contribute to a common result. In mathematical language this common result is called a function of the various forces: and the (marginal) contribution, which any of them is making to it, is represented by the (small) change in the result which would result from a (small) change in that force; that is by the differential coefficient of the result with regard to that force. In other words, the imputed value, or the derived value of a factor of production, if used for only one product, is the differential coefficient of that product with regard to that factor; and so on in successive complications, as indicated in Notes XIV-XXI of the Mathematical Appendix. (Some objections to parts of Prof. Wieser's doctrine of imputed values are well urged by Prof. Edgeworth, Economic Journal, Vol. v, pp. 279-85.)

CHAPTER 7

PRIME AND TOTAL COST IN RELATION TO JOINT PRODUCTS.
COST OF MARKETING.
INSURANCE AGAINST RISK.
COST OF PRODUCTION

1. We may now return to the consideration of prime and supplementary costs, with special reference to the proper distribution of the latter between the joint products of a business.

It often happens that a thing made in one branch of a business is used as a raw material in another, and then the question of the relative profitableness of the two branches can be accurately ascertained only by an elaborate system of book-keeping by double entry; though in practice it is more common to rely on rough estimates made by an almost instinctive guess. Some of the best illustrations of this difficulty are found in agriculture, especially when the same farm combines permanent pasture and arable land worked on long rotation.(1*)

Another difficult case is that of the shipowner who has to apportion the expenses of his ship between heavy goods and goods that are bulky but not heavy. He tries, as far as may be, to get a mixed cargo of both kinds; and an important element in the struggle for existence of rival ports is the disadvantage under which those ports lie which are able to offer a cargo only of bulky or only of heavy goods: while a port whose chief exports are weighty but not bulky, attracts to its neighbourhood industries which make for export goods that can be shipped from it at low freights. The Staffordshire Potteries, for example, owe part of their success to the low freights at which their goods are carried by ships sailing from the Mersey with iron and other heavy cargoes.

But there is free competition in the shipowning trade, and it has great powers of variation as regards the size and shape of ships, the routes which they take, and the whole method of trading; and thus in many ways the general principle can be applied, that the relative proportions of the joint products of a business should be so modified that the marginal expenses of production of either product should be equal to its marginal demand price.(2*) Or, in other words, the amount of carrying power for each kind of cargo has a constant tendency to move towards equilibrium at a point at which the demand price for that amount in a normal state of trade is just sufficient to cover the expenses of providing it; these expenses being reckoned so as to include not only its (money) prime cost, but also all those general expenses of the business which are in the long run incurred on its account, whether directly or indirectly.(3*)

In some branches of manufacture it is customary to make a first approximation to the total cost of producing any class of goods, by assuming that their share of the general expenses of the business is proportionate either to their prime cost, or to the special labour bill that is incurred in making them. Corrections can then be made to meet such cases as those of goods which require either more or less than an average share of space or light, or of the use of expensive machinery; and so on.

2. There are two elements of the general a business, the sharing of which between the different requires some special attention. They are the expense marketing and that of insurance against risk. Some kinds of goods are easily marketed; there is steady demand for them, and it is always safe to make them for stock. But for that very reason competition cuts their price "very fine," and does not allow a large margin above the direct cost of making them. Sometimes the tasks of making and selling them can be rendered almost automatic, so as to require very little to be charged on their account under the heads of the expenses of management and marketing. But in practice it is not uncommon to charge such goods with even less than the small share that would properly fall to them, and to use them as a means of obtaining and maintaining a business connection, that will facilitate the marketing of other classes of goods, the production of which cannot so well be reduced to routine; for as to these there is not so close a competition. Manufacturers, especially in trades connected with furniture and dress, and retailers in almost all trades, frequently find it best to use certain of their goods as a means of advertising others, and to charge the first with less and the second with more than their proportionate share of supplementary expenses. In the former class they put those goods which are so uniform in character and so largely consumed that nearly all purchasers know their value well, in the second those with regard to which purchasers think more of consulting their fancy than of buying at the lowest possible price.

All difficulties of this kind are much increased by that instability of supply price, which results whenever the tendency to increasing return is acting strongly. We have seen that in seeking the normal supply price in such cases we must select as representative a business which is managed with normal ability and so as to get its fair share of the economies, both internal and external, resulting from industrial organization: also that these economies, though they fluctuate with the fortunes of particular businesses, yet increase generally when the aggregate production increases. Now it is obvious that if a manufacturer makes a commodity the increased production of which would put largely increased internal economies within his reach, it is worth his while to sacrifice a great deal in order to push its sales in a new market. If he has a large capital, and the commodity is one in much demand, his expenditure for this purpose may be very great, even exceeding that which he devotes directly to the manufacture: and if, as is likely, he is pushing at the same time several other commodities, nothing more than a very rough guess can be made as to what share of this expenditure should be charged to the sales of each of them in the current year, and what share should be charged to the connection which he is endeavouring to build up for them in the future.

In fact when the production of a commodity conforms to the law of increasing return in such a way as to give a very great advantage to large producers, it is apt to fall almost entirely into the hands of a few large firms; and then the normal marginal supply price cannot be isolated on the plan just referred to, because that plan assumes the existence of a great many competitors with businesses of all sizes, some of them being young and some old, some in the ascending and some in the descending phase. The production of such a commodity really partakes in a great measure of the nature of a monopoly; and its price is likely to be so much influenced by the incidents of the campaign between rival producers, each struggling for an extension of territory, as scarcely to have a true normal level.

Economic progress is constantly offering new facilities for marketing goods at a distance: it not only lowers cost of carriage, but what is often more important, it enables producers and consumers in distant places to get in touch with one another. In spite of this, the advantages of the producer who lives on the spot are very great in many trades; they often enable him to hold his own against competitors at a distance whose methods of production are more economical. He can sell in his own neighbourhood as cheaply as they can, because though the cost of making is greater for his goods than for theirs, he escapes much of the cost which they incur for marketing. But time is on the side of the more economic methods of production; his distant competitors will gradually get a stronger footing in the place, unless he or some new man adopts their improved methods.

It remains to make a closer study of the relation in which insurance against the risks of a business stands to the supply price of any particular commodity produced in it.

3. The manufacturer and the trader commonly insure against injury by fire and loss at sea; and the premiums which they pay are among the general expenses, a share of which has to be added to the prime cost in order to determine the total cost of their goods. But no insurance can be effected against the great majority of business risks.

Even as regards losses by fire and sea, insurance companies have to allow for possible carelessness and fraud; and must therefore, independently of all allowances for their own expenses and profits, charge premiums considerably higher than the true equivalent of the risks run by the buildings or the ships of those who manage their affairs well. The injury done by fire or sea however is likely, if it occurs at all, to be so very great that it is generally worth while to pay this extra charge; partly for special trade reasons, but chiefly because the total utility of increasing wealth increases less than in proportion to its amount. But the greater part of business risks are so inseparably connected with the general management of the business that an insurance company which undertook them would really make itself responsible for the business: and in consequence every firm has to act as its own insurance office with regard to them. The charges to which it is put under this head are part of its general expenses, and a share of them has to be added to the prime cost of each of its products.

But here there are two difficulties. In some cases insurance against risk is apt to be left out of account altogether, in others it is apt to be counted twice over. Thus a large shipowner sometimes declines to insure his ships with the underwriters: and sets aside part at least of the premiums that he might have paid to them, to build up an insurance fund of his own. But he must still, when calculating the total cost of working a ship, add to its prime cost a charge on account of insurance. And he must do the same thing, in some form or other, with regard to those risks against which he could not buy an insurance policy on reasonable terms even if he wanted to. At times, for instance, some of his ships will be idle in port, or will earn only nominal freights: and to make his business remunerative in the long run he must, in some form or other, charge his successful voyages with an insurance premium to make up for his losses on those which are unsuccessful.

In general, however, he does this, not by making a formal entry in his accounts under a separate head, but by the simple plan of taking the average of successful and unsuccessful voyages together; and when that has once been done, insurance against these risks cannot be entered as a separate item in cost of production, without counting the same thing twice over. Having decided to run these risks himself, he is likely to spend a little more than the average of his competitors, in providing against their occurrence; and this extra expense enters in the ordinary way into his balance-sheet. It is really an insurance premium in another form; and therefore he must not count insurance against this part of the risk separately, for then he would be counting it twice over.(4*)

When a manufacturer has taken the average of his sales of dress materials over a long time, and bases his future action on the results of his past experience, he has already allowed for the risk that the machinery will be depreciated by new inventions rendering it nearly obsolete, and for the risk that his goods will be depreciated by changes in fashion. If he were to allow separately for insurance against these risks, he would be counting the same thin twice over.(5*)

4. Thus, though when we have counted up the average receipts of a risky trade, we must not make a separate full allowance for insurance against risk; though there may be something to be allowed as a charge on account of uncertainty. It is true that an adventurous occupation, such as gold mining, has special attractions for some people: the deterrent force of risks of loss in it is less than the attractive force of chances of great gain, even when the value of the latter estimated on the actuarial principle is much less than that of the former; and as Adam Smith pointed out, a risky trade, in which there is an element of romance, often becomes so overcrowded that the average earnings in it are lower than if there were no risks to be run.(6*) But in the large majority of cases the influence of risk is in the opposite direction; a railway stock that is certain to pay four per cent. will sell for a higher price than one which is equally likely to pay one or seven per cent. or any intermediate amount.

Every trade then has its own peculiarities, but in most cases the evils of uncertainty count for something, though not very much: in some cases a slightly higher average price is required to induce a given outlay, if that average is the mean of widely divergent and uncertain results, than if the adventurer may reckon confidently on a return that differs but little from that average. To the average price therefore we must add a recompense for uncertainty, if that is unusually great; though if we added insurance against risk we should be counting the greater part of that twice over.(7*)

5. This discussion of the risks of trade has again brought before us the fact that the value of a thing, though it tends to equal its normal (money) cost of production, does not coincide with it at any particular time, save by accident. Carey, observing this, suggested that we should speak of value in relation to (money) cost of reproduction instead of in relation to cost of production.

The suggestion has, however, no significance so far as normal values are concerned. For normal cost of production and normal cost of reproduction are convertible terms; and no real change is made by saying that the normal value of a thing tends to equal its normal (money) cost of reproduction instead of its normal (money) cost of production. The former phrase is less simple than the latter, but means the same thing.

And no valid argument for the change can be founded on the fact, which may be readily admitted, that there are some few cases in which the market value of a thing is nearer its cost of reproduction than the cost that was actually incurred in producing that particular thing. The present price of an iron ship for instance, made before the great recent improvements in the manufacture of iron, might diverge less from the cost of reproducing it, that is of producing another just like it by modern methods, than from that which was actually incurred in producing it. But the price of the old ship would be less than the cost of reproduction of the ship, because the art of designing ships has improved as fast as that of manufacturing iron; and moreover steel has displaced iron as the material of shipbuilding. It may still be urged that the price of the ship is equal to that of producing a ship, which would be equally serviceable, on a modern plan and by modern methods. But that would not be the same thing as saying that the value of the ship is equal to its cost of reproduction; and, as a matter of fact, when, as often happens, an unexpected scarcity of ships causes freights to increase very rapidly, those who are anxious to reap the harvest of profitable trade, will pay for a ship in sailing order a price much above that for which a shipbuilding firm would contract to produce another equally good and deliver it some time hence. Cost of reproduction influence on value, save when purchasers can wait for the production of new supplies.

Again, there is no connection between cost of reproduction and price in the cases of food in a beleaguered city, of quinine the supply of which has run short in a fever-stricken island, of a picture by Raphael, of a book that nobody cares to read, of an armour-clad ship of obsolete pattern, of fish when the market is glutted, of fish when the market is nearly empty, of a cracked bell, of a dress material that has gone out of fashion, or of a house in a deserted mining village.

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The reader, unless already experienced in economic analysis, is recommended to omit the next seven chapters, and pass at once to Chapter XV, which contains a brief summary of this Book. It is true that the four chapters on marginal costs in relation to values, and especially Chapters VIII and IX, bear upon some difficulties which are latent in the phrase "the net product of labour"; and that this phrase is used in Book VI. But the broad explanation of it given there will suffice provisionally for most purposes; and the intricacies connected with it may be best appreciated at a somewhat advanced stage of economic studies.

NOTES:

1. There is scope for applications of mathematical or semi-mathematical analyses, such as are indicated in the last chapter, to some of the chief practical difficulties of book-keeping by double entry in different trades.

2. Compare VI, section 4.

3. Of course this does not apply to railway rates. For a railway company having little elasticity as to its methods of working, and often not much competition from outside, has no inducement to endeavour to adjust the charges which it makes for different kinds of traffic to their cost to itself. In fact though it may ascertain the prime cost in each case easily enough, it cannot determine accUrately what are the relative total costs of fast and slow traffic, of short and long distance traffic, of light and heavy traffic; nor again of extra traffic when its lines and its trains are crowded and when they are nearly empty.

4. Again, certain insurance companies in America take risks against fire in factories at very much less than the ordinary rates, on condition that some prescribed precautions are taken, such as providing automatic sprinklers and making the walls and floor solid. The expense incurred in these arrangements is really an insurance premium; and care must be taken not to count it twice over. A factory which undertakes its own risks against fire will have to add to the prime cost of its goods an allowance for insurance at a lower rate, if it is arranged on this plan, than if built in the ordinary way.

5. Again, when a farmer has calculated the expenses of raising any particular crop with reference to an average year, he must not count in addition insurance against the risk that the season may be bad, and the crop a failure: for in taking an average year, he has already set of the chances of exceptionally good and bad seasons against one another. When the earnings of a ferryman have been calculated on the average of a year, allowance has already been made for the risk that he may sometimes have to cross the stream with an empty boat.

6. Wealth of Nations, Book I, ch. x.

7. The evils resulting from the uncertainty involved in great business risks are well shown by von Thünen (Der isolierte Staat, II, I, p. 82).

CHAPTER 8

MARGINAL COSTS IN RELATION TO VALUES. GENERAL PRINCIPLES

1. This Chapter and the three following are given to a study of the marginal costs of products in relation to the values of those products on the one hand, and on the other hand to the values of the land, machinery, and other appliances used in making them. The study relates to normal conditions and long period results. This fact must ever be borne in mind. The market value of anything may be much above or much below the normal cost of production and the marginal costs of a particular producer at any time may stand in no close relation to marginal costs under normal conditions.(1*)

It was indicated at the end of Chapter VI that no one part of the problem can be isolated from the rest. There are comparatively few things the demand for which is not greatly affected by the demand for other things to the usefulness of which they contribute; and it may even be said that the demand for the majority of articles of commerce is not direct but is derived from the demand for those commodities to the making of which they contribute, as materials or as implements. And again this demand, because it is so derived, is largely dependent on the supply of other things which will work with them in making those commodities. And again the supply of anything available for use in making any commodity is apt to be greatly influenced by the demand for that thing derived from its uses in making other commodities: and so on. These inter-relations can be and must be ignored in rapid and popular discussions on the business affairs of the world. But no study that makes any claim to thoroughness can escape from a close investigation of them. This requires many things to be borne in mind at the same time: and for that reason economics can never become a simple science.(2*)

The contribution which this group of chapters aims at making covers little ground: but that ground is difficult and we shall need to work over it carefully, and from more than one point of view; for it is thickly strewn with pitfalls and stumbling blocks. It deals primarily with the earnings of land, machinery, and other material agents of production. Its main argument applies to the earnings of human beings; but they are influenced by some causes which do not Affect the earnings of material agents of production: and the matter in hand is sufficiently difficult without further complicating it by side issues.

2. Let us begin by recalling the action of the principle of substitution. In the modern world nearly all the means of production pass through the hands of employers and other business men, who specialize themselves in organizing the economic forces of the population. Each of them chooses in every case those factors of production which seem best for his purpose. And the sum of the prices which he pays for those factors which he uses is, as a rule, less than the sum of the prices which he would have to pay for any other set of factors which could be substituted for them: for, whenever it appears that this is not the case, he will, as a rule, set to work to substitute the less expensive arrangement or process.(3*)

This statement is in close harmony with such common sayings of every-day life, as that "everything tends to find its own level," that "most men earn just about what they are worth," that "if one man can earn twice as much as another, that shows that his work is worth twice as much," that "machinery will displace manual labour whenever it can do the work cheaper." The principle does not indeed without hindrance. It may be restricted by custom or act law, by professional etiquette or trade-union regulation: it may be weakened by want of enterprise, or it may be softened by a generous unwillingness to part with old associates. But it never ceases to act, and it permeates all the economic adjustments of the modern world.

Thus there are some kinds of field work for which horsePower is clearly more suitable than steam-power, and vice versa. If we may now suppose that there have been no great recent improvements in horse or steam machinery, and that therefore the experience of the past has enabled farmers gradually to apply the law of substitution; then, on this supposition the application of steam-power will have been pushed just so far that any further use of it in the place of horse-power would bring no net advantage. There will however remain a margin on which they could be indifferently applied (as Jevons would have said); and on that margin the net efficiency of either in adding to the money value of the total product will be proportionate to the cost of applying it.(4*)

Similarly, if there are two methods of obtaining the same result, one by skilled and the other by unskilled labour, that one will be adopted which is the more efficient in proportion to its cost. There will be a margin on which either will be indifferently applied.(5*) On that line the efficiency of each will be in proportion to the price paid for it, account being taken of the special circumstances of different districts and of different workshops in the same district. In other words, the wages of skilled and unskilled labour will bear to one another the same ratio that their efficiencies do at the margin of indifference.

Again, there will be a rivalry between hand-power and machine-power similar to that between two different kinds of hand-power or two different kinds of machine-power. Thus hand-power has the advantage for some operations, as, for instance, for weeding out valuable crops that have an irregular growth; horse-power in its turn has a cleat advantage for weeding an ordinary turnip field; and the application of each of them will be pushed in each district till any further use of it would bring no net advantage there. On the margin of indifference between hand-power and horse-power their prices must be proportionate to their efficiency; and thus the influence of substitution will tend to establish a direct relation between the wages of labour and the price that has to be paid for horse-power.

3. As a rule many kinds of labour, of raw material, of machinery and other plant, and of business organization, both internal and external, go to the production of a commodity: and the advantages of economic freedom are never more strikingly manifest than when a business man endowed with genius is trying experiments, at his own risk, to see whether some new method, or combination of old methods, will be more efficient than the old. Every business man indeed, according to his energy and ability, is constantly endeavouring to obtain a notion of the relative efficiency of every agent of production that he employs; as well as of others that might possibly be substituted for some of them. He estimates as best he can how much net product (i.e. net addition to the value of his total product) will be caused by a certain extra use of any one agent; net that is after deducting for any extra expenses that may be indirectly caused by the change, and adding for any incidental savings. He endeavours to employ each agent up to that margin at which its net product would no longer exceed the price he would have to pay for it. He works generally by trained instinct rather than formal calculation; but his processes are substantially similar to those indicated in our study of derived demand; and, from another point of view, they may be described as those which might be reaped by a complex and refined system of book-keeping by double entry.(6*)

We have already followed some simple estimates of this sort. We have noticed, for instance, how the proportion of hops and malt in ale can be varied, how the extra price which can be got for ale by increasing the quantity of hops in it is a representative of the causes which govern the demand price for hops. Assuming that no further trouble or expense of any kind is involved by this additional use of hops, and that the expediency of using this extra amount is doubtful, the extra value thus given to the ale is the marginal net product of the hops of which we are in search. In this case, as in most others, the net product is an improvement in quality or a general contribution to the value of the product; it is not a definite part of the produce which can be separated from the rest. But in exceptional instances that can be done.(7*)

4. The notion of the marginal employment of any agent of production implies a possible tendency to diminishing return from its increased employment.

Excessive applications of any means to the attainment of any end are indeed sure to yield diminishing. returns in every branch of business; and, one may say, in all the affairs of life. We may take some additional examples of a principle that has already been illustrated.(8*) In the manufacture of sewing machines some parts may well be made of cast iron; for others a common kind of steel will suffice; there are yet others for which a specially expensive steel-compound is needed; and all parts should be finished off more or less smoothly, so that the machine may work easily. Now if any one devoted a disproportionate care and expense to th selection of materials for the less important uses, it might truly be said that that expenditure was yielding a rapidly diminishing return; and that he would have done better to give some of it to making his machines work smoothly, or even to producing more machines: and the case might be even worse if he devoted an excessive expenditure to mere brilliancy of finish, and put low grade metal to work for which a higher grade was needed.

This consideration seems at first to simplify economic problems; but on the contrary it is a chief source of difficulty and confusion. For though there is some analogy between all these various tendencies to diminishing return, they yet are not identical. Thus the diminishing return which arises from an ill-proportioned application of the various agents of production into a particular task has little in common with that broad tendency to the pressure of a crowded and growing population on the means of subsistence. The great classical Law of Diminishing Return has its chief application, not to any one particular crop, but to all the chief food crops. It takes for granted that farmers raise, as a rule, those crops for which their land and other resources are best adapted, account being taken of the relative demands for the several crops; and that they distribute their resources appropriately between different routes. It does not attribute to them unlimited intelligence and wisdom, but it assumes that, taking one with another, they have shown a reasonable amount of care and discretion in the distribution of these resources. It refers to a country the whole land of which is already in the hands of active business men, who can supplement their own capital by loans from banks wherever they can show it is likely to be well applied; and asserts that an increase in the total amount of capital applied to agriculture in that country will yield diminishing returns of produce in general. This statement is akin to, but yet quite distinct from, the statement that if any farmer makes a bad distribution of his resources between different plans of cultivation, he will get a markedly diminishing return from those elements of expenditure which he has driven to excess.

For instance, in any given case, there is a certain proportion between the amounts which may with best advantage be spent on ploughing and harrowing, or manuring. There might be some differences of opinion on the matter, but only within narrow limits. An inexperienced person who ploughed many times over land, which was already in fairly good mechanical condition, while he gave it little or none of the manure which it was craving, would be generally condemned as having so over applied ploughing as to make it yield a rapidly diminishing return. But this result of the misapplication of resources has no very close connection with the tendency of agriculture in an old country to yield a diminishing return to a general increase of resources well applied in cultivation: and indeed exactly parallel cases can be found of a diminishing return to particular resources when applied in undue proportion, even in industries which yield an increasing return to increased applications of capital and labour when appropriately distributed.(9*)

5. The part played by the net product at of production in the modern doctrine of Distribution is to be misunderstood. In particular many able writers have supposed that it represents the marginal use of a thing as governing the value of the whole. It is not so; the doctrine says we must go to the margin to study the action of those forces which govern the value of the whole: and that is a very different affair. Of course the withdrawal of (say) iron from any of its necessary uses would have just the same influence on its value as its withdrawal from its marginal uses; in the same way as the pressure in a boiler for cooking under high pressure would be affected by the escape of any other steam just as it would by the escape of the steam in one of the safety valves: but in fact the steam does not escape except through the safety valves. In like manner iron, or any other agent of production, is not (under ordinary circumstances) thrown out of use except at points at which its use yields no clear surplus of profit; that is, it is thrown out from its marginal uses only.

Again, the finger of an automatic weighing machine determines, in the sense of indicating, the weight sought for. So the escape of steam from a safety valve, governed by a spring representing a pressure of a hundred pounds to the square inch, determines the pressure of steam in the boiler, in the sense of indicating that it has reached a hundred pounds to the inch. The pressure is caused by the heat; the spring in the valve governs the pressure by yielding and letting out some of the steam when its amount is so great, at the existing heat, as to overbear the resistance of the spring.

Similarly, with regard to machinery and other appliances of production made by man, there is a margin through which additional supplies come in after overcoming the resistance of a spring, called "cost of production," For when the supply of those appliances is so small relatively to the demand that the earnings expected from new supplies are more than sufficient to yield normal interest (or profits, if earnings of management are reckoned in) on their cost of production, besides allowing for depreciation, etc., then the valve opens, and the new supplies come in. When the earnings are less than this, the valve remains shut: and as anyhow the existing supply is always in process of slow destruction by use and the lapse of time, the supply is always shrinking when the valve is closed. The valve is that part of the machinery by which the general relations of demand and supply govern value. But marginal uses do not govern value; because they, together with value, are themselves governed by those general relations.

6. Thus, so long as the resources of an individual producer are in the form of general purchasing power, he will push every investment up to the margin at which he no longer expects from it a higher net return than he could get by investing in some other material, or machine, or advertisement, or in the hire of some additional labour every investment will, as it were, be driven up to a valve which offers to it a resistance equal to its own expanding force. If he invests in material or in labour, that is soon embodied in some saleable product: the sale replenishes his fluid capital, and that again is invested up to the margin at which any further investment would yield a return so diminished as not to be profitable.

But if he invests in land, or in a durable building or machine, the return which he gets from his investment may vary widely from his expectation. It will be governed by the market for his products, which may change its character largely through new inventions, changes in fashion, etc., during the life of a machine, to say nothing of the perpetual life of land. The incomes which he thus may derive from investments in land and in machinery differ from his individual point of view mainly in the longer life of the land. But in regard to production in general, a dominant difference between the two lies in the fact that the supply of land is fixed (though in a new country, the supply of land utilized in man's service may be increased); while the supply of machines may be increased without limit. And this difference reacts on the individual producer. For if no great new invention renders his machines obsolete, while there is a steady demand for the things made by them, they will be constantly on sale at about their cost of production; and his machines will generally yield him normal profits on that cost of production, with deductions corresponding to their wear and tear.

Thus the rate of interest is a ratio: and the two things which it connects are both sums of money. So long as capital is "free," and the sum of money or general purchasing power over which it gives command is known, the net money income, expected to be derived from it, can be represented at once as bearing a given ratio (four or five or ten per cent) to that sum. But when the free capital has been invested in a particular thing, its money value cannot as a rule be ascertained except by capitalizing the net income which it will yield: and therefore the causes which govern it are likely to be akin in a greater or less degree to those which govern rents.

We are thus brought to the central doctrine of this part of economics, viz.: -- "That which is rightly regarded as interest on 'free' or 'floating' capital, or on new investments of capital, is more properly treated as a sort of rent -- a Quasi-rent -- On old investments of capital. And there is no sharp line of division between floating capital and that which has been 'sunk' for a special branch of production, nor between new and old investments of capital; each group shades into the other gradually. And thus even the rent of land is seen, not as a thing by itself, but as the leading species of a large genus; though indeed it has peculiarities of its own which are of vital importance from the point of view of theory as well as of practice."(10*)

NOTES:

1. Numerous objections have been urged against the important place assigned to marginal costs in modern analysis. But it will be found that most of them rely on arguments, in which statements referring to normal conditions and normal value are controverted by statements relating to abnormal or particular conditions.

2. The reader is referred to the footnote on p. 393 with special reference to the compressed mathematical version of the central problem of value which begins in Note XIV in the Mathematical Appendix and culminates in Note XXI.

3. Compare V, III, section 3; and V, IV, sections 3, 4; and Note XIV in the Mathematical Appendix.

4. This margin will vary with local circumstances, as well as with the habits, inclinations, and resources of individual farmers. The difficulty of applying steam machinery in small fields and on rugged ground is overcome more generally in those districts in which labour is scarce than in those in which it is plentiful; especially if, as is probable, coal is cheaper, and the feed of horses dearer in the former than the latter.

5. Skilled manual labour being generally used for special orders and for things of which not many are required of the same pattern; and unskilled labour aided by specialized machinery being used for others. The two methods are to be seen side by side on similar work in every large workshop: but the position of the line between them will vary a little from one workshop to another.

6. The changes, which he desires, may be such as could only be made on a large scale; as for instance the substitution of steam-power for hand-power in a certain factory; and in that case there would be a certain element of uncertainty and risk in the change. Such breaches of continuity are however inevitable both in production and consumption if we regard the action of single individuals. But as there is a continuous demand in a large market for hats and watches and wedding cakes, though no individual buys many of them (see III, III, section 5), so there will always be trades in which small businesses are most economically conducted without steam power, and larger businesses with; while businesses of intermediate size are on the margin. Again, even in large establishments in which steam is already in use, there will always be some things done by hand-power which are done by steam power elsewhere; and so on .

7. See p. 387, and Mathematical Note XVI. See also other illustrations in, VI, VII. A further illustration of the relation between the wages of the marginal shepherd, and the net product of his labour will be worked out in detail in VI, I, section 7 .

8. See V, IV, section 4; see also the note on von Thünen, below, p. 523.

9. See above IV, iii, section 8; and Carver, Distribution of Wealth, ch. ii, and above footnotes on pp. 319, 320. Mr J. A. Hobson is a vigorous and suggestive writer on the realistic and social sides of economics: but, as a critic of Ricardian doctrines, he is perhaps apt to underrate the difficulty of the problems which he discusses. He argues that if the marginal application of any agent of production be curtailed, that will so disorganize production that every other agent will be working to less effect than before; and that therefore the total resulting loss will include not only the true marginal product of that agent, but also a part of the products due to the other agents: but he appears to have overlooked the following points: -- (1) There are forces constantly at work tending so to readjust the distribution of resources between their different uses, that any maladjustment will be arrested before it has gone far: and the argument does not profess to apply to exceptional cases of violent maladjustment. (2) When the adjustment is such as to give the best results, a slight change in the proportions in which they are applied diminishes the efficiency of that adjustment by a quantity which is very small relatively to that change in technical language it is of "the second order of smalls" --; and it may therefore be neglected relatively to that change. (In pure mathematical phrase, efficiency being regarded as a function of the proportions of the agents; when the efficiency is at its maximum, its differential coefficient with regard to any one of these proportions is zero.) A grave error would therefore have been involved, if any allowance had been made for those elements which Mr Hobson asserts to have been overlooked. (3) In economics, as in physics, changes are generally continuous. Convulsive changes may indeed occur, but they must be dealt with separately: and an illustration drawn from a convulsive change can throw no true light on the processes of normal steady evolution. In the particular problem before us, this precaution is of special importance: for a violent check to the supply of any one agent of production, may easily render the work of all other agents practically useless; and therefore it may inflict a loss out of all proportion to the harm done by a small check to the supply of that agent when applied up to that margin, at which there was doubt whether the extra net product due to a small additional application of it would be remunerative. The study of changes in complex quantitative relations is often vitiated by a neglect of this consideration, to which Mr Hobson seems to be prone; as indeed is instanced by his remarks on a "marginal shepherd" in The Industrial System, p. i 10. See Professor Edgeworth's masterly analyses of the two instances mentioned in this note, Quarterly Journal of Economics, 1904, p. 167; and Scientia, 1910, pp. 95-100.

10. This statement is reproduced from the Preface to the first edition of the present volume.

CHAPTER 9

MARGINAL COSTS IN RELATION TO VALUES.
GENERAL PRINCIPLES, CONTINUED

1. The incidents of the tenure of land are so complex: and so many practical issues connected with them have raised controversies on side issues of the problem of value, that it will be well to supplement our previous illustration from land. We may take another from an imaginary commodity so chosen that sharp outlines can be assigned to each stage of the problem, without inviting the objection that such sharp outlines are not found in the actual relations between landlord and tenant.

But before entering on this, we may prepare the way for using, as we go, illustrations drawn from the incidence of taxation to throw side-lights on the problem of value. For indeed a great part of economic science is occupied with the diffusion throughout the community of economic changes which primarily affect some particular branch of production or consumption; and there is scarcely any economic principle which cannot be aptly illustrated by a discussion of the shifting of the effects of some tax "forwards," i.e. towards the ultimate consumer, and away from the producer of raw material and implements of production; or else in the opposite direction, "backwards." But especially is this true of the class of problems now under discussion.(1*)

It is a general principle that if a tax impinges on anything used by one set of persons in the production of goods or services to be disposed of to other persons, the tax tends to check production. This tends to shift a large part of the burden of the tax forwards on to consumers, and a small part backwards on to those who supply the requirements of this set of producers. Similarly, a tax on the consumption of anything is shifted in a greater or less degree backwards on to its producer.

For instance, an unexpected and heavy tax upon printing would strike hard upon those engaged in the trade, for if they attempted to raise prices much, demand would fall off quickly: but the blow would bear unevenly on various classes engaged in the trade. Since printing machines and compositors cannot easily find employment out of the trade, the prices of printing machines and wages of compositors would be kept low for some time. On the other hand, the buildings and steam engines, the porters, engineers, and clerks would not wait for their numbers to be adjusted by the slow process of natural decay to the diminished demand; some of them would be quickly at work in other trades, and very little of the burden would stay long on those of them who remained in the trade. A considerable part of the burden, again, would fall on subsidiary industries, such as those engaged in making paper and type; because the market for their products would be curtailed. Authors and publishers would also suffer a little; because they would be forced either to raise the price of books, with a consequent diminution of sales, or to see a greater proportion of their gross receipts swallowed up by costs. Finally, the total turnover of the booksellers would diminish, and they would suffer a little.

So far it has been assumed that the tax spreads its net very wide, and covers every place to which the printing industry in question could be easily transferred. But, if the tax were only local, the compositors would migrate beyond its reach; and the owners of printing houses might bear a larger and not a smaller proportionate share of the burden than those whose resources were more specialized but more mobile. If the local tax were uncompensated by any effect which tended to attract population, part of the burden would be thrown on local bakers, grocers, etc., whose sales would be diminished.

Next suppose the tax to be levied on printing presses instead of on printed matter. In that case, if the printers had no semi-obsolete presses which they were inclined to destroy or to leave idle, the tax would not strike marginal production: it would not immediately affect the output of printing, nor therefore its price. It would merely intercept some of the earnings of the presses on the way to the owners, and lower the quasi-rents of the presses. But it would not affect the rate of net profits which was needed to induce people to invest fluid capital in presses: and therefore, as the old presses wore out, the tax would add to marginal expenses, that is to expenses which the producer was free to incur or not as he liked, and which he was in doubt whether to incur. Therefore the supply of printing would be curtailed; its price would rise: and new presses would be introduced only up to the margin at which they would be able, in the judgment of printers generally, to pay the tax and yet yield normal profits on the outlay. When this stage had been reached the distribution of the burden of a tax upon presses would henceforth be nearly the same as that of a tax upon printing: excepting only that there would be more inducement to get a great deal of work out of each press. For instance more of the presses might be made to work double shifts; in spite of the fact that night work involves special expenses.

We now pass to apply these principles of shifting of taxes to our main illustration.

2. Let us suppose that a meteoric shower of a few thousand large stones harder than diamonds fell all in one place; so that they were all picked up at once, and no amount of search could find any more. These stones, able to cut every material, would revolutionize many branches of industry; and the owners of them would have a differential advantage in production, that would afford a large producer's surplus. This surplus would be governed wholly by the urgency and volume of the demand for their services on the one hand and the number of the stones on the other hand: it could not be affected by the cost of obtaining a further supply, because none could be had at any price. A cost of production might indeed influence their value indirectly: but it would be the cost of tools made of hard steel and other materials of which the supply can be increased to keep pace with demand. So long as any of the stones were habitually used by intelligent producers for work which could be done equally well by such tools, the value of a stone could not much exceed the cost of producing tools (allowance being made for wear and tear) equally efficient with it in these inferior uses.

The stones, being so hard as not to be affected by wear, would probably be kept in operation during all the working hours of the day. And if their services were very valuable, it might be worth while to keep people working overtime, or even in double or triple shifts, in order to extract the utmost service from them. But the more intensively they were applied, the less net return would be reaped from each additional service forced from them; thus illustrating the law that the intensive working not only of land, but of every other appliance of production is likely to yield a diminishing return if pressed far enough.

The total supply of stones is fixed. But of course any particular manufacturer might obtain almost as many as he liked to pay for: and in the long run he would expect his outlay on them to be returned with interest (or profits, if the remuneration for his own work were not reckoned separately), just in the same way as if he were buying machinery, the total stock of which could be increased indefinitely, so that its price conformed pretty closely to its cost of production.

But when he had once bought the stones, changes in the processes of production or of demand for the things made by their aid, might cause the income yielded by them to become twice as great or only half as great as he had expected. In the latter case it would resemble the income derived from a machine, which had not the latest improvements and could earn only half as much as a new machine of equal cost. The values of the stone and of the machine alike would be reached by capitalizing the income which they were capable of earning, and that income would be governed by the net value of the services rendered by them. The income earning power and therefore the value of each would be independent of its own costs of production, but would be governed by the general demand for its products in relation to the general supply of those products. But in the case of the machine that supply would be controlled by the cost of supply of new machines equally efficient with it; and in the case of the stone there would be no such limit, so long as all the stones in existence were employed on work that could not be done by anything else.

This argument may be put in another way. Since any one, who bought stones, would take them from other producers, his purchase would not materially affect the general relations of demand for the services of the stones to the supply of those services. It would not therefore affect the price of the stones; which would still be the capitalized value of the services which they rendered in those uses, in which the need for them was the least urgent: and to say that the purchaser expected normal interest on the price which represented the capitalized value of the services, would be a circular statement that the value of the services rendered by stones is governed by the value of those very services.(2*)

Next let us suppose that the stones were not all found at once but were scattered over the surface of the earth on public ground, and that a laborious search might expect to be rewarded by finding one here and there. Then people would hunt for the stones only up to that point, or margin, at which the probable gain of so doing would in the long run just reward the outlay of labour and capital involved; and in the long run, the normal value of the stones would be such as to maintain equilibrium between demand and supply, the number of the stones gathered annually being in the long run just that for which the normal demand price was equal to the normal supply price.

Finally, let us bring the case of the stones into accord with that of the lighter machinery and other plant ordinarily used in manufacture, by supposing that the stones were brittle, and were soon destroyed; and that an inexhaustible store existed from which additional supplies could be obtained quickly and certainly at a nearly uniform cost. In this case the value of the stones would always correspond closely to that cost: variations in demand would have but little influence on their price, because even a slight change in price would quickly effect a great change in the stock of them in the market. In this case the income derived from a stone (allowance being made for wear-and-tear) would always adhere closely to interest on its cost of production.

3. This series of hypotheses stretches continuously from the one extreme in which the income derived from the stones is a rent in the strictest sense of the term, to the other extreme in which it is to be classed rather with interest on free or floating capital. In the first extreme case the stones cannot be worn out or destroyed, and no more can be found. They of course tend to be distributed among the various uses to which they are applicable in such a way that there is no use to which an increased supply of them could be applied, without taking them away from some other use in which they were rendering net services at least as valuable. These margins of application of the several uses are thus governed by the relation in which the fixed stock of stones stands to the aggregate of demands for them in different uses. And the margins being thus governed, the prices that will be paid for their use are indicated by the value of the services which they render at any one of those margins.

A uniform tax on them, collected from the user, will lower their net service in each use by the same amount: it will not affect their distribution between several uses; and it will fall wholly on the owner, after perhaps some little delay caused by a frictional resistance to readjustments.

At the opposite extreme of our chain of hypotheses, the stones perish so quickly, and are so quickly reproduced at about a uniform cost, that variations in the urgency and volume of the uses to which the stones can be put will be followed so promptly by changes in the stock of them available, that those services can never yield much more or much less than normal interest on the money cost of obtaining additional stones. In this case a business man, when making his estimates for the cost of any undertaking in which stones will be used, may enter interest (or if he is counting his own work in, profits), for the time during which those stones will be used (together with wear-and-tear), as part of the prime, special, or direct expenses of his undertaking. A tax on the stones under these conditions would fall entirely on any one who even a little while after the tax had come into force, gave out a contract for anything in making which the stones would be used.

Taking an intermediate hypothesis as to the length of life of the stones and the rapidity with which new supplies could be obtained; we find that the charges which the borrower of stones must expect to pay, and the revenue which the owner of the stones could reckon on deriving from them at any time, might temporarily diverge some way from interest (or profits) on their cost. For changes in the urgency and volume of the uses to which they could be applied, might have caused the value of the services rendered by them in their marginal uses to rise or fall a great deal, even though there had been no considerable change in the difficulty of obtaining them. And if this rise or fall, arising from variations in demand, and not from variations in the cost of the stones, is likely to be great during the period of any particular enterprise, or any particular problem of value that is under discussion; then for that discussion the income yielded by the stones is to be regarded as more nearly akin to a rent than to interest on the cost of producing the stones. A tax upon the stones in such a case would tend to diminish the rental which people would pay for their use, and therefore to diminish the inducements towards investing capital and effort in obtaining additional supplies. It would therefore check the supply, and compel those who needed the stones to pay gradually increasing rentals for their use, up to the point at which the rentals fully covered the costs of producing the stones. But the time needed for this readjustment might be long: and in the interval a great part of the tax would fall upon the owners of the stones.

If the life of the stones was long relatively to that process of production in which the stones were used which was under discussion, the stock of stones might be in excess of that needed to do all the work for which they were specially fitted. Some of them might be lying almost idle, and the owner of these stones might make up his estimate of the marginal price for which he was just willing to work without entering in that estimate interest on the value of the stones. That is to say, some costs which would have been classed as prime costs in relation to contracts, or other affairs, which lasted over a long period, would be classed as supplementary costs in relation to a particular affair which would last but a short time, and which came under consideration when business was slack.

It is of course just as essential in the long run that the price obtained should cover general or supplementary costs as that it should cover prime costs. An industry will be driven out of existence in the long run as certainly by failing to return even a moderate interest on capital invested in steam engines, as by failing to replace the price of the coal or the raw material used up from day to day: just as a man's work will be stopped as certainly by depriving him of food as by putting him in chains. But the man can go on working fairly well for a day without food; while if he is put in chains the check to his work comes at once. So an industry may, and often does, keep tolerably active during a whole year or even more, in which very little is earned beyond prime costs, and the fixed plant has "to work for nothing." But when the price falls so low that it does not pay for the out of pocket expenses during the yea r for wages and raw material, for coal and for lighting, etc., then the production is likely to come to a sharp stop.

This is the fundamental difference between those incomes yielded by agents of production which are to be regarded as rents or quasi-rents and those which (after allowing for the replacement of wear-and-tear and other destruction) may be regarded as interest (or profits) on current investments. The difference is fundamental, but it is only one of degree. Biology tends to show that the animal and vegetable kingdoms have a common origin. But yet there are fundamental differences between mammals and trees; while in a narrower sense the differences between an oak tree and an apple tree are fundamental; and so are in a still narrower sense those between an apple tree and a rose bush, though they are both classed as rosaceae. Thus our central doctrine is that interest on free capital and quasi-rent on an old investment of capital shade into one another gradually; even the rent of land being not a thing by itself, but the leading species of a large genus.(3*)

4. Again, pure elements are seldom isolated from all others by nature either in the physical or moral world. Pure rent in the strict sense of the term is scarcely ever met with: nearly all income from land contains more or less important elements which are derived from efforts invested in building houses and sheds, in draining the land and so on. But economists have learnt to recognize diversity of nature in those composite things to which the names of rent, profits, wages etc. are given in popular language; they have learnt that there is an element of true rent in the composite product that is commonly called wages, an element of true earnings in what is commonly called rent and so on. They have learnt in short to follow the example of the chemist who seeks for the true properties of each element; and who is thus prepared to deal with the common oxygen or soda of commerce, though containing admixtures of other elements.(4*)

They recognize that nearly all land in actual use contains an element of capital; that separate reasonings are required for those parts of its value which are, and those which are not, due to efforts of man invested in the land for the purposes of production; and that the results of these reasonings must be combined in dealing with any particular case of that income which commonly goes by the name "rent," but not all of which is rent in the narrower sense of the term. The manner in which the reasonings are to be combined depends on the nature of the problem. Sometimes the mere mechanical "composition of forces" suffices; more often allowance must be made for a quasi-chemical interaction of the various forces; while in nearly all problems of large scope and importance, regard must be had to biological conceptions of growth.

5. Finally a little may be said on a distinction that is sometimes made between "scarcity rents" and "differential rents." In a sense all rents are scarcity rents, and all rents are differential rents. But in some cases it is convenient to estimate the rent of a particular agent by comparing its yield to that of an inferior (perhaps a marginal) agent, when similarly worked with appropriate appliances. And in other cases it is best to go straight to the fundamental relations of demand to the scarcity or abundance of the means for the production of those commodities for making which the agent is serviceable.

Suppose for instance that all the meteoric stones in existence were equally hard and imperishable; and that they were in the hands of a single authority: further that this authority decided, not to make use of its monopolistic power to restrict production so as to raise the price of its services artificially, but to work each of the stones to the full extent it could be profitably worked (that is up to the margin of pressure so intensive that the resulting product could barely be marketed at a price which covered, with profits, its expenses without allowing anything for the use of the stone). Then the price of the services rendered by the stones would have been governed by the natural scarcity of the aggregate output of their services in relation to the demand for those services; and the aggregate surplus or rent would most easily be reckoned as the excess of this scarcity price over the aggregate expenses of working the stones. It would therefore generally be regarded as a scarcity rent. But on the other hand it could have been reckoned as the differential excess of the aggregate value of the net services of the stones over that which would have been reached if all their uses had been as unproductive as their marginal uses. And exactly the same would be true if the stones were in the hands of different producers, impelled by competition with one another to work each stone up to the margin at which its further use ceased to be profitable.

This last instance has been so chosen as to bring out the fact that the "differential" as well as the "scarcity" routes for estimating rent are independent of the existence of inferior agents of production: for the differential comparison in favour of the more advantageous uses of the stones can be made by reference to the marginal uses of good stones, as clearly as by reference to the use of inferior stones which are on the margin of not being worth using at all.

In this connection it may be noted that the opinion that the existence of inferior land, or other agents of production, tends to raise the rents of the better agents is not merely untrue. It is the reverse of the truth. For, if the bad land were to be flooded and rendered incapable of producing anything at all, the cultivation of other land would need to be more intensive; and therefore the price of the product would be higher, and rents generally would be higher, than if that land had been a poor contributor to the total stock of produce.(5*)

NOTES:

1. The substance of this section is reproduced from answers to questions proposed by the Royal Commission on Local Taxation. See [C. 9528], 1899, pp. 112-26.

2. Such circular reasonings are sometimes nearly harmless: but they always tend to overlay and hide the real issues. And they are sometimes applied to illegitimate uses by company promoters; and by advocates of special interests, who desire to influence the course of legislation in their own favour. For instance a semi monopolistic business aggregation or trust is often "over-capitalized." To effect this a time is chosen, at which the branch of production with which it is concerned is abnormally prosperous: when perhaps some solid firms are earning fifty per cent. net on their capital in a single year, and thus making up for lean years past and to come in which their receipts will do little more than cover prime costs. Financiers connected with the flotation sometimes even arrange that the businesses to be offered to the public shall have a good many orders to fill at specially favourable prices: the loss falling on themselves, or on other companies which they control. The gains to be secured by semi-monopolistic selling, and possibly by some further economies in production are emphasized: and the stock of the trust is absorbed by the public. If ultimately objection to the conduct of the trust is raised, and especially to the strengthening of its semi-monopolistic position by a high tariff or any other public favour, the answer is given that the shareholders are receiving but a moderate return on their investments. Such cases are not uncommon in America. In this country a more moderate watering of the stock of some railways has been occasionally used indirectly as a defence of the shareholders against a lowering of rates, that threatens to reduce dividends on inflated capital below what would be a fair return on solid capital.

3. See above, p. 412.

4. Professor Fetter seems to ignore this lesson in an article on "The Passing of the Concept of Rent" in the Quarterly Journal of Economics, May 1901, p. 419; where he argues that "if only those things which owe nothing to labour are classed as land, and if it is then shown that there is no material thing in settled countries of which this can be said, it follows that everything must be classed as capital." Again he appears to have missed the true import of the doctrines which he assails, when he argues (ib. pp. 423-9) against "Extension as the fundamental attribute of land, and the basis of rent." The fact is that its extension (or rather the aggregate of "its space relations") is the chief, though not the only property ofland, which causes the income derived from it (in an old country) to contain a large element of true rent: and that the element of true rent, which exists in the income derived from land, or the "rent of land" in the popular use of the term, is in practice so much more important than any others that it has given a special character to the historical development of the Theory of Rent (see above, p. 147). If meteoric stones of absolute hardness, in high demand and incapable of increase, had played a more important part in the economic history of the world than land, then the elements of true rent which attracted the chief attention of students, would have been associated with the property of hardness; and this would have given a special tone and character to the development of the Theory of Rent. But neither extension nor hardness is a fundamental attribute of all things which yield a true rent. Professor Fetter seems also to have missed the point of the central doctrine as to rents, quasi-rents and interest, given above.

5. Compare Cassel, Das Recht auf den vollen Arbeitsertrag, p. 81.

The many misconceptions, that have appeared in the writings even of able economists, as to the nature of a quasi-rent, seem to arise from an inadequate attention to the differences between short periods and long in regard to value and costs. Thus it has been said that a quasi-rent is an "unnecessary profit," and that it is "no part of cost" Quasi-rent is correctly described as an unnecessary profit in regard to short periods, because no "special" or "prime" costs have to be incurred for the production of a machine that, by hypothesis, is already made and waiting for its work. But it is a necessary profit in regard to those other (supplementary) costs which must be incurred in the long run in addition to prime costs; and which in some industries, as for instance sub marine telegraphy, are very much more important than prime costs. It is no part of cost under any conditions: but the confident expectation of coming quasi-rents is a necessary condition for the investment of capital in machinery, and for the incurring of supplementary costs generally.

Again a quasi-rent has been described as a sort of "conjuncture" or "opportunity" profit; and, almost in the same breath, as no profit or interest at all, but only a rent. For the time being, it is a conjuncture or opportunity income: while in the long run it is expected to, and it generally does, yield a normal rate of interest (or if earnings of management are counted in, of profit) on the free capital, represented by a definite sum of money that was invested in producing it. By definition the rate of interest is a percentage; that is a relation between two numbers (see above, p. 412). A machine is not a number: its value may be a certain number of pounds or dollars: but that value is estimated, unless the machine be a new one, as the aggregate of its (discounted) earnings, or quasi-rents. If the machine is new, its makers have calculated that this aggregate will appear to probable purchasers as the equivalent of a price which will repay the makers for it: in that case therefore it is as a rule, both a cost price, and a price which represents an aggregate of (discounted) future incomes. But when the machine is old and partially obsolete in pattern, there is no close relation between its value and its cost of production: its value is then simply the aggregate of the discounted values of the future quasi-rents, which it is expected to earn.

CHAPTER X

MARGINAL COSTS IN RELATION TO AGRICULTURAL VALUES

1. We now pass from general considerations to those relating to land; and we begin with those specially applicable to agricultural land in an old country.

Suppose, that a war, which was not expected to last long, were to cut off part of the food supplies of England. Englishmen would set themselves to raise heavier crops by such extra application of capital or labour as was likely to yield a speedy return; they would consider the results of artificial manures, of the use of clod-crushing machines, and so on; and the more favourable these results were, the less would be the rise in the price of produce in the coming year which they regarded as necessary to make it worth their while to incur additional outlay in these directions. But the war would have very little effect on their action as to those improvements which would not bear fruit till it was over. In any inquiry then as to the causes that will determine the prices of corn during a short period, that fertility which the soil derives from slowly made improvements has to be taken for granted as it then is, almost in the same way as if it had been made by nature. Thus, the income derived from these permanent improvements gives a surplus above the prime or special costs needed for raising extra produce. But it is not a true surplus, in the same sense that the rent proper is, i.e. it is not a surplus above the total costs of the produce: it is needed to cover the general expenses of the business.

To speak more exactly: -- If the extra income derived from improvements that have been made in the land by its individual owner is so reckoned as not to include any benefit which would have been conferred on the land by the general progress of society independently of his efforts and sacrifices; then, as a rule, the whole of it is required to remunerate him for those efforts and sacrifices. He may have underestimated the gains which will result from them; but he is about equally likely to have made an overestimate. If he has estimated them rightly, his interest has urged him to make the investment as soon as it showed signs of being profitable: and in the absence of any special reason to the contrary we may suppose him to have done this. In the long run, then, the net returns to the investment of capital in the land, taking successful and unsuccessful returns together, do not afford more than an adequate motive to such investment. If poorer returns had been expected than those on which people actually based their calculations, fewer improvements would have been made.

That is to say: -- for periods which are long in comparison with the time needed to make improvements of any kind, and bring them into full operation, the net incomes derived from them are but the price required to be paid for the efforts and sacrifices of those who make them: the expenses of making them thus directly enter into marginal expenses of production, and take a direct part in governing long-period supply price. But in short periods, that is, in periods short relatively to the time required to make and bring into full bearing improvements of the class in question, no such direct influence on supply price is exercised by the necessity that such improvements should in the long run yield net incomes sufficient to give normal profits on their cost. And therefore when we are dealing with such periods, these incomes may be regarded as quasi-rents which depend on the price of the produce.(1*)

We may conclude then: -- (1) The amount of produce raised, and therefore the position of the margin of cultivation (i.e. the margin of the profitable application of capital and labour to good and bad land alike) are both governed by the general conditions of demand and supply. They are governed on the one hand by demand; that is, by the numbers of the population who consume the produce, the intensity of their need for it, and their means of paying for it; and on the other hand by supply; that is, by the extent and fertility of the available land, and the numbers and resources of those ready to cultivate it. Thus cost of production, eagerness of demand, margin of production, and price of the produce mutually govern one another: and no circular reasoning is involved in speaking of any one as in part governed by the others. (2) That part of the produce which goes as rent is of course thrown on the market, and acts on prices, in just the same way as any other part. But the general conditions of demand and supply, or their relations to one another, are not affected by the division of the produce into the share of rent and the share needed to render the farmer's expenditure profitable. The amount of that rent is not a governing cause; but is itself governed by the fertility of land, the price of the produce, and the position of the margin: it is the excess of the value of the total returns which capital and labour applied to land do obtain, over those which they would have obtained under circumstances as unfavourable as those on the margin of cultivation. (3) If the cost of production were estimated for parts of the produce which do not come from the margin, a charge on account of rent would of course need to be entered in this estimate; and if this estimate were used in an account of the causes which govern the price of the produce; then the reasoning would be circular. For that, which is wholly an effect, would be reckoned up as part of the cause of those things of which it is an effect. (4) The cost of production of the marginal produce can be ascertained without reasoning in a circle. The cost of production of other parts of the produce cannot. The cost of production on the margin of the profitable application of capital and labour is that to which the price of the whole produce tends, under the control of the general conditions of demand and supply: it does not govern price, but it focusses the causes which do govern price.

2. It has sometimes been suggested that if all land were equally advantageous and all were occupied, the income derived from it would partake of the nature of a monopoly rent: but this seems to be an error. Of course the landowners might conceivably combine to stint production, whether their properties were of equal fertility or not; the raised prices which would thus be obtained for the produce would be monopoly prices; and the incomes of the owners would be monopoly revenues rather than rents. But, with a free market, the revenues from land would be rents, governed by the same causes and in the same way in a country where the land was all of equal advantage, as in those where good and bad land were intermingled.(2*)

It is, indeed, true that if there were more than enough land, all of about the same fertility, to enable everyone to have as much of it as was needed to give full scope to the capital he was prepared to apply to it, then it could yield no rent. But that merely illustrates the old paradox that water, when abundant, has no market value: for though the services of some part of it are essential to support life, yet everyone can get without effort to that margin of satiety at which any further supplies would be of no service to him. When every cottager has a well from which he can draw as much water as he needs, with no more labour than is required at his neighbour's well, the water in the well has no market value. But let a drought set in, so that the shallow wells are exhausted, and even the deeper wells are threatened, then the owners of those wells can exact a charge for every bucket which they allow anyone to draw for his own use. The denser population becomes, the more numerous will be the occasions on which such charges can be made (it being supposed that no new wells are developed): and at last every owner of a well may find in it a permanent source of revenue.

In the same way the scarcity value of land in a new country gradually emerges. The early settler exercises no exclusive privilege, for he only does what anyone else is at liberty to do. He undergoes many hardships, if not personal dangers; and perhaps he runs some risks that the land may turn out badly, and that he may have to abandon his improvements. On the other hand, his venture may turn out well; the flow of population may trend his way, and the value of his land may soon give as large a surplus over the normal remuneration of his outlay on it as the fishermen's haul does when they come home with their boat full. But in this there is no surplus above the rewards needed for his venture. He has engaged in a risky business which was open to all, and his energy and good fortune have given him an exceptionally high reward: anyone else might have taken the same chance as he did. Thus the income which he expects the land to afford in the future enters into the calculations of the settler, and adds to the motives which determine his action when in doubt as to how far to carry his enterprise. He regards its "discounted value"(3*) as profits on his capital, and as earnings of his own labour, in so far as his improvements are made with his own hands.

A settler often takes up land with the expectation that the produce which it affords while in his possession, will fall short of an adequate reward for his hardships, his labour and his expenditure. He looks for part of his reward to the value of the land itself, which he may perhaps after a while sell to some new-comer who has no turn for the life of a pioneer. Sometimes even, as the British farmer learns to his cost, the new settler regards his wheat almost as a by-product; the main product for which he works is a farm, the title-deeds to which he will earn by improving the land: he reckons that its value will steadily rise, not through his own efforts so much as through the growth of those comforts and resources, and of those markets in which to buy and in which to sell, that are the product of the growing public prosperity.

This may be put in another way. People are generally unwilling to face the hardships and isolation of pioneer agriculture, unless they can look forward with some confidence to much higher earnings, measured in terms of the necessaries of life, than they could get at home. Miners cannot be attracted to a rich mine, isolated from other conveniences and varied social opportunities of civilization, except by the promise of high wages: and those who superintend the investment of their own capital in such mines expect very high profits. For similar reasons pioneer farmers require high aggregate gains made up of receipts for the sale of their produce, together with the acquisition of valuable title-deeds, to remunerate them for their labour and endurance of hardships. And the land is peopled up to that margin at which it just yields gains adequate for this purpose, without leaving any surplus for rent, when no charge is made for the land. When a charge is made, immigration spreads only up to that margin, at which the gains will leave a surplus, of the nature of rent, to cover such charges, in addition to rewarding the pioneer's endurance.

3. With all this it is to be remembered that land is but a particular form of capital from the point of view of the individual producer. The question whether a farmer has carried his cultivation of a particular piece of land as far as he profitably can; and whether he should try to force more from it, or to take in another piece of land; is of the same kind as the question whether he should buy a new plough, or try to get a little more work out of his present stock of ploughs, using them sometimes when the soil is not in a very favourable condition, and feeding his horses a little more lavishly. He weighs the net product of a little more land against the other uses to which he could put the capital sum that he would have to expend in order to obtain it: and in like manner he weighs the net product, to be got by working his ploughs under unfavourable circumstances, against that got by increasing his stock of ploughs, and thus working under more favourable conditions. That part of his produce which he is in doubt whether to raise by extra use of his existing ploughs, or by introducing a new plough, may be said to be derived from a marginal use of the plough. It pays nothing net (i.e. nothing beyond a charge for actual wear-and-tear) towards the net income earned by the plough.

So again a manufacturer or trader, owning both land and buildings, regards the two as bearing similar relations to his business. Either will afford him aid and accommodation at first liberally; and afterwards with diminishing return, as he endeavours to force more and more from them: till at last he will doubt whether the overcrowding of his workshops or his storerooms is not so great a source of trouble, that it would answer his purpose to obtain more space. And when he comes to decide whether to obtain that space by taking in an extra piece of land or by building his factory a floor higher, he weighs the net income to be derived from further investments in the one against that to be derived from the other. That part of his production which he just forces out of his existing appliances (being in doubt whether it would not be better worth his while to increase those appliances than to work so intensively those which he has), does not contribute to the net income which those appliances yield him. This argument says nothing as to whether the appliances were made by man, or part of a stock given by nature; it applies to rents and quasi-rents alike.

But there is this difference from the point of view of society. If one person has possession of a farm, there is less land for others to have. His use of it is not in addition to, but in lieu of the use of a farm by other people: whereas if he invests in improvements of land or in buildings on it, he will not appreciably curtail the opportunities of others to invest capital in like improvements. Thus there is likeness amid unlikeness between land and appliances made by man. There is unlikeness because land in an old country is approximately (and in some senses absolutely) a permanent and fixed stock: while appliances made by man, whether improvements in land, or in buildings, or machinery, etc., are a flow capable of being increased or diminished according to variations in the effective demand for the products which they help in raising. So far there is unlikeness. But on the other hand there is likeness, in that, since some of them cannot be produced quickly, they are a practically fixed stock for short periods: and for those periods the incomes derived from them stand in the same relation to the value of the products raised by them, as do true rents.(4*)

4. Let us apply these considerations to the supposition that a permanent tax is to be levied on "corn," in the sense in which it was used by the classical economists as short for all agricultural produce. It is obvious that the farmer would try to make the consumer pay some part at least of the tax. But any rise in the price charged to the consumer would check demand, and thus react on the farmer. In order to decide how much of this tax would be shifted on to the consumer, we must study the margin of profitable expenditure, whether that be the margin of a little expenditure applied to poor land and land far removed from good markets, or the margin of a large expenditure applied to rich land, and land near to dense industrial districts.

If only a little corn had been raised near the margin, a moderate fall in the net price received by the farmer would not cause a great check to the supply of corn. There would therefore be no great rise in the price paid for it by the consumer; and the consumer would bear very little of the tax. But the surplus value of the corn over its expenses of production would fall considerably. The farmer, if cultivating his own land, would bear the greater part of the tax. And, if he were renting the land, he could demand a great reduction of his rent.

If, on the other hand, a great deal of corn had been raised near the margin of cultivation, the tax would tend to cause a great shrinkage of production. The consequent rise of price would arrest that shrinkage, leaving the farmer in a position to cultivate nearly as intensively as before: and the landlord's rent would suffer but little.(5*)

Thus, on the one hand, a tax which is so levied as to discourage the cultivation of land or the erection of farm buildings on it, tends to be shifted forward on to the consumers of the produce of land. But, on the other hand, a tax on that part of the (annual) value of land, which arises from its position, its extension, its yearly income of sunlight and heat and rain and air, cannot settle anywhere except on the landlord; a lessee being, of course, landlord for the time. This (annual) value of the land is commonly called its "original value" or its "inherent value"; but much of that value is the result of the action of men, though not of its individual holders. For instance, barren heath land may suddenly acquire a high value from the growth of an industrial population near it; though its owners have left it untouched as it was made by nature. It is, therefore, perhaps more correct to call this part of the annual value of land its "public value"; while that part which can be traced to the work and outlay of its individual holders may be called its "private value." The old terms "inherent value" and "original value" may however be retained for general use, with a note of caution as to their partial inaccuracy. And, using another term that has precedent in its favour, we may speak of this annual public value of the land as "true rent."

A tax on the public value of land does not greatly diminish the inducements to cultivate the land highly, nor to erect farm buildings on it. Such a tax therefore does not greatly diminish the supply of agricultural produce offered on the market, nor raise the price of produce; and it is not therefore shifted away from the owners of land.

This assumes that the true rent of land on which the tax is levied is assessed with reference to its general capabilities, and not to the special use which the owner makes of it: its net product is supposed to be that which could be got by a cultivator of normal ability and enterprise, turning it to good account to the best of his judgment. If an improved method of cultivation develops latent resources of the soil, so as to yield an increased return much in excess of what is required to remunerate the outlay with a good rate of profits; this excess of net return above normal profits belongs properly to true rent: and yet, if it is known, or even expected, that a very heavy special tax on true rent will be made to apply to this excess income, that expectation may deter the owner from making the improvement.(6*)

5. A little has been said incidentally of the competition between different branches of industry for the same raw material or appliances for production. But now we have to consider the competition between various branches of agriculture for the same land. This case is simpler than that of urban land, because farming is a single business so far as the main crops are concerned; though the rearing of choice trees (including vines), flowers, vegetables etc. affords scope for various kinds of specialized business ability. The classical economists were therefore justified in provisionally supposing that all kinds of agricultural produce can be regarded as equivalent to certain quantities of corn; and that all the land will be used for agricultural purposes, with the exception of building sites which are a small and nearly fixed part of the whole. But when we concentrate our attention on any one product, as for instance, hops, it may seem that a new principle is introduced. That is however not the case. Let us look into this.

Hops are grown in varying rotations with other crops; and the farmer is often in doubt whether he shall grow hops or something else on one of his fields. Thus each crop strives against others for the possession of the land; and if any one crop shows signs of being more remunerative than before relatively to others, the cultivators will devote more of their land and resources to it. The change may be retarded by habit, or diffidence, or obstinacy, or limitations of the cultivator's knowledge; or by the terms of his lease. But it will still be true in the main that each cultivator -- to recall once more the dominant principle of substitution -- "taking account of his own means, will push the investment of capital in his business in each several direction until what appears in his judgment to be the margin of profitableness is reached; that is, until there seems to him no good reason for thinking that the gains resulting from any further investment in that particular direction would compensate him for his outlay."

Thus in equilibrium, oats and hops and every other crop will yield the same net return to that outlay of capital and labour, which the cultivator is only just induced to apply. For otherwise he would have miscalculated; he would have failed to get the maximum reward which his outlay can be made to yield: and it would still be open to him to increase his gains by redistributing his crops, by increasing or diminishing his cultivation of oats or some other crop.(7*)

This brings us to consider taxation in reference to the competition of different crops for the use of the same land. Let us suppose that a tax is imposed on hops, wherever grown; it is not to be a mere local rate or tax. The farmer can evade a part of the pressure of the tax by lessening the intensity of his cultivation of the land which he plants with hops; and a yet further part by substituting another crop on land which he had proposed to devote to hops. He will have recourse to this second plan in so far as he considers that he would get a better result by growing another crop, and selling it free from the tax, than by growing hops and selling them in spite of the tax. In this case the surplus which he could obtain from the land by growing, say, oats upon it would come into his mind when deciding where to set the limit to his production of hops. But even here there would be no simple numerical relation between the surplus, or rent, which the land would yield under oats, and the marginal costs which the price of hops must cover. And a farmer whose land produced hops of exceptionally high quality, and which happened to be in good condition at the time for hops, would have no doubt at all that it was best to grow hops on the land; though in consequence of the tax he might decide to curtail a little his expenditure on it.(8*)

Meanwhile the tendency towards a general restriction in the supply of hops would tend to raise their price. If the demand for them were very rigid, and hops of adequate quality could not easily be imported from beyond the range of this special tax, the price might rise by nearly the full amount of the tax. In that case the tendency would be checked, and very nearly as much hops would be grown as before the tax had been levied. And here, as in the case of a tax on printing, recently discussed, the effect of a local tax is in strong contrast to that of a general tax. For unless the local tax covered most of the ground in the country on which good hops could be grown, its effect would be to drive them beyond its boundary: very little revenue would be got from it, local farmers would suffer a good deal, and the public would pay a rather higher price for their hops.

6. The argument of the last section applies, so far as short periods are concerned, to the earning power of farmbuildings and to other quasi-rents. When existing farmbuildings, or other appliances which could be used in producing one commodity are diverted to producing another because the demand for that is such as to enable them to earn a higher income by producing it, then for the time the supply of the first will be less, and its price higher than if the appliances had not been able to earn a higher income by another use. Thus, when appliances are capable of being used in more than one branch of agriculture, the marginal cost in each branch will be affected by the extent to which these appliances are called off for work in other branches. Other agents of production will be pushed to more intensive uses in the first branch, in spite of a diminishing return; and the value of its product will rise, because only at a higher value will the price be in equilibrium. The increased earning power of the appliances due to the external demand will appear to be the cause of this increase in value: for it will cause a relative scarcity of the appliances in that branch of production, and therefore raise marginal costs. And from this statement it appears superficially to be a simple transition to the statement that the increased earning power of the appliances enter into those costs which govern value. But the transition is illegitimate. There will be no direct or numerical relation between the increase in the price of the first commodity and the income that the appliances can earn when they have been transferred to the second industry and adapted for service in it.

Similarly, if a tax be put on factories used in one industry, some of them will be diverted to other industries; and consequently the marginal costs and therefore the values of the products in those industries will fall; simultaneously with a temporary fall in net rental values of factories in all uses. But these falls will vary in amount, and there will be no numerical relation between the fall in the prices of the product and in these rents, or rather quasi-rents.

These principles are not applicable to mines, whether for short periods or for long. A royalty is not a rent, though often so called. For, except when mines, quarries, etc., are practically inexhaustible, the excess of their income over their direct outgoings has to be regarded, in part at least, as the price got by the sale of stored-up goods -- stored up by nature indeed, but now treated as private property; and therefore the marginal supply price of minerals includes a royalty in addition to the marginal expenses of working the mine. Of course the owner desires to receive the royalty without undue delay; and the contract between him and the lessee often provides, partly for this reason, for the payment of a rent as well as a royalty. But the royalty itself on a ton of coal, when accurately adjusted, represents that diminution in the value of the mine, regarded as a source of wealth in the future, which is caused by taking the ton out of nature's storehouse.(9*)

NOTES:

1. Of course the character and extent of the improvements depends partly on the conditions of land tenure, and the enterprise and ability and command over capital on the part of landlords and tenants which existed at the time and place in question. In this connection we shall find, when we come to study land tenure, that there are large allowances to be made for the special conditions of different places.

It may be noted, however, that rent proper is estimated on the understanding that the original properties of the soil are unimpaired. And when the income derived from improvements is regarded as a quasi-rent, it is to be understood that they are kept up in full efficiency: if they are being deteriorated, the equivalent of the injury done to them must be deducted from the income they are made to yield before we can arrive at that Net income which is to be regarded as their quasi rent.

That part of the income which is required to cover wear-and-tear bears some resemblance to a royalty, which does no more than cover the injury done to a mine by taking ore out of it.

2. Compare V, IX, section 5.

3. Compare III, V, section 3 and V, IV, section 2.

4. The relations between rent and profits engaged the attention of the economists of the last generation; among whom may be specially mentioned Senior and Mill, Hermann and Mangoldt. Senior seemed almost on the point of perceiving that the key of the difficulty was held by the element of time: but here as elsewhere he contented himself with suggestions; he did not work them out. He says (Political Economy, p. 1 29), "for all useful purposes the distinction of profits from rent ceases as soon as the capital from which a given revenue arises has become, whether by gift or by inheritance, the property of a person to whose abstinence and exertions it did not owe its creation." Again, Mill says, Political Economy, Book III, ch. v, §4, "Any difference in favour of certain producers or in favour of production in certain circumstances is the source of a gain, which though not called rent unless paid periodically by one person to another, is governed by laws entirely the same with it."

It has been well observed that a speculator, who, without manipulating prices by false intelligence or otherwise, anticipates the future correctly; and who makes his gains by shrewd purchases and sales on the Stock Exchange or in Produce Markets, generally renders a public service by pushing forward production where it is wanted, and repressing it where it is not: but that a speculator in land in an old country can render no such public service, because the stock of land is fixed. At the best he can prevent a site with great possibilities from being devoted to inferior uses in consequence of the haste, ignorance, or impecuniosity of those in control of it.

5. Of course the adjustments of rent to the true economic surplus from the land are in practice slow and irregular. These matters are discussed in VI, sections IX and X, and the incidence of a tax on grain under certain rather arbitrary assumptions is studied in some detail in Appendix K.

6. The exemption of vacant building land from taxes on its full value retards building. See Appendix G.

7. In so far as the farmer is producing raw material, or even human food, for market, his distribution of resources between different uses is a problem of business economy: in so far as he is producing for his own domestic consumption, it is, in part at least, a problem of domestic economy. Compare above V, iv, §4. It may be added that Note XIV in the Mathematical Appendix emphasizes the fact that that distribution of outlay between different enterprises, which will give a maximum aggregate return, is fixed by the same set of equations as that for the similar problem in domestic economy.

Mill (Principles, III, XVI, 2), when discussing "joint products," observed that all questions relating to the competition of crops for the possession of particular soils are complicated by the rotation of crops and similar causes; an intricate debit and credit account by double entry needs to be kept between the various members of the rotation. Practice and shrewd instinct enable the farmer to do this fairly well. The whole problem might be expressed in simple mathematical phrases. But they would be tedious, and perhaps unfruitful. They would therefore not be serviceable, so long as they remained abstract; though they belong to a class which may ultimately be of good use in the higher science of agriculture, when that has advanced far enough to fill in realistic details.

8. If for instance he reckoned that he could get a surplus of £30 above his expenses (other than rent) in spite of the tax by growing hops, and a surplus of only £20 above similar expenses by growing any other crop, it could not be trulv said that the rent which the field could be made to yield by growing other crops, "entered into" the marginal price of hops. But it is easier to interpret the classical doctrine that "Rent does not enter into cost of production" in a sense in which it is not true, and to scoff at it, than in the sense in which it was intended and is true. It seems best therefore to avoid the phrase.

The ordinary man is offended by the old phrase that rent does not enter into the price of oats; when he sees that an increase in the demand for land for other uses, manifests itself in a rise of the rental value of all land in the neighbourhood; leaves less land free for growing oats; consequently makes it worth while to force larger crops of oats out of the remaining oat-land, and thus raises the marginal expenses of oats and their price. A rise in rent does serve as a medium through which the growing scarcity of land available for hops and other produce obtrudes itself on his notice; and it is not worth while to try to force him to go behind these symptoms of the change in conditions to the truly operative causes. It is therefore inexpedient to say that the rent of land does not enter into their price. But it is worse than inexpedient to say that the rent of the land does enter into their price: that is false.

Jevons asks (Preface to Theory of Political Economy, p. liv): "If land which has been yielding £2 per acre rent, as pasture, be ploughed up and used for raising wheat, must not £2 per acre be debited against the expenses of production of wheat;" The answer is in the negative. For there is no connection between this particular sum of £2 and the expenses of production of that wheat which only just pays its way. What should be said is: "When land capable of being used for producing one commodity is used for producing another, the price of the first is raised bv the consequent limitation of its field of production. The price of the second will be the expenses of production (wages and profits) of that part of it which only just pays its way, that which is produced on the margin of profitable expenditure. And if for the purposes of any particular argument we take together the whole expenses of the production on that land, and divide these among the whole of the commodity produced; then the rent which we ought to count in is not that which the land would pay if used for producing the first commodity, but that which it does pay when used for producing the second."

9. See above, Book IV, chapter 3, note. Adam Smith is attacked by Ricardo for putting rent on the same footing with wages and profits as parts of (money) cost of production; and no doubt he does this sometimes. But yet he says elsewhere, "Rent it is to be observed enters into the composition of the price of commodities in a different way from wages and profit. High or low wages and profit are the causes of high or low price: high or low rent is the effect of it. It is because high or low wages and profit must be paid in order to bring a particular commodity to market that its price is high or low. But it is because its price is high or low a great deal more, or very little more, or no more than what is sufficient to pay those wages and profits, that it affords a high rent, or a low rent, or no rent at all." (Wealth of Nations, I, XI.) In this, as in many other instances, he anticipated in one part of his writings truths which in other parts he has seemed to deny.

Adam Smith discusses the "price at which coals can be sold for any considerable time"; and contends that "the most fertile mine regulates the price of coals at all other mines in the neighbourhood." His meaning is not clear; but he does not appear to be referring to any temporary underselling; and he seems to imply that the mines are leased at so much a year. Ricardo, following on apparently the same lines, comes to the opposite conclusion that it "is the least fertile mine which regulates price"; which is perhaps nearer the truth than Adam Smith's doctrine. But in fact when the charge for the use of a mine is mainly in the form of a royalty, neither proposition seems to be applicable. Ricardo was technically right (or at all events not definitely wrong) when he said that rent does not enter into the marginal cost of production of mineral produce. But he ought to have added that if a mine is not practically inexhaustible, the income derived from it is partly rent and partly royalty; and that though the rent does not, the minimum royalty does enter directly into the expenses incurred on behalf of every part of the produce, whether marginal or not.

The royalty is of course calculated in regard to those seams in the mine, which are neither exceptionally rich and easy of working, nor exceptionally poor and difficult. Some seams barely pay the expenses of working them; and some which run short, or have a bad fault, do not even nearlv pav the wages of the labour spent on them. The whole argument however implicitly assumes the conditions of an old country. Professor Taussig is probably right when, having in view the circumstances of a new country (Principles, II, p. 96), he "doubts whether any payment at all can be secured by the owner of the very poorest mine, assuming he has done nothing to develop it."