LECTURE II

The Components of Price are Wages, Profit, Rent.

All things which man uses are the results of labour. Take for example the objects before and about usthe table, the table-cloth, the ink-stand, the window, the carpet, the fire-irons, the gold watchwe can easily trace the processes of human labour by which these became what they are.

All these things have their price. Upon what does their price depend? The Price of any article involves three elements, Wages, Profits, Rent. This is one of the cardinal points and foundation stones of Smith's doctrines.

He teaches (B. i. c. vi.), as we have said, that all things which man needs or desires is provided by labour. And that at first, all thus produced belongs to the labourer; and what he gets for it is his wages. But when men have capital or stock on which they can support others while they labour (that is, have food, clothing, &c.), or have the command of these by raising money, they set others to work, and charge the labour with a profit in the price of what they produce. Further, the production of many things requires land; and when the land has all been appropriated, rent is demanded for it. Now land has everywhere been appropriated in a very early stage of society. For instance, in New Zealand the claim to property in land is as technical and as obstinately urged as in England.

(Smith, W. N. p. 22.) "As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials. In exchanging the complete manufacture either for money, for labour, or for other goods, over and above what may be sufficient to pay the price of the materials and the wages of the workmen, something must be given for the profits of the undertaker of the work, who hazards his stock in this adventure. The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced. He could have no interest to employ them, unless he expected from the sale of their work something more than what was sufficient to replace his stock to him and he could have no interest to employ a great stock rather than a small one, unless his profits were to bear some proportion to the extent of his stock.

"The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular sort of labour, the labour of inspection and direction. They are however altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship, and the ingenuity of this supposed labour of inspection and direction. They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock. Let us suppose, for example, that in some particular place, where the common annual profits of manufacturing stock are ten per cent. there are two different manufactures, in each of which twenty workmen are employed at the rate of fifteen pounds a year each, or at the expense of three hundred a year in each manufactory. Let us suppose too that the coarse materials annually wrought up in the one cost only seven hundred pounds, while the finer materials in the other cost seven thousand. The capital annually employed in the one will in this case amount only to one thousand pounds; whereas that employed in the other will amount to seven thousand three hundred pounds. At the rate of ten per cent., therefore, the undertaker of the one will expect a yearly profit of about one hundred pounds only; while that of the other will expect about seven hundrel and thirty pounds. But though their profits are so very different, their labour of inspection and direction may be either altogether or very nearly the same. In many great works, almost the whole labour of this kind is committed to some principal clerk. His wages properly express the value of this labour of inspection and direction. Though in settling them some regard is had commonly, not only to his labour and skill, but to the trust which is reposed in him, yet they never bear any regular proportion to the capital of which he oversees the management; and the owner of this capital, though he is thus discharged of almost all labour, still expects that his profits shall bear a regular proportion to his capital. In the price of commodities, therefore, the profits of stock constitute a component part altogether different from the wages of labour, and regulated by quite different principles.

"In this state of things, the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him. Neither is the quantity of labour commonly employed in acquiring or producing any commodity the only circumstance which can regulate the quantity which it ought commonly to purchase, command, or exchange, for. An additional quantity, it is evident, must be due for the profits of the stock which advanced the wages and furnished the materials of that labour.

"As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth `which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them; and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of the commodities makes a third component part."

Thus Wages, Profits, Rent, are the three component parts of Price.

At first it might appear as if there were a fourth element of Price; namely, Materials. Thus the table, besides the wages of the journeyman and the profit of the master cabinet-maker, cost also the price of the wood. But then, of what does the price of the wood consist? of the Rent of the Land on which it grows; the Profit of the landlord for leaving it to grow; and the Wages of the woodman who cut it down. And thus Price is reduced to Wages, Profits and Rent.

Wages,' as we have said, is the reward of labour. Profits is the reward of abstinence:of the abstinence of the master cabinet-maker, who employed his money to pay a journeyman carpenter, instead of spending it in eating, drinking, clothes, &c. Rent is a monopoly, but a necessary and inevitable monopoly, for land must be appropriated; and always has been appropriated, as we have said.

Smith gives an example to illustrate the manner in which the three elements of price show themselves (p. 20):

"In the price of corn, for example, one part pays the rent of the landlord, anothor pays the wages or maintenance of the labourers and labouring cattle employed in producing it, and the third pays the profit of the farmer. These three parts seem either immediately or ultimately to make up the whole price of corn. A fourth part, it may perhaps be thought, is necessary for replacing the stock of the farmer, or for compensating the wear and tear of his labouring cattle, and other instruments of husbandry. But it must be considered that the price of any instrument of husbandry, such as a labouring horse, is itself made up of the same three parts; the rent of the land upon which he is reared, the labour of tending and rearing him, and the profits of the farmer who advances both the rent of this land and the wages of this labour. Though the price of the corn, therefore, may pay the price as well as the maintenance of the horse, the whole price still resolves itself either immediately or ultimately into the same three parts of rent, of labour, and profit.

"In the price of flour or meal, we must add to the price of the corn the profits of the miller and the wages of his servants; in the price of bread, the profits of the baker and the wages of his servants; in the price of both, the labour of transporting the corn from the house of the farmer to that of the miller, and from that of the miller to that of the baker, together with the profits of those who advance the wages of that labour.

"The price of flax resolves itself into the same three parts as that of corn. In the price of linen we must add to this price the wages of the flax-dresser, of the spinner, of the weaver, of the bleacher, &c., together with the profits of their respective employers.

"As any particular commodity comes to be more manufactured, that part of the price which resolves itself into wages and profit, comes to be greater in proportion to that which resolves itself into rest. In the progress of the manufacture, not only the number of profits increase, but every subsequent profit is greater than the foregoing; because the capital which from it is derived must always be greater. The capital which employs the weaver, for example, must be greater than that which employs the spinners, because it not only replaces that capital with its profits, but pays, besides, the wages of the weavers; and the profits must always bear some proportion to the capital."

There are however exceptions to the proposition that these three elements of price always exist.

Exceptions to the above. (Smith, p. 23.)

"Even in the .most improved societies, there are always a few commodities of which the price resolves itself into two parts only, the wages of labour, and the profits of stock; and a still smaller number, in which it consists altogether in the wages of labour. In the price of sea-fish, for example, one part pays the labour of the fishermen, and the other the profits of the capital employed in the fishery. Rent very seldom makes any part of it, though it does sometimes, as I shall show hereafter. It is otherwise, at least through the greater part of Europe, in river fisheries. A salmon-fishery pays a rent; and rent, though it cannot well be called the rent of land, makes a part of the price of a salmon as well as wages and profit. In some parts of Scotland a few poor people make a trade of gathering, along the seashore, those little variegated stones commonly known by the name of Scotch Pebbles. The price which is paid to them by the stone-cutter is altogether the wages of their labour; neither rent not profit make any part of it."

Again, there are cases in which the three elements, or two of them, are liable to be confounded.

"A gentleman who farms a part of his own estate, after paying the expense of cultivation, should gain both the rent of the landlord and the profit of the farmer. He is apt to denominate his whole gain, profit, and thus confounds rent with profit, at least in common language. The greater part of our North American and West Indian planters are in this situation. They farm, the greater part of them, their own estates, and accordingly we seldom hear of the rent of a plantation, but frequently of its profits.

"Common farmers seldom employ any overseer to direct the general operations of the farm. They generally, too, work a good deal with their own hands, as ploughmen, harrowers, &c. What remains of the crop after paying the rent, therefore, should not only replace to them their stock employed in cultivation, together with its ordinary profits, but pay them the wages which are due to them, both as labourers and overseers. Whatever remains, however, after paying the rent and keeping up the stock, is called profit. But wages evidently make a part of it. The farmer, by having these wages, must necessarily gain them. Wages, therefore, are in this case confounded with profit.

"An independent manufacturer, who has stock enough both to purchase materials, and to maintain himself till he can carry his work to market, should gain both the wages of a journeyman who works under a master, and the profit which that master makes by the sale of the journeyman's work. His whole gains, however, are commonly called profit, and wages are, in this case too, confounded with profit.

"A gardener who cultivates his own garden with his own hands, unites in his own person the three different characters of landlord, farmer, and labourer. His produce, therefore, should pay him the rent of the first, the profit of the second, and the wages of the third. The whole however is commonly considered as the earnings of his labour. Both rent and profit are, in this case, confounded with wages."

And thus the three elements of Price are Wages, Profits, and Rent; and these exist, with few exceptions, in all cases, though sometimes two of them may be confounded.

Fixed and Circulating capital.

Capital is further distinguished as Fixed Capital and Circulating Capital.

(Smith, p. 120.) " There are two different ways in which the capital of a merchant may be employed so as to yield a profit to its employer.

"First, It may be employed in raising, manufacturing, or purchasing goods, and selling them again with a profit. The capital employed in this manner yields no revenue or profit to its employer while it either remains in his possession, or continues in the same shape. The goods of the merchant yield him no revenue or profit till he sells them for money, and the money yields him as little till it is again exchanged for goods. His capital is continually going from him in one shape and returning to him in another, and it is only by means. of such circulation, or successive exchanges, that it can yield him any profit. Such capitals therefore may very properly be called Circulating Capitals.

"Secondly, It may be employed in the improvement of land, in the purchase of useful machines, and instruments of trade, or in such-like things as yield a revenue or profit without changing masters, or circulating any further. Such capitals therefore may very properly be called Fixed Capitals.

"Different occupations require very different proportions between the fixed and circulating capitals employed in them.

"The capital of a merchant, for example, is altogether a circulating capital. He has occasion for no machines or instruments of trade, unless his shop or warehouse be considered as such.

"Some part of the capital of every master, artificer, or manufacturer, must be fixed in the instruments of his trade. This part however is very small in some and very great in others. A master tailor requires no other instruments of trade but a parcel of needles. Those of a master shoemaker are a little, though but a very little more expensive. Those of the weaver rise a good deal above those of the shoemaker. The far greater part of the capital of all such master artificers, however, is circulated either in the wages of their workmen, or in the price of their materials, and repaid with a profit by the price of the work.

"In other works a much greater fixed capital is required. In a great Iron-work, for example, the furnace for melting the ore, the forge, the slitt-mill, are instruments of trade which cannot be erected without a very great expense. In coal-works and mines of every kind, the machinery necessary, both for drawing out the water and for other purposes, is frequently still more expensive.

"That part of the capital of the farmer which is employed in the instruments of agriculture, is a fixed, that which is employed in the wages and maintenance of his labouring servants, is a circulating capital. He makes a profit of the one by keeping it in his own possession, and of the other by parting with it. The price or value of his labouring cattle is a fixed capital in the same manner as that of the instruments of husbandry; their maintenance is a circulating capital, in the same manner as that of the labouring servants. The farmer makes his profit by keeping the labouring cattle, and by parting with their maintenance. Both the price and the maintenance of the cattle, which are bought in, and fattened, not for labour, but for sale, are a circulating capital. The farmer makes his profit by parting with them. A flock of sheep, or a herd of cattle, that in a breeding country is bought in neither for labour nor for sale, but in order to make a profit by their wool, by their milk, and by their increase, is a fixed capital. Their profit is made by keeping them. Their maintenance is circulating capital. The profit is made by parting with it, and it comes back with both its own profit, and the profit upon the whole price of the cattle, in the price of the wool, the milk, and the increase. The whole value of the seed, too, is properly a fixed capital. Though it goes backwards and forwards between the ground and the granary, it never changes masters, and therefore does not properly circulate. The farmer makes his profit not by its sale, but by its increase."