Principles of Political Economy
by John Stuart Mill

Book 4

Chapter 2

Influence of the Progress of Industry and Population on Values
and Prices

    1. The changes which the progress of industry causes or
presupposes in the circumstances of production, are necessarily
attended with changes in the values of commodities.
    The permanent values of all things which are neither under a
natural nor under an artificial monopoly, depend, as we have
seen, on their cost of production. But the increasing power which
mankind are constantly acquiring over nature, increases more and
more the efficiency of human exertion, or in other words,
diminishes cost of production. All inventions by which a greater
quantity of any commodity can be produced with the same labour,
or the same quantity with less labour, or which abridge the
process, so that the capital employed needs not be advanced for
so long a time, lessen the cost of production of the commodity.
As, however, value is relative; if inventions and improvements in
production were made in all commodities, and all in the same
degree, there would be no alteration in values. Things would
continue to exchange for each other at the same rates as before;
and mankind would obtain a greater quantity of all things in
return for their labour and abstinence, without having that
greater abundance measured and declared (as it is when it affects
only one thing) by the diminished exchange value of the
commodity. 
    As for prices, in these circumstances they would be affected
or not, according as the improvements in production did or did
not extend to the precious metals. If the materials of money were
an exception to the general diminution of cost of production, the
values of all other things would fall in relation to money, that
is, there would be a fall of general prices throughout the world.
But if money, like other things, and in the same degree as other
things, were obtained in greater abundance and cheapness, prices
would be no more affected than values would: and there would be
no visible sign in the state of the markets, of any of the
changes which had taken place; except that there would be (if
people continued to labour as much as before) a greater quantity
of all sorts of commodities, circulated at the same prices by a
greater quantity of money. 
    Improvements in production are not the only circumstance
accompanying the progress of industry, which tends to diminish
the cost of producing, or at least of obtaining, commodities.
Another circumstance is the increase of intercourse between
different parts of the world. As commerce extends, and the
ignorant attempts to restrain it by tariffs become obsolete,
commodities tend more and more to be produced in the places in
which their production can be carried on at the least expense of
labour and capital to mankind. As civilization spreads, and
security of person and property becomes established, in parts of
the world which have not hitherto had that advantage, the
productive capabilities of those places are called into fuller
activity, for the benefit both of their own inhabitants and of
foreigners. The ignorance and misgovernment in which many of the
regions most favoured by nature are still grovelling, afford
work, probably, for many generations before those countries will
be raised even to the present level of the most civilized parts
of Europe. Much will also depend on the increasing migration of
labour and capital to unoccupied parts of the earth, of which the
soil, climate, and situation are found, by the ample means of
exploration now possessed, to promise not only a large return to
industry, but great facilities of producing commodities suited to
the markets of old countries. Much as the collective industry of
the earth is likely to be increased in efficiency by the
extension of science and of the industrial arts, a still more
active source of increased cheapness of production will be found,
probably, for some time to come, in the gradually unfolding
consequences of Free Trade, and in the increasing scale on which
Emigration and Colonization will be carried on.
    From the causes now enumerated, unless counteracted by
others, the progress of things enables a country to obtain at
less and less of real cost, not only its own productions but
those of foreign countries. Indeed, whatever diminishes the cost
of its own productions, when of an exportable character, enables
it, as we have already seen, to obtain its imports at less real
cost. 

    2. But is it the fact, that these tendencies are not
counteracted? Has the progress of wealth and industry no effect
in regard to cost of production, but to diminish it? Are no
causes of an opposite character brought into operation by the
same progress, sufficient in some cases not only to neutralize,
but to overcome the former, and convert the descending movement
of cost of production into an ascending movement? We are already
aware that there are such causes, and that, in the case of the
most important classes of commodities, food and materials, there
is a tendency diametrically opposite to that of which we have
been speaking. The cost of production of these commodities tends
to increase. 
    This is not a property inherent in the commodities
themselves. If population were stationary, and the produce of the
earth never needed to be augmented in quantity, there would be no
cause for greater cost of production. Mankind would, on the
contrary, have the full benefit of all improvements in
agriculture, or in the arts subsidiary to it, and there would be
no difference, in this respect, between the products of
agriculture and those of manufactures. The only products of
industry, which, if population did not increase, would be liable
to a real increase of cost of production, are those which,
depending on a material which is not renewed, are either wholly
or partially exhaustible; such as coal, and most if not all
metals; for even iron, the most abundant as well as most useful
of metallic products, which forms an ingredient of most minerals
and of almost all rocks, is susceptible of exhaustion so far as
regards its richest and most tractable ores. 
    When, however, population increases, as it has never yet
failed to do when the increase of industry and of the means of
subsistence made room for it, the demand for most of the
productions of the earth, and particularly for food, increases in
a corresponding proportion. And then comes into effect that
fundamental law of production from the soil, on which we have so
frequently had occasion to expatiate; the law, that increased
labour, in any given state of agricultural skill, is attended
with a less than proportional increase of produce. The cost of
production of the fruits of the earth increases, caeteris
paribus, with every increase of the demand. 
    No tendency of a like kind exists with respect to
manufactured articles. The tendency is in the contrary direction.
The larger the scale on which manufacturing operations are
carried on, the more cheaply they can in general be performed. Mr
Senior has gone the length of enunciating as an inherent law of
manufacturing industry, that in it increased production takes
place at a smaller cost, while in agricultural industry increased
production takes place at a greater cost. I cannot think,
however, that even in manufactures, increased cheapness follows
increased production by anything amounting to a law. It is a
probable and usual, but not a necessary, consequence. 
    As manufactures, however, depend for their materials either
upon agriculture, or mining, or the spontaneous produce of the
earth, manufacturing industry is subject, in respect of one of
its essentials, to the same law as agriculture. But the crude
material generally forms so small a portion of the total cost,
that any tendency which may exist to a progressive increase in
that single item, is much over.balanced by the diminution
continually taking place in all the other elements; to which
diminution it is impossible at present to assign any limit. 
    The tendency, then, being to a perpetual increase of the
productive power of labour in manufactures, while in agriculture
and mining there is a conflict between two tendencies, the one
towards an increase of productive power, the other towards a
diminution of it, the cost of production being lessened by every
improvement in the processes, and augmented by every addition to
population; it follows that the exchange values of manufactured
articles, compared with the products of agriculture and of mines,
have, as population and industry advance, a certain and decided
tendency to fall. Money being a product of mines, it may also be
laid down as a rule, that manufactured articles tend, as society
advances, to fall in money price. The industrial history of
modern nations, especially during the last hundred years, fully
bears out this assertion. 

    3. Whether agricultural produce increases in absolute as well
as comparative cost of production, depends on the conflict of the
two antagonist agencies, increase of population, and improvement
in agricultural skill. In some, perhaps in most, states of
society, (looking at the whole surface of the earth,) both
agricultural skill and population are either stationary, or
increase very slowly, and the cost of production of food,
therefore, is nearly stationary. In a society which is advancing
in wealth, population generally increases faster than
agricultural skill, and food consequently tends to become more
costly; but there are times when a strong impulse sets in towards
agricultural improvement. Such an impulse has shown itself in
Great Britain during the last twenty or thirty years. In England
and Scotland agricultural skill has of late increased
considerably faster than population, insomuch that food and other
agricultural produce, notwithstanding the increase of people, can
be grown at less cost than they were thirty years ago: and the
abolition of the Corn Laws has given an additional stimulus to
the spirit of improvement. In some other countries, and
particularly in France, the improvement of agriculture gains
ground still more decidedly upon population, because though
agriculture, except in a few provinces, advances slowly,
population advances still more slowly, and even with increasing
slowness; its growth being kept down, not by poverty, which is
diminishing, but by prudence. 
    Which of the two conflicting agencies is gaining upon the
other at any particular time, might be conjectured with tolerable
accuracy from the money price of agricultural produce (supposing
bullion not to vary materially in value), provided a sufficient
number of years could be taken, to form an average independent of
the fluctuations of seasons. This, however, is hardly
practicable, since Mr Tooke has shown that even so long a period
as half a century may include a much greater proportion of
abundant and a smaller of deficient seasons than is properly due
to it. A mere average, therefore, might lead to conclusions only
the more misleading, for their deceptive semblance of accuracy.
There would be less danger of error in taking the average of only
a small number of years, and correcting it by a conjectural
allowance for the character of the seasons, than in trusting to a
longer average without any such correction. It is hardly
necessary to add, that in founding conclusions on quoted prices,
allowance must also be made as far as possible for any changes in
the general exchange value of the precious metals.(1*) 

    4. Thus far, of the effect of the progress of society on the
permanent or average values and prices of commodities. It remains
to be considered, in what manner the same progress affects their
fluctuations. Concerning the answer to this question there can be
no doubt. It tends in a very high degree to diminish them. In
poor and backward societies, as in the East, and in Europe during
the Middle Ages, extraordinary differences in the price of the
same commodity might exist in places not very distant from each
other, because the want of roads and canals, the imperfection of
marine navigation, and the insecurity of communications
generally, prevented things from being transported from the
places where they were cheap to those where they were dear. The
things most liable to fluctuations in value, those directly
influenced by the seasons, and especially food, were seldom
carried to any great distances. Each locality depended, as a
general rule, on its own produce and that of its immediate
neighbourhood. In most years, accordingly, there was, in some
part or other of any large country, a real dearth. Almost every
season must be unpropitious to some among the many soils and
climates to be found in an extensive tract of country; but as the
same season is also in general more than ordinarily favourable to
others, it is only occasionally that the aggregate produce of the
whole country is deficient, and even then in a less degree than
that of many separate portions; while a deficiency at all
considerable, extending to the whole world, is a thing almost un.
known. In modern times, therefore, there is only dearth, where
there formerly would have been famine, and sufficiency everywhere
when anciently there would have been scarcity in some places and
superfluity in others. 
    The same change has taken place with respect to all other
articles of commerce. The safety and cheapness of communications,
which enable a deficiency in one place to be supplied from the
surplus of another, at a moderate or even a small advance on the
ordinary price, render the fluctuations of prices much less
extreme than formerly. This effect is much promoted by the
existence of large capitals, belonging to what are called
speculative merchants, whose business it is to buy goods in order
to resell them at a profit. These dealers naturally buying things
when they are cheapest, and storing them up to be brought again
into the market when the price has become unusually high; the
tendency of their operations is to equalize price, or at least to
moderate its inequalities. The prices of things are neither so
much depressed at one time, nor so much raised at another, as
they would be if speculative dealers did not exist. 
    Speculators, therefore, have a highly useful office in the
economy of society; and (contrary to common opinion) the most
useful portion of the class are those who speculate in
commodities affected by the vicissitudes of seasons. If there
were no corn-dealers, not only would the price of corn be liable
to variations much more extreme than at present, but in a
deficient season the necessary supplies might not be forthcoming
at all. Unless there were speculators in corn, or unless, in
default of dealers, the farmers became speculators, the price in
a season of abundance would fall without any limit or check,
except the wasteful consumption that would invariably follow.
That any part of the surplus of one year remains to supply the
deficiency of another, is owing either to farmers who withhold
corn from the market, or to dealers who buy it when at the
cheapest and lay it up in store. 

    5. Among persons who have not much considered the subject,
there is a notion that the gains of speculators are often made by
causing an artificial scarcity; that they create a high price by
their own purchases, and then profit by it. This may easily be
shown to be fallacious. If a corn-dealer makes purchases on
speculation, and produces a rise, when there is neither at the
time nor afterwards any cause for a rise of price except his own
proceedings; he no doubt appears to grow richer as long as his
purchases continue, because he is a holder of an article which is
quoted at a higher and higher price: but this apparent gain only
seems within his reach so long as he does not attempt to realize
it. If he has bought, for instance, a million of quarters, and by
with. holding them from the market, has raised the price ten
shillings a quarter; just so much as the price has been raised by
withdrawing a million quarters, will it be lowered by bringing
them back, and the best that he can hope is that he will lose
nothing except interest and his expenses. If by a gradual and
cautious sale he is able to realize, on some portion of his
stores, a part of the increased price, so also he will
undoubtedly have had to pay a part of that price on some portion
of his purchases. He runs considerable risk of incurring a still
greater loss; for the temporary high price is very likely to have
tempted others, who had no share in causing it, and who might
otherwise not have found their way to his market at all, to bring
their corn there, and intercept a part of the advantage. So that
instead of profiting by a scarcity caused by himself, he is by no
means unlikely, after buying in an average market, to be forced
to sell in a super-abundant one.
    As an individual speculator cannot gain by a rise of price
solely of his own creating, so neither can a number of
speculators gain collectively by a rise which their operations
have artificially produced. Some among a number of speculators
may gain, by superior judgment or good fortune in selecting the
time for realizing, but they make this gain at the expense, not
of the consumer, but of the other speculators who are less
judicious. They, in fact, convert to their own benefit the high
price produced by the speculations of the others, leaving to
these the loss resulting from the recoil. It is not to be denied,
therefore, that speculators may enrich themselves by other
people's loss. But it is by the losses of other speculators. As
much must have been lost by one set of dealers as is gained by
another set. 
    When a speculation in a commodity proves profitable to the
speculators as a body, it is because, in the interval between
their buying and reselling, the price rises from some cause
independent of them, their only connexion with it consisting in
having foreseen it. In this case, their purchases make the price
begin to rise sooner than it otherwise would do, thus spreading
the privation of the consumers over a longer period, but
mitigating it at the time of its greatest height: evidently to
the general advantage. In this, however, it is assumed that they
have not overrated the rise which they looked forward to. For it
often happens that speculative purchases are made in the
expectation of some increase of demand, or deficiency of supply,
which after all does not occur, or not to the extent which the
speculator expected. In that case the speculation, instead of
moderating fluctuation, has caused a fluctuation of price which
otherwise would not have happened, or aggravated one which would.
But in that case, the speculation is a losing one, to the
speculators collectively, however much some individuals may gain
by it. All that part of the rise of price by which it exceeds
what there are independent grounds for, cannot give to the
speculators as a body any benefit, since the price is as much
depressed by their sales as it was raised by their purchases; and
while they gain nothing by it, they lose, not only their trouble
and expenses, but almost always much more, through the effects
incident to the artificial rise of price, in checking
consumption, and bringing forward supplies from unforeseen
quarters. The operations, therefore, of speculative dealers, are
useful to the public whenever profitable to themselves; and
though they are sometimes injurious to the public, by heightening
the fluctuations which their more usual office is to alleviate,
yet whenever this happens the speculators are the greatest
losers. The interest, in short, of the speculators as a body,
coincides with the interest of the public; and as they can only
fail to serve the public interest in proportion as they miss
their own, the best way to promote the one is to leave them to
pursue the other in perfect freedom. 
    I do not deny that speculators may aggravate a local
scarcity. In collecting corn from the villages to supply the
towns, they make the dearth penetrate into nooks and corners
which might otherwise have escaped from bearing their share of
it. To buy and resell in the same place, tends to alleviate
scarcity; to buy in one place and resell in another, may increase
it in the former of the two places, but relieves it in the
latter, where the price is higher, and which, therefore, by the
very supposition, is likely to be suffering more. And these
sufferings always fall hardest on the poorest consumers, since
the rich, by outbidding, can obtain their accustomed supply
undiminished if they choose. To no persons, therefore, are the
operations of corn-dealers on the whole so beneficial as to the
poor. Accidentally and exceptionally, the poor may suffer from
them: it might sometimes be more advantageous to the rural poor
to have corn cheap in winter, when they are entirely dependent on
it, even if the consequence were a dearth in spring, when they
can perhaps obtain partial substitutes. But there are no
substitutes, procurable at that season, which serve in any great
degree to replace bread-corn as the chief article of food: if
there were, its price would fall in the spring, instead of
continuing, as it always does, to rise till the approach of
harvest.
    There is an opposition of immediate interest, at the moment
of sale, between the dealer in corn and the consumer, as there
always is between the seller and the buyer: and a time of dearth
being that in which the speculator makes his largest profits, he
is an object of dislike and jealousy at that time, to those who
are suffering while he is gaining. It is an error, however, to
suppose that the corn.dealer's business affords him any
extraordinary profit: he makes his gains not constantly, but at
particular times, and they must therefore occasionally be great,
but the chances of profit in a business in which there is so much
competition, cannot on the whole be greater than in other
employments. A year of scarcity, in which great gains are made by
corn-dealers, rarely comes to an end without a recoil which
places many of them in the list of bankrupts. There have been few
more promising seasons for corn-dealers than the year 1847, and
seldom was there a greater break-up among the speculators than in
the autumn of that year. The chances of failure, in this most
precarious trade, are a set off against great occasional profits.
If the corn-dealer were to sell his stores, during a dearth, at a
lower price than that which the competition of the consumers
assigns to him, he would make a sacrifice, to charity or
philanthropy, of the fair profits of his employment, which may be
quite as reasonably required from any other person of equal
means. His business being a useful one, it is the interest of the
public that the ordinary motives should exist for carrying it on,
and that neither law nor opinion should prevent an operation
beneficial to the public from being attended with as much private
advantage as is compatible with full and free competition.
    It appears, then, that the fluctuations of values and prices
arising from variations of supply, or from alterations in real
(as distinguished from speculative) demand, may be expected to
become more moderate as society advances. With regard to those
which arise from miscalculation, and especially from the
alterations of undue expansion and excessive contraction of
credit, which occupy so conspicuous a place among commercial
phenomena, the same thing cannot be affirmed with equal
confidence. Such vicissitudes, beginning with irrational
speculation and ending with a commercial crisis, have not
hitherto become either less frequent or less violent with the
growth of capital and extension of industry. Rather they may be
said to have become more so: in consequence, as is often said, of
increased competition; but, as I prefer to say, of a low rate of
profits and interest, which makes capitalists dissatisfied with
the ordinary course of safe mercantile gains. The connexion of
this low rate of profit with the advance of population and
accumulation, is one of the points to be illustrated in the
ensuing chapters. 

NOTES:

1. A still better criterion, perhaps, than that suggested in the
text, would be the increase or diminution of the amount of the
labourer's wages estimated in agricultural produce.