The Principles of Political Economy, by John Stuart Mill

Chapter 26

Of Distribution, as Affected by Exchange

§1. We have now completed, as far as is compatible with our purposes and limits, the exposition of the machinery through which the produce of a country is apportioned among the different classes of its inhabitants; which is no other than the machinery of Exchange, and has for the exponents of its operation, the laws of Value and of Price. We shall now avail ourselves of the light thus acquired, to cast a retrospective glance at the subject of Distribution. The division of the produce among the three classes, Labourers, 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 rent; 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 labour and land. If we examine, on what the pecuniary value of labour, 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; 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, in all old countries, 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 labouring people; and that wages in any country are habitually at the lowest rate, to which in that country the labourer will suffer them to be depressed rather than put a restraint upon multiplication.

What is here meant, however, by wages, is the labourer’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 labourer’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 iteration 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 labour is an exact measure of the Cost of Labour, and may be made use of as a convenient symbol to express it.

The money wages of labour are a compound result of two elements: first, real wages, or wages in kind, or in other words, the quantity which the labourer 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 labour is that which will just enable the labourers, one with another, to purchase the commodities without which they neither cannot 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 labouring 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 labourers habitually consume: because if their wages cannot 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 labourers’ 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 labour 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.

§2. It is well said by Dr Chalmers, that many of the most important lessons in political economy are to be learnt at the extreme margin of cultivation, the last point which the culture of the soil has reached in its contest with the spontaneous agencies of nature. 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 labourers, capitalists, and landlords.

When the demand of an increasing population for more food cannot 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. But as soon as the price has risen sufficiently to give to the additional outlay of capital the ordinary profit, the rise will not go on still further for the purpose of enabling the new land, or the new expenditure on old land, to yield rent as well as profit. The land or capital last put in requisition, and occupying what Dr Chalmers calls the margin of cultivation, will yield, and continue to yield, no rent. But if this yields no rent, the rent afforded by all other land or agricultural capital will be exactly so much as it produces more than this. The price of food will always on the average be such, that the worst land, and the least productive instalment of the capital employed on the better lands, shall just replace the expenses with the ordinary profit. If the least favoured 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 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 favourable.

§3. 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 labour, or in the profits of former capitalists; and that therefore profits, in the last resort, depend upon the Cost of Labour, falling as that rises, and rising as it falls. Let us endeavour to trace more minutely the operation of this law.

There are two modes in which the Cost of Labour, which is correctly represented (money being supposed invariable) by the money wages of the labourer, may be increased. The labourer 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 labourer’s consumption. On either of these suppositions, the rate of profit will fall.

If the labourer 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 is, not unfrequently, said — that he will get rid of it by raising his price. But this opinion we have already, and more than once, fully refuted.1

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 labourer 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 Labour, arises from the labourer’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 favourable 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. As the real wages of labour are by supposition unaltered, he must pay higher money wages to his labourers. 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 labour: it will rise so as to indemnify him for the increased labour which he must now employ in order to produce a given quantity of food: but the increased wages of that labour are a burthen common to all, and for which no one can be indemnified. It will be paid wholly from profits.

Thus we see that increased wages, when common to all descriptions of productive labourers, and when really representing a greater Cost of Labour, are always and necessary at the expense of profits. And by reversing the cases, we should find in like manner that diminished wages, when representing a really diminished Cost of Labour, are equivalent to a rise of profits. But the opposition of pecuniary interest thus indicated between the class of capitalists and that of labourers, is to a great extent only apparent. Real wages are a very different thing from the Cost of Labour, and are generally highest at the times and places where, from the easy terms on which the land yields all the produce as yet required from it, the value and price of food being low, the cost of labour to the employer, notwithstanding its ample remuneration, is comparatively cheap, and the rate of profit consequently high. We thus obtain a full confirmation of our original theorem that Profits depend on the Cost of Labour: or, to express the meaning with still greater accuracy, the rate of profit and the cost of labour vary inversely as one another, and are joint effects of the same agencies or causes.

But does not this proposition require to be slightly modified, by making allowance for that portion (though comparatively small) of the expenses of the capitalist, which does not consist in wages paid by himself or reimbursed to previous capitalists, but in the profits of those previous capitalists? Suppose, for example, an invention in the manufacture of leather, the advantage of which should consist in rendering it unnecessary that the hides should remain for so great a length of time in the tan-pit. Shoemakers, saddlers, and other workers in leather, would save a part of that portion of the cost of their material which consists of the tanner’s profits during the time his capital is locked up; and this saving, it may be said, is a source from which they might derive an increase of profit, though wages and the Cost of Labour remained exactly the same. In the case here supposed, however, the consumer alone would benefit, since the prices of shoes, harness, and all other articles into which leather enters, would fall, until the profits of the producers were reduced to the general level. To obviate this objection, let us suppose that a similar saving of expense takes place in all departments of production at once. In that case, since values and prices would not be affected, profits would probably be raised; but if we look more closely into the case we shall find, that it is because the cost of labour would be lowered. In this as in any other case of increase in the general productiveness of labour, if the labourer obtained only the same real wages, profits would be raised: but the same real wages would imply a smaller Cost of Labour; the cost of production of all things having been, by the supposition, diminished. If, on the other hand, the real wages of labour rose proportionally, and the Cost of Labour to the employer remained the same, the advances of the capitalist would bear the same ratio to his returns as before, and the rate of profit would be unaltered. The reader who may wish for a more minute examination of this point, will find it in the volume of separate Essays to which reference has before been made.2 The question is too intricate in comparison with its importance, to be further entered into in a work like the present; and I will merely say, that it seems to result from the considerations adduced in the Essay, that there is nothing in the case in question to affect the integrity of the theory which affirms an exact correspondence, in an inverse direction, between the rate of profit and the Cost of Labour.

1 Supra, book iii. ch. iv. section 2, and ch. xxv. section 4.

2 Essay IV, on Profits and Interest.

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