Different effects of Fixed and Circulating Capital on Price.

We have seen that the price of everything depends on three elements, Wages, Rent, Capital and the Capital is either Fixed, as Machinery, or Circulating, as Wages and Materials. Fixed capital however is not absolutely fixed. All machines, for instance, wear out in the course of time, and must be replaced as that time expires. And according to the length of time which any article of Fixed Capital lasts, the effect of that portion of Capital or Price is different.

We will take examples.

A Tailor may be taken as an ex ample of a producer who has little Fixed Capital. He requires only needles, thread, a shop-board and his goose.

A Linen Manufacturer (who both spins and weaves) has much Fixed Capital, as Spinning Jennies, Looms, &c.; probably Steam Engines.

Suppose the Tailor pays annually, to io men, L500 in wages, and pays 5oo for materials (cloth) suppose profits to be ten per cent, and he makes 100 suits of clothes, what is the price of each suit?

Wages with Profits... 550

Materials with Profits 550


This gives 100 suits at 11 each.

Suppose the Linen-Manufacturer pays annually to io men 500 in wages; and pays 100 for materials (flax): and has machinery worth 400 which lasts io years: and produces 1000 shirts a year. What is the price of each shirt?

The obvious calculation is:

Wages with profits 550

Materials with profits 110

To replace 400 in 10 years 40


This gives 1000 shirts at 1/10 or 148.

But this calculation is not right. The fixed capital must be replaced with Profits, as well as the circulating capital. And we must ask what annuity to continue for io years, is worth 400 present value. The answer is, 64.

Hence to determine the price:

Wages with Profits 550

Materials with Profits 110

To replace 400 in 10 years with Profits 64


This gives 1000 shirts at 724 per shirt, which is 14.48s., or 148. 6d. nearly.

And if any of the elements changc,numnber of labourers, rate of wages, rate of profits, duration of Fixed Capital,we can calculate the effect upon price in the same manner as in these examples.

The mode of calculating the effect of Fixed Capital, by considering the sum needed to replace it as the present value of an annuity, is plainly right. To replace a Fixed Capital of 400 which is exhausted in 10 years, an annual payment of 40 in each future year will suffice. But the Manufacturer will riot give this 40 at present except he can have it returned with profit: and for that purpose not 40, but 64 a year is requisite.

This correction of the mode of calculating the result of Fixed Capital was, I believe, first introduced by Mr Ricardo, in his Principles of Political Economy published in 1817.

Profits are not the result of Labour.

In his Principles of Political Economy, Mr Ricardo maintained that commodities universally exchange for each other according to the quantity of labour worked up in them.

Mr McCulloch attempted further to support this assertion, by maintaining that what are commonly called Profits may be called Labour; and thus he held that Profits and Labour are not distinct elements of Price.

Upon this Mr Malthus observes (Def p. 100), "There is nothing that may not be proved by a new definition. A composition of flour, milk, suet, and stones is a plum-pudding; if by stones be meant plums. Upon this principle, Mr McCulloch undertakes to show, that commodities do really exchange with each other according to the quantity of labour employed upon them; and it must be acknowledged, that in the instances which he has chosen he has not been deterred by apparent difficulties. He has taken the bull by the horns. The cases are nearly as strong as that of the plum-pudding.

"They are the two followingnamely, that the increase of value which a cask of wine acquires, by being kept a certain number of years untouched in a cellar, is occasioned by the increased quantity of labour employed upon it; and that an oak-tree of a hundred years' growth, worth 25, which may not have been touched by man, beast, or machine for a century, derives its whole value from labour.

"Mr McCulloch acknowledges that Mr Ricardo was inclined to modify his grand principle, that the exchangeable value of commodities depended on the quantity of labour required for their production, so far as to allow that the additional exchangeable value that is sometimes given to commodities, by kceping them after they have been purchased or produced until they become fit to be used, was not to be considered as an effect of labour, but as an equivalent for the profits which the capital laid out on the commodities would have yielded had it been actually employed. This was looking at the subject in the true point of view, and showing that he would not get out of the difficulty by changing the meaning of the term labour; but Mr McCulloch says

I confess, however, notwithstanding the hesitation I cannot but feel in differing from so great an authority, that I see no good reason for making this exception. Suppose, to illustrate the principle, that a cask of new wine, which cost 50, is put into a cellar, and that at the end of twelve months it is worth the question is, whether ought the 5 of additional value given to the wine to be considered as a compensation for the time the 50 worth of capital has been locked up, or ought it to be considered as the value of additional labour actually laid out on the wine. I think that it ought to be considered in the latter point of view, and for this, as it appears to me a most satisfactory and conclusive reason, that if we keep a commodity, as a cask of wine which has not arrived at maturity, and on which therefore a change or effect is to be produced, it will be possessed of additional value at the year's end; whereas, had we kept a cask of wine which had already arrived at maturity, and on which no beneficial or desirable effect could be produced for a hundred or a thousand years, it would not have been worth a single additional farthing. This seems to prove incontrovertibly that the additional value acquired by the wine during the period it has been kept in the cellar is not a compensation or return for time, but for the effect or change that has been produced on it. Time cannot of itself produce any effect, it merely affords space for really efficient causes to operate; and it is therefore clear, that it can have nothing to do with the value.'

"On this passage it should be remarked, in the first place, that the question stated in it is not the main question in reference to the new meaning which Mr McCulloch must give to the term labour, in order to make out his proposition. lie acknowledges that the increased value acquired by the wine is either owing to the operation of nature during the year in improving its quality, or to the profits acquired by the capitalist for being deprived for a year from using his capital of 50 in any other way. But in either case Mr McCulloch's language is quite unwarranted. When he uses the expression, `additional labour actually laid out upon the wine,' who could possibly imagine that, instead of meaning human labour, he meant the processes carried on by nature in the cask of wine during the time that it is kept? This is at once giving an entirely new meaning to the term labour.

"But, further, it is most justly stated by Mr Ricardo, that when the powers of nature can be called into action in unlimited abundance, she always works gratis; and her processes never add to the value, though they may add very greatly to the utility of the objects to which they are applied.

"This truth is also fully adopted and strongly stated by Mr McCulloch himself'. `All the rude products (he says) and all the productive powers and capacities of nature are gratuitously offered to man. Nature is not niggardly or parsimonious; she neither demands nor receives an equivalent for her favours. An object which it does not require any portion of labour to appropriate or to adapt to our use may be of the very highest utility, but as it is the free gift of nature, it is utterly impossible it can be possessed of the smallest value.' Consequently, as the processes which are carrying on in the cask of' wine, while it is kept, are unquestionably the free gift of nature, and are at the service of all who want them, it is utterly impossible, even if their effects were ten times greater than they are, that they should add in the smallest degree to the price of the wine. It is, no doubt, perfectly true, as stated by Mr McCulloch, that if wine were not improved by keeping, it would not be worth a single additional farthing after being kept a hundred or even a thousand years. But this proves nothing but that, in that case, no one would ever think of keeping wine longer than was absolutely necessary for its convenient sale or convenient consumption.

"The improvement which wino derives from keeping is unquestionably the cause of its being kept; but when on this account the wine-merchant has kept his wine, the additional price which he is enabled to put upon it is regulated upon principles totally distinct from the average degree of improvement which the wine acquires. It is regulated exclusively, as stated by Mr Ricardo, by the average profits which the capital engaged in keeping the wine would have yielded if it had been actively employed; and that this is tile regulating principle of the additional price, and not the degree of improvement, is quite certain: because it would be universally allowed that if, in the case supposed by Mr McCulloch, the ordinary rate of profits had been 20 per cent., instead of 10 per cent., a cask of new wine, worth 50, after it had been kept a year, would have been increased in value 10 instead of 5, although the processes of nature and the improvement of time wine were precisely the same in the two cases; and there can not be the least doubt, as I said before, that if the quality of wine, by a year's keeping, were ordinarily improved in a degree ten times as great as at present, the prices of wines would not be raised; because, if they were so raised, all wine-merchants who sold kept wines would be making greater profits than other dealers.

"Nothing then can be clearer than that the additional value of the kept wine is derived from the additional amount of profits of which it is composed, determined by the time for which the capital was advanced and the ordinary rate of profits.

"The value of the oak-tree of a hundred years' growth is derived, in a very considerable degree, from the same cause; though, in rich and cultivated countries, where alone it could be worth 25, rent would necessarily form a part of this value.

"If the number of acorns necessary on an average to rear one good oak were planted by the hand of man, they would be planted on appropriated land; and as land is limited in quantity, the powers of vegetation in the land cannot be called into action by every one who is in possession of acorns, in the same way as the improving operations of nature may be called into action by every person who possesses a cask of wine. But setting this part of the value aside, and supposing the acorns to be planted at a certain expense, it is quite clear, that almost the whole of the remaining value would be derived from the compound interest or profits upon the advances of the labour required for the first planting of the acorns, and the subsequent protection of' the young trees. A much larger part, therefore, of the final value of the tree than of the final value of the wine would be owing to profits.

"Now, if we were to compare an oak-tree, worth 25, with a quantity of hardware [for instance, axes,] worth the same sum, the value of which was chiefly made up of human labour; and as the reason why these two objects were of the same value, were to state that the same quantity of labour had been worked up in themwe should obviously state a direct falsity, according to the common usage of language; and nothing could make the statement true, but the magical influence of a new meaning given to the term labour. But to make Labour mean profits, or fermentation, or vegetation, or rent, appears to me quite as unwarrantable as to make stones mean plums."

Are Profits justifiable?

We have had in England a controversy, What is Profit? as we have just seen. In France there has been a controversy, Whether there ought to be Profits? Whether capital ought to be allowed to bring Profit to its owner? It has been maintained by the socialists that the Profit of capital is a thing which is wrong and against nature.

(Bastiat, p. 3.) "It is thus that the democratic Socialist, Thoré, expresses himself:

"`The revolution will always have to be recommenced, so long as we occupy ourselves with consequences only, without having the logick or the courage to attack the principle itself". This principle is capital, false property, interest, and usury, which by the old regime, is made to weigh upon labour.

"`Ever since the aristocrats invented the incredible fiction, that capital possesses the power of reproducing itself, the workers have been at the mercy of the idle.

"`At the end of a year, will you find an additional crown in a bag of one hundred shillings? At the end of fourteen years, will your shilling have doubled in your bag?

"`Will a work of industry or of skill produce another, at the end of fourteen years?

"`Let us begin, then, by demolishing this fatal fiction.'

"I have quoted the above," Bastiat says, "merely for the sake of establishing the fact, that many persons consider the productiveness of capital a false, a fatal, and an iniquitous principle. But quotations are superfluous; it is well known that the people attribute their sufferings to what they call die trafficking in man by man.

"In fact, the phrase, tyranny of capital, has become proverbial."

Bastiat argues against this doctrine with great force and ingenuity. To us the matter will seem to need no argument. A man who has capital will not give the use of it for nothing. And no one would accumulate capital if he was to get nothing by it. Bastiat gives a curious illustration of this.

(Bastiat, p. 45.) "A friend of mine, commissioned to make enquiry into Parisian industry, has assured me that the manufacturers have revealed to him a very striking fact, which proves, better than any reasoning can, how much insecurity and uncertainty injure the formation of capital. It was remarked, that during the most distressing period, the popular expenses of mere fancy had not diminished. The small theatres, the fighting lists, the public-houses, and tobacco depots, were as much frequented as in prosperous times. In the inquiry, the operatives themselves explained this phenomenon thus:' What is the use of pinching? Who knows what will happen to us? Who knows that interest will not be abolished? Who knows but that the State will become a universal and gratuitous lender, and that it will wish to annihilate all the fruits that we might expect from our savings?' Well! I say, that if such ideas could prevail during two single years, it would be enough to turn our beautiful France into a Turkeymisery would become general and endemic, and, most assuredly, the poor would be the first upon whom it would fall."

Mercantile Price is meant.

I return to the subject of Price.

Price, as I have said, depends on three elements; Wages, Profits, and Rent. The Price here spoken of is what may be called Mercantile Price.

Mr Mill notices this duly according to its importance (Pol. Econ. pp. 519, 521), he says:

"I must give warning, once for all, that the cases I contemplate are those in which value and prices are determined by competition alone. In so far only as they are thus determined, can they be reduced to any assignable law. `rho buyers must be supposed as studious to buy cheap, as the sellers to sell dear. The values and prices, therefore, to which our conclusions apply, are mercantile values and prices; such prices as are quoted in price-currents; prices in the wholesale markets, in which buying as well as selling is a matter of business; in which the buyers take pains to know, and generally do know, the lowest price at which an article of a given quality can be obtained, and in which, therefore, the axiom is true, that there cannot be, for the same article, of the same quality, two prices in the same market. Our propositions will be true in a much more qualified sense, of retail prices; the prices paid in shops, for articles of personal consumption. For such things there often are not merely two, but many prices in different shops, or even in the same shop; habit and accident have as much to do in the matter as general causes. Purchases for private use, even by people in business, are not always made on business principles: the feelings which come into play in the operation of getting and that of spending their income, are often extremely different. Either from indolence, or insouciance, or because people think it fine to pay and ask no questions, three-fourths of those who can afford it, give much higher prices than necessary for the things they consume; while the poor often do the same from ignorance and defect of judgment, want of time for searching and making enquiry, and not unfrequently from coercion, open or disguised. For these reasons, retail prices do not follow with all the regularity which might be expected, the action of the causes which determine wholesale l)rices. The influence of those causes is ultimately felt in the retail markets, and is the real source of such variations in retail prices as are of a general and permanent character. But there is no regular or exact correspondence. Shoes of equally good quality are sold in different shops at prices which differ considerably; and the price of leather may fall without causing the richer class of buyers to pay less for shoes. Nevertheless, shoes do sometimes fall in price; and when they do, the cause is always some such general circumstance as the cheapening of leather; arid when leather is cheapened, even if no difference shows itself in shops frequented by rich people, the artisan and the labourer generally get their shoes cheaper, and there is a visible diminution in the contract prices at which shoes are delivered for the supply of a workhouse or of a regiment. In all reasoning about prices the proviso must be understood, `supposing all parties to take care of their own interest.' Inattention to these distinctions has led to improper applications of the abstract principles of political economy, and still oftener to an undue discrediting of those principles through their being compared with a different sort of facts from those which they contemplate, or which can fairly be expected to accord with them."

Natural Price and Market Price.

But even the prices determined by competition do not agree steadily with the results of such calculations as we have made. Such calculations give the natural price of commodities and to this natural price the actual price constantly tends, and never can be far above or far below it. But for a time the market price may be above or below the natural price.

So Smith (B. i. c. vii.):

"The market-price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit, which must be paid in order to bring it thither. Such people may be called the effectual demanders, and their demand the effectual demand; since it may be sufficient to effectuate the bringing of the commodity to market. It is different from the absolute demand. A very poor man may be said in some sense to have a demand for a coach and six; he might like to have it; but his demand is not an effectual demand, as the commodity can never be brought to market in order to satisfy it.

"When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay the whole value of the rent, wages, and profit, which must be paid in order to bring it thither, cannot be supplied with the quantity which they want. Rather than want it altogether, some of them will be willing to give more. A competition will immediately begin among them, and the market-price will rise more or less above the natural price, according as either the greatness of the deficiency, or the wealth and wanton luxury of the competitors, happen to animate more or less the eagerness of the competition. Among competitors of equal wealth and luxury, the same deficiency will generally occasion a more or less eager competition, according as the acquisition of the commodity happens to be of more or less importance to them. Hence the exorbitant price of the necessaries of life during the blockade of a town or in a famine."

On the other hand, "When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages, and profit, which must be paid in order to bring it thither. Some part must be sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole. The market-price will sink more or less below the natural price, according as the greatness of the excess increases more or less the competition of the seller, or according as it happens to be more or less important to them to get immediately rid of the commodity. The same excess in the importation of perishable will occasion a much greater competition than in that of durable commodities; in the importation of oranges, for example, than in that of old iron."

Value in Use and Value in Exchange.

In connection with this, we must take another distinction made by Smith.

Dr Adam Smith distinguishes two kinds of value; the one arising from utility, the other from what can be obtained in exchange. He says, "The word value, it is to be observed, has two different meanings; it sometimes expresses time utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called value in use, the other value in exchange. The things which have the greatest value in use, have frequently little or no value in exchange; and, on the contrary, those that have the greatest value in exchange, have frequently little or no value in use. Nothing is more useful than water, but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use, but a very great quantity of other goods may frequently be had in exchange for it.

"Nature works for us gratuitously; and when she supplies us with articles in such abundance, that no labour is required to procure them, those articles, however useful they may be, have not exchangeable value: but no sooner does the labour of man become necessary to procure us the enjoyments of any commodity, than that commodity acquires a value; either a price is paid for it in money, or other things are given in exchange for it. Light, air, and water are the free and bountiful gifts of nature, but if a man constructs a lamp, we must pay for the light it diffuses; if we are indebted to his labour. for a ventilator, or even a fan, we pay for the air they procure us; and when water is conveyed through pipes into our houses, raised by pumps, or brought to us in any manner by the art of man, a price is paid for it.

"Utility may therefore be considered as the sole cause of value in use, whilst value in exchange may be produced by any circumstance which renders the possession of' an object so difficult of attainment, and at the same time so desirable, that men are willing to give something in exchange for it. Thus not only utility but beauty, curiosity, fashion, rarity, and many other qualities may create exchangeable value; and it is to this value that, in political economy, we chiefly confine our attention."

Demand and Supply

Price, that is Market Price, as has been said, depends upon Demand and Supply. In what manner, by what law does it so depend? if the supply increase, in what proportion will the price fall? If the supply diminish, in what proportion will the price rise?

With a view to answer this question commodities have been divided into three classes.

(1) Those of which the supply cannot be increased at allancient statues, pictures, special wines, as Johannisburg.

In these the price depends entirely on the demand. As an example we may take what Mr M ill quotes, p. 523.

This topic is happily illustrated by Mr De Quincey. `Walk into almost any possible shop, buy the first article you see; what will determine its price? In ninety-nine cases out of a hundred, simply the element Ddifficulty of attainment. The other element, U, or intrinsic utility, will be perfectly inoperative. Let the thing (measured by its uses) be, for your purposes, worth ten guineas, so that you would rather give ten guineas than lose it; yet, if the difficulty of producing it be only worth one guinea, one guinea is the price which it will bear. But still not the less, though U is inoperative, can U be supposed absent? By no possibility; for if it had been absent, assuredly you would not have bought the article even at the lowest price. U acts upon you, though it does not act upon the price. On the other hand, in the hundredth case, we will suppose the circumstances reversed: you are on Lake Superior in a steam-boat, making your way to an unsettled region 8oo miles a head of civilization, and consciously with no chance at all of purchasing any luxury whatsoever, little luxury or big luxury, for the space of ten years to come. One fellow passenger, whom you will part with before sunset, has a powerful musical-snuffbox: knowing by experience the power of such a toy over your own feelings, the magic with which at times it lulls your agitations of mind, you are vehemently desirous to purchase it. In the hour of leaving London you had forgot to do so; here is a final chance. But the owner, aware of your situation not less than yourself, is determined to operate by a strain puslie(l to the very uttermost upon U, upon the intrinsic worth of the article in your individual estimate for your individual purposes. He will not hear of D as any controlling power or mitigating agency in the case; and finally, although at six guineas a-piece in London or Paris you might have loaded a waggon with such boxes, you pay sixty rather than lose it when the last knell of the clock has sounded, which summons you to buy now or to forfeit for ever. Here, as before, only one clement is operative: before it was D, now it is U. But after all, D was not absent, though inoperative. The inertness of D allowed U to put forth its total effect. The practical compression of D being withdrawn, U springs up, like water in a pump, when released from the pressure of air. Yet still that D was present in your thoughts, though the price was otherwise regulated, is evident; both because U and D must co-exist in order to found any case of exchange value whatever, and because undeniably you take into very particular consideration this D, the extreme difficulty of attainment (which here is the greatest possible, viz, an impossibility) before you consent to have the price racked up to U. The special D has vanished; but it is replaced in your thoughts by an unlimited D. Undoubtedly you have submitted to U in extremity as the regulating force of the price; but it was under a sense of D's latent presence. Yet D is so far from exerting any positive force, that the retirement of D from all agency whatever on the pricethis it is which creates as it were a perfect vacuum, and through that vacuum U rushes up to its highest and ultimate gradation.

"This case, in which the value is wholly regulated by the necessities or desires of the purchaser, is the case of strict and absolute monopoly; in which, the article desired being only obtainable from one person, he can exact any equivalent, short of the point at which no purchaser could be found. But it is not a necessary consequence, even of complete monopoly, that the value should be forced up to this ultimate limit: as will be seen when we have considered the law of value in so far as depending on the other element, difficulty of attainment."

(2) The second class is commodities susceptible of indefinite multiplication, as linens, woollens, cottons, axes, watches.

In these the market-price tends rapidly to the natural price: and yet there may be great derangement, as for instance if the supply of material, as cotton, should fail for a time.

(3) The third class is commodities susceptible of multiplication by increased expense, that is, by increased labour. Of these corn is the type, and for us, the most important.

If the supply of corn `be diminished, how much is the price increased?

The statement generally given on this subject is that made by Sir W. Davenant, and quoted by Mr Tooke in his book, On. High and Low Prices.

The statement is this: that

a deficiency in the crop of 1/10, 2/10, 3/10, 4/10, 5/10,

raises the price 3/10, 8/10, 16/10, 28/10, 45/10.


Which amounts to this: that when the

supply is 10 9 8 7 6 5,

the price is 10 13 18 26 38 55.

Of course nothing like mathematical exactness or absolute steadiness can be looked for in such cases. And moreover the effect of the importation of corn is set aside. If the above numbers were to be made the basis of a mathematical rule, it would be found that the price varies inversely as the square of the supply; or rather in a higher ratio.

But this part of Political Economy is not so far advanced in the establishment of general rules, that we can apply mathematical calculation to it with any advantage. To do so would only give a false impression of the certainty and exactness of our results.