Chapter LV: Section CXCVII

INFLUENCE OF THE BRANCHES OF INCOME ON THE PRICE OF COMMODITIES.

We have seen, § 106, that the cost of production of a commodity, considered from the point of view of individual economy, may be reduced to the payment for the use of the requisite productive forces rented or loaned to the producer. Hence every great variation in the relation of the three branches of income to one another must produce a corresponding variation in the price of commodities.[197-1] When, for instance, the rate of wages increases because they absorb a larger part of the national income, those commodities in the production of which human labor, directly employed, is the chief factor, must become dearer as compared with others. Whether this difference shall be felt principally by the products of nature or of capital (compare § 46 seq.), depends on the causes which brought about the enhancement of the rate of wages. Thus, a large decrease of population, or emigration on a large scale, will usually lower rent as well as the rate of interest;[197-2] an extraordinary improvement made in the art of agriculture, only the former; and an extraordinary increase of capital, only the latter. The usual course of things, namely that the growth of population necessitates a heavier draft on the resources of the soil, and thus causes rents to go up, and makes labor dear, must have the effect of raising the price of the products of labor and of natural forces, as compared with the products of capital; and all the more as it causes the rate of interest to suffer a positive decline. The products of mechanical labor become relatively cheaper; and cheaper in proportion as the producing machinery is more durable; therefore in proportion as, in the price of the services it renders, mere interest preponderates over compensation for its wear and tear.[197-3]

Let us, for a moment, leave ground-rent out of the question entirely, and suppose a nation's economy whose production is conducted by eleven undertakers employed on different commodities. Let us suppose that undertaker No. 1 uses machinery exclusively and employs only as many workmen as are strictly necessary to look after it, that undertaker No. 2 has a somewhat larger number of workmen and a somewhat smaller amount of fixed capital, etc.; and that this increase in the number of workmen and decrease in the amount of fixed capital continues until we reach undertaker No. 11, who employs all his capital in the payment of wages. If now, the rate of wages were to rise, and the interest on capital to fall in the same proportion, the commodities produced by undertaker No. 11 would rise most in price, and those of No. 1 decline most. In the case of undertaker No. 6, the opposing influences would probably balance each other, and if the producers of money belonged to this sixth class, it would be very easy to get a view of the whole change in the circumstances of production, in the money-price of the different commodities.[197-4]

[Footnote 197-1: Compare _Adam Smith_, I, ch. 7, fin. This
relative increase or decrease of one branch of income at the
expense or to the advantage of another, should be
distinguished from the absolute change of its amount which
does not affect the cost of production. Thus, for instance,
when the rent of land indeed increases, but in consequence
of a simultaneous improvement in agriculture, a decline in
the rate of interest, and an enhancement of the price of
wheat is avoided (§ 157). So, too, when individual wages
increase on account of the greater skill and energy of
labor, but the same quantity and quality of labor do not
become dearer (§ 172 seq.); and lastly, when the rate of
interest remaining unaltered, the receipts of capitalists
are increased by reason of an increase of their capital (§
185).]

[Footnote 197-2: After the great plague in the 14th century
in England, when all the products of labor became dearer,
skins and wool fell largely in price: _Rogers_, I, § 400.]

[Footnote 197-3: Anyone who carefully reads all the five
divisions of _Ricardo's_ first chapter will soon find that
this great thinker rightly understood the foregoing,
although the great abstractness and hypothetical nature of
his conclusions might easily lead the reader astray. The
proposition which closes the second part, and which has been
so frequently misunderstood by his disciples, can be
maintained only on the supposition that the prices of all
commodities hitherto have been made up of equal proportions
of rent, capital and wages. But think of Brussels lace and
South American skins!]

[Footnote 197-4: Compare _J. Mill_, Anfangsgründe der polit.
Oekonomie, Jacob's translation, § 13 ff.; _McCulloch_,
Principles, III, 6. _Adam Smith_ was of opinion, that higher
wages enhanced the price of commodities in an arithmetical
ratio, a higher rate of interest in a geometrical one (I,
ch. 9). Similarly _Child_, Discourse of Trade, 38. This last
_Kraus_, Staatswirthschaft, better expresses by saying that
an increase in the rate of interest operates in the ratio of
the compounded interests.]