The Principles of Political Economy
by John Stuart Mill

Book 3: Distribution


Chapter 4

Ultimate Analysis of Cost of Production

    1. The component elements of Cost of Production have been set
forth in the First Part of this enquiry.(1*) The principal of
them, and so much the principal as to be nearly the sole, we
found to be Labour. What the production of a thing costs to its
producer, or its series of producers, is the labour expended in
producing it. If we consider as the producer the capitalist who
makes the advances, the word Labour may be replaced by the word
Wages: what the produce costs to him, is the wages which he has
had to pay. At the first glance indeed this seems to be only a
part of his outlay, since he has not only paid wages to
labourers, but has likewise provided them with tools, materials,
and perhaps buildings. These tools, materials, and buildings,
however, were produced by labour and capital; and their value,
like that of the article to the production of which they are
subservient, depends on cost of production, which again is
resolvable into labour. The cost of production of broadcloth does
not wholly consist in the wages of weavers; which alone are
directly paid by the cloth manufacturer. It consists also of the
wages of spinners and woolcombers, and, it may be added, of
shepherds, all of which the clothier has paid for in the price of
yarn. It consists too of the wages of builders and brickmakers,
which he has reimbursed in the contract price of erecting his
factory. It partly consists of the wages of machine-makers,
iron-founders, and miners. And to these must be added the wages
of the carriers who transported any of the means and appliances
of the production to the place where they were to be used, and
the product itself to the place where it is to be sold. 
    The value of commodities, therefore, depends principally (we
shall presently see whether it depends solely) on the quantity of
labour required for their production; including in the idea of
production, that of conveyance to the market. "In estimating,"
says Ricardo,(2*) "the exchangeable value of stockings, for
example, we shall find that their value, comparatively with other
things, depends on the total quantity of labour necessary to
manufacture them and bring them to market. First, there is the
labour necessary to cultivate the land on which the raw cotton is
grown; secondly, the labour of conveying the cotton to the
country where the stockings are to be manufactured, which
includes a portion of the labour bestowed in building the ship in
which it is conveyed, and which is charged in the freight of the
goods; thirdly, the labour of the spinner and weaver; fourthly, a
portion of the labour of the engineer, smith, and carpenter, who
erected the buildings and machinery by the help of which they are
made; fifthly, the labour of the retail dealer and of many
others, whom it is unnecessary further to particularize. The
aggregate sum of these various kinds of labour, determines the
quantity of other things for which these stockings will exchange,
while the same consideration of the various quantities of labour
which have been bestowed on those other things, will equally
govern the portion of them which will be given for the stockings.

    "To convince ourselves that this is the real foundation of
exchangeable value, let us suppose any improvement to be made in
the means of abridging labour in any one of the various processes
through which the raw cotton must pass before the manufactured
stockings come to the market to be exchanged for other things;
and observe the effects which will follow. If fewer men were
required to cultivate the raw cotton, or if fewer sailors were
employed in navigating, or shipwrights in constructing, the ship
in which it was conveyed to us; if fewer hands were employed in
raising the buildings and machinery, or if these, when raised,
were rendered more efficient; the stockings would inevitably fall
in value, and command less of other things. They would fall,
because a less quantity of labour was necessary to their
production, and would therefore exchange for a smaller quantity
of those things in which no such abridgement of labour had been
made. 
    "Economy in the use of labour never fails to reduce the
relative value of a commodity, whether the saving be in the
labour necessary to the manufacture of the commodity itself, or
in that necessary to the formation of the capital, by the aid of
which it is produced. In either case the price of stockings would
fall, whether there were fewer men employed as bleachers,
spinners, and weavers, persons immediately necessary to their
manufacture; or as sailors, carriers, engineers, and smiths,
persons more indirectly concerned. In the one case, the whole
saving of labour would fall on the stockings, because that
portion of labour was wholly confined to the stockings; in the
other, a portion only would fall on the stockings, the remainder
being applied to all those other commodities, to the production
of which the buildings, machinery, and carriage, were
subservient."

    2. It will have been observed that Ricardo expresses himself
as if the quantity of labour which it costs to produce a
commodity and bring it to market, were the only thing on which
its value depended. But since the cost of production to the
capitalist is not labour but wages, and since wages may be either
greater or less, the quantity of labour being the same; it would
seem that the value of the product cannot be determined solely by
the quantity of labour, but by the quantity together with the
remuneration; and that values must partly depend on wages. 
    In order to decide this point, it must be considered, that
value is a relative term: that the value of a commodity is not a
name for an inherent and substantive quality of the thing itself,
but means the quantity of other things which can be obtained in
exchange for it. The value of one thing, must always be
understood relatively to some other thing, or to things in
general. Now the relation of one thing to another cannot be
altered by any cause which affects them both alike. A rise or
fall of general wages is a fact which affects all commodities in
the same manner, and therefore affords no reason why they should
exchange for each other in one rather than in another proportion.
To suppose that high wages make high values, is to suppose that
there can be such a thing as general high values. But this is a
contradiction in terms : the high value of some things is
synonymous with the low value of others. The mistake arises from
not attending to values, but only to prices. Though there is no
such thing as a general rise of values, there is such a thing as
a general rise of prices. As soon as we form distinctly the idea
of values, we see that high or low wages can have nothing to do
with them; but that high wages make high prices, is a popular and
widely-spread opinion. The whole amount of error involved in this
proposition can only be seen thoroughly when we come to the
theory of money; at present we need only say that if it be true,
there can be no such thing as a real rise of wages; for if wages
could not rise without a proportional rise of the price of
everything, they could not, for any substantial purpose, rise at
all. This surely is a sufficient reductio ad absurdum, and shows
the amazing folly of the propositions which may and do become,
and long remain, accredited doctrines of popular political
economy. It must be remembered too that general high prices, even
supposing them to exist, can be of no use to a producer or
dealer, considered as such; for if they increase his money
returns, they increase in the same degree all his expenses. There
is no mode in which capitalists can compensate themselves for a
high cost of labour, through any action on values or prices. It
cannot be prevented from taking its effect on low profits. If the
labourers really get more, that is, get the produce of more
labour, a smaller percentage must remain for profit. From this
Law of Distribution, resting as it does on a law of arithmetic,
there is no escape. The mechanism of Exchange and Price may hide
it from us, but is quite powerless to alter it. 

    3. Although, however, general wages, whether high or low, do
not affect values, yet if wages are higher in one employment than
another, or if they rise and fall permanently in one employment
without doing so in others, these inequalities do really operate
upon values. The causes which make wages vary from one employment
to another, have been considered in a former chapter. When the
wages of an employment permanently exceed the average rate, the
value of the thing produced will, in the same degree, exceed the
standard determined by mere quantity of labour. Things, for
example, which are made by skilled labour, exchange for the
produce of a much greater quantity of unskilled labour; for no
reason but because the labour is more highly paid. If, through
the extension of education, the labourers competent to skilled
employment were so increased in number as to diminish the
difference between their wages and those of common labour, all
things produced by labour of the superior kind would fall in
value, compared with things produced by common labour, and these
might be said therefore to rise in value. We have before remarked
that the difficulty of passing from one class of employments to a
class greatly superior, has hitherto caused the wages of all
those classes of labourers who are separated from one another by
any very marked barrier, to depend more than might be supposed
upon the increase of the population of each class considered
separately; and that the inequalities in the remuneration of
labour are much greater than could exist if the competition of
the labouring people generally could be brought practically to
bear on each particular employment. It follows from this that
wages in different employments do not rise or fall
simultaneously, but are, for short and sometimes even for long
periods, nearly independent of one another. All such disparities
evidently alter the relative costs of production of different
commodities, and will therefore be completely represented in
their natural or average value. 
    It thus appears that the maxim laid down by some of the best
political economists, that wages do not enter into value, is
expressed with greater latitude than the truth warrants, or than
accords with their own meaning. Wages do enter into value. The
relative wages of the labour necessary for producing different
commodities, affect their value just as much as the relative
quantities of labour. It is true, the absolute wages paid have no
effect upon values; but neither has the absolute quantity of
labour. If that were to vary simultaneously and equally in all
commodities, values would not be affected. If, for instance, the
general efficiency of all labour were increased, so that all
things without exception could be produced in the same quantity
as before with a smaller amount of labour, no trace of this
general diminution of cost of production would show itself in the
values of commodities. Any change which might take place in them
would only represent the unequal degrees in which the improvement
affected different things; and would consist in cheapening those
in which the saving of labour had been the greatest, while those
in which there had been some, but a less saving of labour, would
actually rise in value. In strictness, therefore, wages of labour
have as much to do with value as quantity of labour: and neither
Ricardo nor any one else has denied the fact. In considering,
however, the causes of variations in value, quantity of labour is
the thing of chief importance; for when that varies, it is
generally in one or a few commodities at a time, but the
variations of wages (except passing fluctuations) are usually
general, and have no considerable effect on value. 

    4. Thus far of labour, or wages, as an element in cost of
production. But in our analysis, in the First Book, of the
requisites of production, we found that there is another
necessary element in it besides labour. There is also capital;
and this being the result of abstinence, the produce, or its
value, must be sufficient to remunerate, not only all the labour
required, but the abstinence of all the persons by whom the
remuneration of the different classes of labourers was advanced.
The return for abstinence is Profit. And profit, we have also
seen, is not exclusively the surplus remaining to the capitalist
after he has been compensated for his outlay, but forms, in most
cases, no unimportant part of the outlay itself. The
flax-spinner, part of whose expenses consists of the purchase of
flax and of machinery, has had to pay, in their price, not only
the wages of the labour by which the flax was grown and the
machinery made, but the profits of the grower, the flax-dresser,
the miner, the ironfounder, and the machine-maker. All these
profits, together with those of the spinner himself, were again
advanced by the weaver, in the price of his material, linen yarn:
and along with them the profit of a fresh set of machine-makers,
and of the miners and iron-workers who supplied them with their
metallic material. All these advances form part of the cost of
production of linen. Profits, therefore, as well as wages, enter
into the cost of production which determines the value of the
produce. 
    Value, however, being purely relative, cannot depend upon
absolute profits, no more than upon absolute wages, but upon
relative profits only. High general profits cannot, any more than
high general wages, be a cause of high values, because high
general values are an absurdity and a contradiction. In so far as
profits enter into the cost of production of all things, they
cannot affect the value of any. It is only by entering in a
greater degree into the cost of production of some things than of
others, that they can have any influence on value. 
    For example, we have seen that there are causes which
necessitate a permanently higher rate of profit in certain
employments than in others. There must be a compensation for
superior risk, trouble, and disagreeableness. This can only be
obtained by selling the commodity at a value above that which is
due to the quantity of labour necessary for its production. If
gunpowder exchanged for other things in no higher ratio than that
of the labour required from first to last for producing it, no
one would set up a powder-mill. Butchers are certainly a more
prosperous class than bakers, and do not seem to be exposed to
greater risks, since it is not remarked that they are oftener
bankrupts. They seem, therefore, to obtain higher profits, which
can only arise from the more limited competition caused by the
unpleasantness, and to a certain degree, the unpopularity, of
their trade. But this higher profit implies that they sell their
commodity at a higher value than that due to their labour and
outlay. All inequalities of profit which are necessary and
permanent, are represented in the relative values of the
commodities. 

    5. Profits, however, may enter more largely into the
conditions of production of one commodity than of another, even
though there be no difference in the rate of profit between the
two employments. The one commodity may be called upon to yield
profit during a longer period of time than the other. The example
by which this case is usually illustrated is that of wine.
Suppose a quantity of wine, and a quantity of cloth, made by
equal amounts of labour, and that labour paid at the same rate.
The cloth does not improve by keeping; the wine does. Suppose
that, to attain the desired quality, the wine requires to be kept
five years. The producer or dealer will not keep it, unless at
the end of five years he can sell it for as much more than the
cloth, as amounts to five years' profit, accumulated at compound
interest. The wine and the cloth were made by the same original
outlay. Here then is a case in which the natural values,
relatively to one another, of two commodities, do not conform to
their cost of production alone, but to their cost of production
plus something else. Unless, indeed, for the sake of generality
in the expression, we include the profit which the wine-merchant
foregoes during the five years, in the cost of production of the
wine: looking upon it as a kind of additional outlay, over and
above his other advances, for which outlay he must be indemnified
at last. 
    All commodities made by machinery are assimilated, at least
approximately, to the wine in the preceding example. In
comparison with things made wholly by immediate labour, profits
enter more largely into their cost of production. Suppose two
commodities, A and B, each requiring a year for its production,
by means of a capital which we will on this occasion denote by
money, and suppose to be 1000l. A is made wholly by immediate
labour, the whole 1000l. being expended directly in wages. B is
made by means of labour which costs 500l. and a machine which
cost 500l., and the machine is worn out by one year's use. The
two commodities will be exactly of the same value; which, if
computed in money, and if profits are 20 per cent per annum, will
be 1200l. But of this 1200l., in the case of A, only 200l., or
one-sixth, is profit: while in the case of B there is not only
the 200l., but as much of 500l. (the price of the machine) as
consisted of the profits of the machine-maker; which, if we
suppose the machine also to have taken a year for its production,
is again one-sixth. So that in the case of A only one-sixth of
the entire return is profit, whilst in B the element of profit
comprises not only a sixth of the whole, but an additional sixth
of a large part. 
    The greater the proportion of the whole capital which
consists of machinery, or buildings, or material, or anything
else which must be provided before the immediate labour can
commence, the more largely will profits enter into the cost of
production. It is equally true, though not so obvious at first
sight, that greater durability in the portion of capital which
consists of machinery or buildings, has precisely the same effect
as a greater amount of it. As we just supposed one extreme case,
of a machine entirely worn out by a year's use, let us now
suppose the opposite and still more extreme case of a machine
which lasts for ever, and requires no repairs. In this case,
which is as well suited for the purposed of illustration as if it
were a possible one, it will be unnecessary that the manufacturer
should ever be repaid the 500l. which he gave for the machine,
since he has always the machine itself, worth 500l.; but he must
be paid, as before, a profit on it. The commodity B, therefore,
which in the case previously supposed was sold for 1200l. of
which sum 1000l. were to replace the capital and 200l. were
profit, can now be sold for 700l., being 500l. to replace wages,
and 200l. profit on the entire capital. Profit, therefore, enters
into the value of B in the ratio of 200l. out of 700l., being
two-sevenths of the whole, or 28 4/7 per cent, while in the case
of A, as before, it enters only in the ratio of one-sixth, or 16
2/3 per cent. The case is of course purely ideal, since no
machinery or other fixed capital lasts for ever; but the more
durable it is, the nearer it approaches to this ideal case, and
the more largely does profit enter into the return. If, for
instance, a machine worth 500l. loses one-fifth of its value by
each year's use, l00l. must be added to the return to make up
this loss, and the price of the commodity will be 8OOl. Profit
therefore will enter into it in the ratio of 200l. to 800l., or
one-fourth, which is still a much higher proportion than
one-sixth, or 200l. in 1200l., as in case A. From the unequal
proportion in which, in different employments, profits enter into
the advances of the capitalist, and therefore into the returns
required by him, two consequences follow in regard to value. One
is, that commodities do not exchange in the ratio simply of the
quantities of labour required to produce them; not even if we
allow for the unequal rates at which different kinds of labour
are permanently remunerated. We have already illustrated this by
the example of wine : we shall now further exemplify it by the
case of commodities made by machinery. Suppose, as before, an
article A made by a thousand pounds' worth of immediate labour.
But instead of B, made by 500l. worth of immediate labour and a
machine worth 500l., let us suppose C, made by 500l. worth of
immediate labour with the aid of a machine which has been
produced by another 500l. worth of immediate labour: the machine
requiring a year for making, and worn out by a year's use;
profits being as before 20 per cent. A and C are made by equal
quantities of labour, paid at the same rate: A costs 1000l. worth
of direct labour; C, only 500l. worth, which however is made up
to 1000l. by the labour expended in the construction of the
machine. If labour, or its remuneration, were the sole ingredient
of cost of production, these two things would exchange for one
another. But will they do so? Certainly not. The machine having
been made in a year by an outlay of 500l., and profits being 20
per cent, the natural price of the machine is 600l.: making an
additional 100l. which must be advanced, over and above his other
expenses, by the manufacturer of C, and repaid to him with a
profit of 20 per cent. While, therefore, the commodity A is sold
for 1200l., C cannot be permanently sold for less than 1320l. 
    A second consequence is, that every rise or fall of general
profits will have an effect on values. Not indeed by raising or
lowering them generally, (which, as we have so often said, is a
contradiction and an impossibility): but by altering the
proportion in which the values of things are affected by the
unequal lengths of time for which profit is due. When two things,
though made by equal labour, are of unequal value because the one
is called upon to yield profit for a greater number of years or
months than the other; this difference of value will be greater
when profits are greater, and less when they are less. The wine
which has to yield five years' profit more than the cloth, will
surpass it in value much more if profits are 40 per cent, than if
they are only 20. The commodities A and C, which, though made by
equal quantities of labour, were sold for 1200l. and 1320l., a
difference of 10 per cent, would, if profits had been only half
as much, have been sold for 1100l. and 1155l., a difference of
only 5 per cent. 
    It follows from this, that even a general rise of wages, when
it involves a real increase in the cost of labour, does in some
degree influence values. It does not affect them in the manner
vulgarly supposed, by raising them universally. But an increase
in the cost of labour, lowers profits; and therefore lowers in
natural value the things into which profits enter in a greater
proportion than the average, and raises those into which they
enter in a less proportion than the average. All commodities in
the production of which machinery bears a large part, especially
if the machinery is very durable, are lowered in their relative
value when profits fall; or, what is equivalent, other things are
raised in value relatively to them. This truth is sometimes
expressed in a phraseology more plausible than sound, by saying
that a rise of wages raises the value of things made by labour,
in comparison with those made by machinery. But things made by
machinery, just as much as any other things, are made by labour,
namely, the labour which made the machinery itself: the only
difference being that profits enter somewhat more largely into
the production of things for which machinery is used, though the
principal item of the outlay is still labour. It is better,
therefore, to associate the effect with fall of profits than with
rise of wages; especially as this last expression is extremely
ambiguous, suggesting the idea of an increase of the labourer's
real remuneration, rather than of what is alone to the purpose
here, namely, the cost of labour to its employer. 

    6. Besides the natural and necessary elements in cost of
production-labour and profits-there are others which are
artificial and casual, as for instance a tax. The tax on malt is
as much a part of the cost of production of that article as the
wages of the labourers. The expenses which the law imposes, as
well as those which the nature of things imposes, must be
reimbursed with the ordinary profit from the value of the
produce, or the things will not continue to be produced. But the
influence of taxation on value is subject to the same conditions
as the influence of wages and of profits. It is not general
taxation, but differential taxation, that produces the effect. If
all productions were taxed so as to take an equal percentage from
all profits, relative values would be in no way disturbed. If
only a few commodities were taxed, their value would rise: and if
only a few were left untaxed, their value would fall. If half
were taxed and the remainder untaxed, the first half would rise
and the last would fall relatively to each other. This would be
necessary in order to equalize the expectation of profit in all
employments, without which the taxed employments would
ultimately, if not immediately, be abandoned. But general
taxation, when equally imposed, and not disturbing the relations
of different productions to one another, cannot produce any
effect on values. 
    We have thus far supposed that all the means and appliances
which enter into the cost of production of commodities, are
things whose own value depends on their cost of production. Some
of them, however, may belong to the class of things which cannot
be increased ad libitum in quantity, and which therefore, if the
demand goes beyond a certain amount, command a scarcity value.
The materials of many of the ornamental articles manufactured in
Italy are the substances called rosso, giallo, and verde antico,
which, whether truly or falsely I know not, are asserted to be
solely derived from the destruction of ancient columns and other
ornamental structures; the quarries from which the stone was
originally cut being exhausted, or their locality forgotten.(3*)
A material of such a nature, if in much demand, must be at a
scarcity value; and this value enters into the cost of
production, and consequently into the value, of the finished
article. The time seems to be approaching when the more valuable
furs will come under the influence of a scarcity value of the
material. Hitherto the diminishing number of the animals which
produce them, in the wildernesses of Siberia, and on the coasts
of the Esquimaux Sea, has operated on the value only through the
greater labour which has become necessary for securing any given
quantity of the article, since, without doubt, by employing
labour enough, it might still be obtained in much greater
abundance for some time longer. 
    But the case in which scarcity value chiefly operates in
adding to cost of production, is the case of natural agents.
These, when unappropriated, and to be had for the taking, do not
enter into cost of production, save to the extent of the labour
which may be necessary to fit them for use. Even when
appropriated, they do not (as we have already seen) bear a value
from the mere fact of the appropriation, but only from scarcity,
that is, from limitation of supply. But it is equally certain
that they often do bear a scarcity value. Suppose a fall of
water, in a place where there are more mills wanted than there is
water-power to supply them, the use of the fall of water will
have a scarcity value, sufficient either to bring the demand down
to the supply, or to pay for the creation of an artificial power,
by steam or otherwise, equal in efficiency to the water-power. 
    A natural agent being a possession in perpetuity, and being
only serviceable by the products resulting from its continued
employment, the ordinary mode of deriving benefit from its
ownership is by an annual equivalent, paid by the person who uses
it, from the proceeds of its use. This equivalent always might
be, and generally is, termed rent. The question, therefore,
respecting the influence which the appropriation of natural
agents produces on values, is often stated in this form: Does
Rent enter into Cost of Production? and the answer of the best
political economists is in the negative. The temptation is strong
to the adoption of these sweeping expressions, even by those who
are aware of the restrictions with which they must be taken; for
there is no denying that they stamp a general principle more
firmly on the mind, than if it were hedged round in theory with
all its practical limitations. But they also puzzle and mislead,
and create an impression unfavourable to political economy, as if
it disregarded the evidence of facts. No one can deny that rent
sometimes enters into cost of production. If I buy or rent a
piece of ground, and build a cloth manufactory on it, the
ground-rent forms legitimately a part of my expenses of
production, which must be repaid by the product. And since all
factories are built on ground, and most of them in places where
ground is peculiarly valuable, the rent paid for it must, on the
average, be compensated in the values of all things made in
factories. In what sense it is true that rent does not enter into
the cost of production or affect the value of agricultural
produce, will be shown in the succeeding chapter. 

NOTES:

1. Supra, pp. 31-2.

2. Principles of Political Economy and Taxation, ch. 1,sect.3.

3. Some of these quarries, I believe, have been rediscovered, and
are again worked.