Principles of Political Economy · Part XXXI

Our present high wages should be a cause for congratulation, because they are due to the generally high productiveness of our resources, or, in other words, due to low cost; and it is to be hoped that they may long continue high. We do not seem to be in imminent danger of not having goods which we can export in quantities which will buy for us all we may wish to import from abroad. (See Chart No. XIII, and note the vast increase of exports at the same time that wages are known to be higher in this country than abroad.) So long as wages continue high, we may possibly be unwilling to see gratified that false and ignorant desire which leads some people to think that we ought to produce, equally well with any competitor in the world, everything that is made. If, as was pointed out under the discussion on cost of labor,(289) we must necessarily connect with efficiency of labor all natural advantages under which labor works, it is easy to see that high wages are entirely consistent with low prices; and that high wages do not prevent us to-day from having an hitherto unequaled export trade. Even if all wages and all profits were lower, it would, however, affect all industries alike, and some would still be more productive relatively to others, and the same inequality would remain. If, however, we learn to use our materials better, use machinery with more effect on the quantity produced, adapt our industries to our climate, get the raw products more cheaply, free ourselves from excessive and unreasonable taxation, it would be difficult to say what commodities we might not be able eventually to manufacture in competition with the rest of the world. For we have scarcely ever, as a country, had the advantage of such conditions to aid us in our foreign trade.

Mr. Mill now goes on to consider the suggestive fact that wages are higher in England than on the Continent, and yet that the English have no difficulty in underselling their Continental rivals.

Before examining this opinion on grounds of principle, it is worth while to bestow a moment’s consideration upon it as a question of fact. Is it true that the wages of manufacturing labor are lower in foreign countries than in England, in any sense in which low wages are an advantage to the capitalist? The artisan of Ghent or Lyons may earn less wages in a day, but does he not do less work? Degrees of efficiency considered, does his labor cost less to his employer? Though wages may be lower on the Continent, is not the Cost of Labor, which is the real element in the competition, very nearly the same? That it is so seems the opinion of competent judges, and is confirmed by the very little difference in the rate of profit between England and the Continental countries. But, if so, the opinion is absurd that English producers can be undersold by their Continental rivals from this cause. It is only in America that the supposition is prima facie admissible. In America wages are much higher than in England, if we mean by wages the daily earnings of a laborer; but the productive power of American labor is so great—its efficiency, combined with the favorable circumstances in which it is exerted, makes it worth so much to the purchaser—that the Cost of Labor is lower in America than in England; as is proved by the fact that the general rate of profits and of interest is very much higher.

§ 3. Low wages enable a Country to undersell another, when Peculiar to certain branches of Industry.

But is it true that low wages, even in the sense of low Cost of Labor, enable a country to sell cheaper in the foreign market? I mean, of course, low wages which are common to the whole productive industry of the country.

If wages, in any of the departments of industry which supply exports, are kept, artificially or by some accidental cause, below the general rate of wages in the country, this is a real advantage in the foreign market. It lessens the comparative cost of production of those articles in relation to others, and has the same effect as if their production required so much less labor. Take, for instance, the case of the United States in respect to certain commodities. In that country tobacco and cotton, two great articles of export, are produced by slave-labor, while food and manufactures generally are produced by free laborers, who either work on their own account or are paid by wages. In spite of the inferior efficiency of slave-labor, there can be no reasonable doubt that, in a country where the wages of free labor are so high, the work executed by slaves is a better bargain to the capitalist. To whatever extent it is so, this smaller cost of labor, being not general, but limited to those employments, is just as much a cause of cheapness in the products, both in the home and in the foreign market, as if they had been made by a less quantity of labor. If the slaves in the Southern States were emancipated, and their wages rose to the general level of the earnings of free labor in America, that country might be obliged to erase some of the slave-grown articles from the catalogue of its exports, and would certainly be unable to sell any of them in the foreign market at the present price. Their cheapness is partly an artificial cheapness, which may be compared to that produced by a bounty on production or on exportation; or, considering the means by which it is obtained, an apter comparison would be with the cheapness of stolen goods.

Chart XV.

How far Mr. Mill was in error may be seen by Chart No. XV, which shows the enormous increase of cotton production under the régime of free labor as compared with that of slave-labor in the United States. The abolition of slavery has been an economic gain to the South. Moreover, the exports of raw cotton have increased from 644,327,921 pounds in 1869, to 2,288,075,062 pounds in 1883; while for corresponding years the exports of tobacco increased from 181,527,630 to 235,628,360 pounds. In other words, exports of tobacco were increased by 30 per cent, and those of raw cotton by no less than 255 per cent. Besides, the prices of cotton and tobacco are no higher now than before 1850.

An advantage of a similar economical, though of a very different moral character, is that possessed by domestic manufactures; fabrics produced in the leisure hours of families partially occupied in other pursuits, who, not depending for subsistence on the produce of the manufacture, can afford to sell it at any price, however low, for which they think it worth while to take the trouble of producing. The workman of Zürich is to-day a manufacturer, to-morrow again an agriculturist, and changes his occupations with the seasons in a continual round. Manufacturing industry and tillage advance hand in hand, in inseparable alliance, and in this union of the two occupations the secret may be found why the simple and unlearned Swiss manufacturer can always go on competing and increasing in prosperity in the face of those extensive establishments fitted out with great economic and (what is still more important) intellectual resources.

In the case of these domestic manufactures, the comparative cost of production, on which the interchange between countries depends, is much lower than in proportion to the quantity of labor employed. The work-people, looking to the earnings of their loom for a part only, if for any part, of their actual maintenance, can afford to work for a less remuneration than the lowest rate of wages which can permanently exist in the employments by which the laborer has to support the whole expense of a family. Working, as they do, not for an employer but for themselves, they may be said to carry on the manufacture at no cost at all, except the small expense of a loom and of the material; and the limit of possible cheapness is not the necessity of living by their trade, but that of earning enough by the work to make that social employment of their leisure hours not disagreeable.

§ 4. —But not when common to All.

These two cases, of slave-labor and of domestic manufactures, exemplify the conditions under which low wages enable a country to sell its commodities cheaper in foreign markets, and consequently to undersell its rivals, or to avoid being undersold by them. But no such advantage is conferred by low wages when common to all branches of industry. General low wages never caused any country to undersell its rivals, nor did general high wages ever hinder it from doing so.

To demonstrate this, we must turn to an elementary principle which was discussed in a former chapter.(290) General low wages do not cause low prices, nor high wages high prices, within the country itself. General prices are not raised by a rise of wages, any more than they would be raised by an increase of the quantity of labor required in all production. Expenses which affect all commodities equally have no influence on prices. If the maker of broadcloth or cutlery, and nobody else, had to pay higher wages, the price of his commodity would rise, just as it would if he had to employ more labor; because otherwise he would gain less profit than other producers, and nobody would engage in the employment. But if everybody has to pay higher wages, or everybody to employ more labor, the loss must be submitted to; as it affects everybody alike, no one can hope to get rid of it by a change of employment; each, therefore, resigns himself to a diminution of profits, and prices remain as they were. In like manner, general low wages, or a general increase in the productiveness of labor, does not make prices low, but profits high. If wages fall (meaning here by wages the cost of labor), why, on that account, should the producer lower his price? He will be forced, it may be said, by the competition of other capitalists who will crowd into his employment. But other capitalists are also paying lower wages, and by entering into competition with him they would gain nothing but what they are gaining already. The rate, then, at which labor is paid, as well as the quantity of it which is employed, affects neither the value nor the price of the commodity produced, except in so far as it is peculiar to that commodity, and not common to commodities generally.

However, without there being any change in the productiveness of any industry, if the price of the article should rise, for instance, from an increased demand, that would make the total value arising from the products of the industry larger in its purchasing power, and so there would be a larger sum to be divided among labor and capital. If there be free competition, more capital would move into this one industry under the hope of larger profits, and so wages would rise. Therefore, it is possible that high wages and high prices may go together, but not as cause and effect. In fact, the change in price generally precedes the change in wages. On the other hand, while low wages are not the cause of low prices nor high wages of high prices, yet the two may be found together, as both due to a common cause, viz., the small or great value of the total product.(291)

Since low wages are not a cause of low prices in the country itself, so neither do they cause it to offer its commodities in foreign markets at a lower price. It is quite true that, if the cost of labor is lower in America than in England, America could sell her cottons to Cuba at a lower price than England, and still gain as high a profit as the English manufacturer. But it is not with the profit of the English manufacturer that the American cotton-spinner will make his comparison; it is with the profits of other American capitalists. These enjoy, in common with himself, the benefit of a low cost of labor, and have accordingly a high rate of profit. This high profit the cotton-spinner must also have: he will not content himself with the English profit. It is true he may go on for a time at that lower rate, rather than change his employment; and a trade may be carried on, sometimes for a long period, at a much lower profit than that for which it would have been originally engaged in. Countries which have a low cost of labor and high profits do not for that reason undersell others, but they do oppose a more obstinate resistance to being undersold, because the producers can often submit to a diminution of profit without being unable to live, and even to thrive, by their business. But this is all which their advantage does for them; and in this resistance they will not long persevere when a change of times which may give them equal profits with the rest of their countrymen has become manifestly hopeless.

§ 5. Low profits as affecting the carrying Trade.

It is worth while also to notice a third class of small, but in this case mostly independent communities, which have supported and enriched themselves almost without any productions of their own (except ships and marine equipments), by a mere carrying-trade, and commerce of entrepot; by buying the produce of one country, to sell it at a profit in another. Such were Venice and the Hanse Towns.

When the Venetians became the agents of the general commerce of Southern Europe, they had scarcely any competitors: the thing would not have been done at all without them, and there was really no limit to their profits except the limit to what the ignorant feudal nobility could and would give for the unknown luxuries then first presented to their sight. At a later period competition arose, and the profit of this operation, like that of others, became amenable to natural laws. The carrying-trade was taken up by Holland, a country with productions of its own and a large accumulated capital. The other nations of Europe also had now capital to spare, and were capable of conducting their foreign trade for themselves: but Holland, having, from the variety of circumstances, a lower rate of profit at home, could afford to carry for other countries at a smaller advance on the original cost of the goods than would have been required by their own capitalists; and Holland, therefore, engrossed the greatest part of the carrying-trade of all those countries which did not keep it to themselves by navigation laws,(292) constructed, like those of England, for the express purpose.

In the United States, early in the century, a retaliatory policy against England gave us a body of navigation laws copied after the mediæval statutes of England and the Continent, which still remain on the statute-book. They do not permit an American to buy a vessel abroad and sail it under our flag without paying enormous duties; a provision which is intended to foster ship-building in the United States. Even with this legislation, ships, as a fact, are not built here for the foreign trade; and our ship-builders practically supply the coasting-trade only (which is not open to foreigners). The ability to buy ships anywhere, and enter them to registry under our flag free of duty, is what is meant by the demand for “free ships.” This, however, has to do with ship-building. But ship-owning or ship-sailing, is quite distinct from it. The ability to get as great a return from capital and labor invested in a ship as from other occupations open to Americans is another thing. Even if we had “free ships,” the higher returns in other industries in our country, particularly as regards profits, might cause capitalists naturally to neglect a less for a more productive business. In 1884 Congress has very properly taken away many vexatious restrictions upon ships, which diminished the returns from ship-sailing, and it remains to be seen whether we can thereby regain any of our foreign carrying-trade. At present we have a very small tonnage even in that part of the shipping engaged in carrying our own goods.

Chapter XXI. Of Distribution, As Affected By Exchange.

§ 1. Exchange and money make no Difference in the law of Wages.

The division of the produce among the three classes, laborers, capitalists, and landlords, when considered without any reference to exchange, appeared to depend on certain general laws. It is fit that we should now consider whether these same laws still operate, when the distribution takes place through the complex mechanism of exchange and money; or whether the properties of the mechanism interfere with and modify the presiding principles.

The primary division of the produce of human exertion and frugality is, as we have seen, into three shares—wages, profits, and rents; and these shares are portioned out, to the persons entitled to them, in the form of money and by a process of exchange; or, rather, the capitalist, with whom in the usual arrangements of society the produce remains, pays in money, to the other two sharers, the market value of their labor and land. If we examine on what the pecuniary value of labor and the pecuniary value of the use of land depend, we shall find that it is on the very same causes by which we found that wages and rent would be regulated if there were no money and no exchange of commodities.

It is evident, in the first place, that the law of wages is not affected by the existence or non-existence of exchange or money. Wages depend on the ratio between population and capital [taking into account the nature of a country’s industries]; and would do so if all the capital in the world were the property of one association, or if the capitalists among whom it is shared maintained each an establishment for the production of every article consumed in the community, exchange of commodities having no existence. As the ratio between capital and population, everywhere but in new colonies, depends on the strength of the checks by which the too rapid increase of population is restrained, it may be said, popularly speaking, that wages depend on the checks to population; that, when the check is not death by starvation or disease, wages depend on the prudence of the laboring people; and that wages in any country are habitually at the lowest rate to which in that country the laborer will suffer them to be depressed rather than put a restraint upon multiplication.

What is here meant, however, by wages, is the laborer’s real scale of comfort; the quantity he obtains of the things which nature or habit has made necessary or agreeable to him: wages in the sense in which they are of importance to the receiver. In the sense in which they are of importance to the payer, they do not depend exclusively on such simple principles. Wages in the first sense, the wages on which the laborer’s comfort depends, we will call real wages, or wages in kind. Wages in the second sense we may be permitted to call, for the present, money wages; assuming, as it is allowable to do, that money remains for the time an invariable standard, no alteration taking place in the conditions under which the circulating medium itself is produced or obtained. If money itself undergoes no variation in cost, the money price of labor is an exact measure of the cost of labor, and may be made use of as a convenient symbol to express it [if the efficiency of labor also be supposed to remain the same].

The money wages of labor are a compound result of two elements: first, real wages, or wages in kind, or, in other words, the quantity which the laborer obtains of the ordinary articles of consumption; and, secondly, the money prices of those articles. In all old countries—all countries in which the increase of population is in any degree checked by the difficulty of obtaining subsistence—the habitual money price of labor is that which will just enable the laborers, one with another, to purchase the commodities without which they either can not or will not keep up the population at its customary rate of increase. Their standard of comfort being given (and by the standard of comfort in a laboring class is meant that rather than forego which they will abstain from multiplication), money wages depend on the money price, and therefore on the cost of production, of the various articles which the laborers habitually consume: because, if their wages can not procure them a given quantity of these, their increase will slacken and their wages rise. Of these articles, food and other agricultural produce are so much the principal as to leave little influence to anything else.

It is at this point that we are enabled to invoke the aid of the principles which have been laid down in this Third Part. The cost of production of food and agricultural produce has been analyzed in a preceding chapter. It depends on the productiveness of the least fertile land, or of the least productively employed portion of capital, which the necessities of society have as yet put in requisition for agricultural purposes. The cost of production of the food grown in these least advantageous circumstances determines, as we have seen, the exchange value and money price of the whole. In any given state, therefore, of the laborers’ habits, their money wages depend on the productiveness of the least fertile land, or least productive agricultural capital: on the point which cultivation has reached in its downward progress—in its encroachments on the barren lands, and its gradually increased strain upon the powers of the more fertile. Now, the force which urges cultivation in this downward course is the increase of people; while the counter-force, which checks the descent, is the improvement of agricultural science and practice, enabling the same soil to yield to the same labor more ample returns. The costliness of the most costly part of the produce of cultivation is an exact expression of the state, at any given moment, of the race which population and agricultural skill are always running against each other.

It will be noted, in this exposition, that Mr. Mill has in view an old country, with a population so dense that numbers are always pressing close upon subsistence; that their wages are so low as to give the laborers little more than the necessary wants of life. That these are not the economic conditions in the United States goes without saying. First of all, the margin of cultivation is high: only soils of high productiveness are in cultivation, and the returns to labor and capital are, consequently, very large. High wages are found together with low prices of food. The existing population is not so numerous as to require for the cultivation of food any but lands of a very high grade of fertility. The ability to command a high reward for labor (as compared with European industries), owing to the general prevalence of high returns in the United States, has resulted in the establishment of a higher standard for our laborers. The standard being relatively so high, there is no intimate connection between the increase of population here and the price of food; for, as a rule, wages are not so low that any change in the cost of producing food would require checks upon population. There is a considerable margin above necessaries, in the laborer’s real wages in the United States, which may go for comforts, decencies, and amusements.

§ 2. In the law of Rent.

The degree of productiveness of this extreme margin is an index to the existing state of the distribution of the produce among the three classes, of laborers, capitalists, and landlords. When the demand of an increasing population for more food can not be satisfied without extending cultivation to less fertile land, or incurring additional outlay, with a less proportional return, on land already in cultivation, it is a necessary condition of this increase of agricultural produce that the value and price of that produce must first rise. The price of food will always on the average be such that the worst land, and the least productive installment of the capital employed on the better lands, shall just replace the expenses with the ordinary profit. If the least favored land and capital just do thus much, all other land and capital will yield an extra profit, equal to the proceeds of the extra produce due to their superior productiveness; and this extra profit becomes, by competition, the prize of the landlords. Exchange and money, therefore, make no difference in the law of rent: it is the same as we originally(293) found it. Rent is the extra return made to agricultural capital when employed with peculiar advantages; the exact equivalent of what those advantages enable the producers to economize in the cost of production: the value and price of the produce being regulated by the cost of production to those producers who have no advantages; by the return to that portion of agricultural capital the circumstances of which are the least favorable.

§ 3. —Nor in the law of Profits.

Wages and rent being thus regulated by the same principles when paid in money, as they would be if apportioned in kind, it follows that Profits are so likewise. For the surplus, after replacing wages and paying rent, constitutes Profits.

We found, in the last chapter of the Second Book, that the advances of the capitalist, when analyzed to their ultimate elements, consist either in the purchase or maintenance of labor, or in the profits of former capitalists; and that, therefore, profits in the last resort depend upon the Cost of Labor, falling as that rises, and rising as it falls. Let us endeavor to trace more minutely the operation of this law.

There are two modes in which the Cost of Labor, which is correctly represented (money being supposed invariable as well as efficiency) by the money wages of the laborer, may be increased. The laborer may obtain greater comforts; wages in kind—real wages—may rise. Or the progress of population may force down cultivation to inferior soils and more costly processes; thus raising the cost of production, the value, and the price, of the chief articles of the laborer’s consumption. On either of these suppositions the rate of profit will fall.

If the laborer obtains more abundant commodities only by reason of their greater cheapness, if he obtains a greater quantity, but not on the whole a greater cost, real wages will be increased, but not money wages, and there will be nothing to affect the rate of profit. But, if he obtains a greater quantity of commodities of which the cost of production is not lowered, he obtains a greater cost; his money wages are higher. The expense of these increased money wages falls wholly on the capitalist. There are no conceivable means by which he can shake it off. It may be said—it used formerly to be said—that he will get rid of it by raising his price. But this opinion we have already, and more than once, fully refuted.(294)

The doctrine, indeed, that a rise of wages causes an equivalent rise of prices, is, as we formerly observed, self-contradictory: for, if it did so, it would not be a rise of wages; the laborer would get no more of any commodity than he had before, let his money wages rise ever so much; a rise of real wages would be an impossibility. This being equally contrary to reason and to fact, it is evident that a rise of money wages does not raise prices; that high wages are not a cause of high prices. A rise of general wages falls on profits. There is no possible alternative.

Having disposed of the case in which the increase of money wages, and of the Cost of Labor, arises from the laborer’s obtaining more ample wages in kind, let us now suppose it to arise from the increased cost of production of the things which he consumes, owing to an increase of population unaccompanied by an equivalent increase of agricultural skill. The augmented supply required by the population would not be obtained, unless the price of food rose sufficiently to remunerate the farmer for the increased cost of production. The farmer, however, in this case sustains a twofold disadvantage. He has to carry on his cultivation under less favorable conditions of productiveness than before. For this, as it is a disadvantage belonging to him only as a farmer, and not shared by other employers, he will, on the general principles of value, be compensated by a rise of the price of his commodity; indeed, until this rise has taken place, he will not bring to market the required increase of produce. But this very rise of price involves him in another necessity, for which he is not compensated. He must pay higher money wages to his laborers [if they retain the same quantity of real wages]. This necessity, being common to him with all other capitalists, forms no ground for a rise of price. The price will rise, until it has placed him in as good a situation, in respect of profits, as other employers of labor; it will rise so as to indemnify him for the increased labor which he must now employ in order to produce a given quantity of food; but the increased wages of that labor are a burden common to all, and for which no one can be indemnified. It will be paid wholly from profits.