Chapter 3

Real and Relative Variation of Price Icon

September 30, 2015

When revenue is added to capital, it thenceforth ceases to be revenue, or, as such, to be capable of satisfying the wants of the proprietor. It can only yield an increased revenue, being an item of productive capital, consumable in the manner of capital, that is to say, in such way as to yield a product in exchange and return for the value consumed.

The price of an article is the quantity of money it may be worth; current price, the quantity it may be sure of obtaining at the particular place. Its locality is material, for the desire of a specific object varies in relation to the quantity procurable according to the locality.

When capital or land, or personal service, is let out to hire, its productive power is transferred to the renter or adventurer in production, in consideration of a given amount of products agreed upon beforehand. It is a sort of speculative bargain, wherein the renter takes the risk of profit and loss, according as the revenue he may realise, or the product obtained by the agency transferred, shall exceed or fall short of the rent or hire he is to pay.

Yet one revenue only can be realised; and, though a borrowed capital may yield to the adventurer an annual product of 10 per cent instead of 5% which he pays in the shape of interest, yet the revenue of the capital, the productive service it affords, will not be 10% for in that gross product is included the recompense of the productive agency, both of the capital and of the industry that has turned it to account.

The price obtained upon the sale of an article represents all other articles procurable with that price. To say, that the price of an el of broad-cloth is 8 dollars, implies, that it is exchange- able either for so much coined silver, or for so much of any other product or products as may be procurable with that sum. Money-price is selected for the purposes of an illustration, in preference to price in commodities at large, merely for greater simplicity; but the real and ultimate object of exchange is, not money, but commodities.

Price, in this sense, may be divided into buying price and selling price; that is to say, the price given to obtain posses- sion of an object, and the price obtainable for the relinquish- ment of its possession.

The actual revenue of each individual is proportionate to the quantity of products at his disposal, being either the immedi- ate fruit of his productive means, or the result of those trans- formations from its primitive state, which his revenue may have undergone, until it have assumed the shape of the ulti- mate object of his consumption. The ratio of that quantity, or of utility inherent in it, can only be estimated from its current price in the dealings of mankind. In this sense, the revenue of an individual is equal to the value derived from his produc- tive means; which value, however, is the greater, in respect to the objects of his consumption, in proportion to the cheap- ness of those objects, which augments his command of other than his own immediate products. The price paid for every product, at the time of its original attainment or creation, is, the charge of the productive agency exerted, or the cost of its production. 9 Tracing upwards to this original price of a product, we unavoidably come to other products; for the charge of productive agency can only have been defrayed by other products. The daily wages of the weaver engaged in producing broad-cloth are products; they consist either of the articles of his daily subsistence, or of the money wherewith he may procure them. both which are equally products. Wherefore the production, as well as the subsequent interchange of products, may be said to resolve itself into a barter of one product for another, conducted upon a comparison of their respective current prices. But there is one important particular, that requires the most assiduous at- tention, the neglect or oversight of which has led to abun- dance of error and misrepresentation, and has made the works In like manner, the revenue of a nation is the more consider- able, in proportion to the intensity of the value whereof it 162Book II= On Distribution cured with an equal charge of production, and without any alteration in the revenues of either buyers or sellers= there will be more actual wealth, more means of enjoyment, with- out any increased expenditure of productive means; the ag- gregate utility will be augmented; the quantum of products procurable for the same price will be enlarged; all which are but varied expressions of the same meaning. of many writers calculated only to mislead the students in this science. An ell of broad-cloth, that has, in the production, required the purchase of productive agency at the price of 8 dollars, will have cost that sum in the manufacture; but if three-fourths only of that productive agency can be made to suffice for its production; if, supposing one kind of productive agency only to be requisite, 15 instead of 20 days’ labour of a single work- man be enabled to complete the product, the same ell of broad- cloth will cost 6 dollars to the producer, at the same rate of wages. In this case the current price of human productive agency will have remained the same, although the cost of production will have varied in the ratio of the difference be- tween 6 dollars and 8 dollars. But, as this difference in the relation between the cost of production and the current price of the product holds out a prospect of larger profit than ordi- nary in this particular channel, it naturally attracts a larger proportion of productive agency, the exertion of which, by enlarging the supply, reduces again the current price to a level with the bare cost of production. 10 But whence is derived this accession of enjoyment, this larger supply of wealth, that nobody pays for? From the increased command acquired by human intelligence over the produc- tive powers and agents presented gratuitously by nature. A power has been rendered available for human purposes, that had before been not known, or not directed to any human object; as in the instance of wind, water, and steam-engines: or one before known and available is directed with superior skill and effect, as in the case of every improvement in mecha- nism, whereby human or animal power is assisted or expanded. The merit of the merchant, who contrives, by good manage- ment, to make the same capital suffice for an extended busi- ness, is precisely analogous to that of the engineer, who sim- plifies machinery, or renders it more productive. This kind of variation in the price of a product I shall call real variation of price, because it is a positive variation, involving no equivalent variation in the object of exchange, and both may, and actually does occur, without any cotemporaneous variation of the price, either of productive agency, of the prod- ucts wherewith it is recompensed, or of those, for which the specific object of this real variation is procurable. The discovery of a new mineral, animal, or vegetable, pos- sessed of the properties of utility in a novel form, or in a greater degree of abundance or perfection, is an acquisition of the same kind. The productive means of mankind were amplified, and a larger product rendered procurable by an equal degree of human exertion, when indigo was substituted for woad, sugar for honey, and cochineal fox the Tyrian dye. In all these instances of improvement, and those of a similar nature that may be hereafter effected, it is observable..hat, since the means of production placed at the disposal of man- kind become in reality more powerful, the product raised al- ways increases in quantity, in proportion as it diminishes in value. We shall presently see the consequences of this cir- cumstance. 11

It is otherwise with regard to the variation of price of prod- ucts already in existence one to another, without reference to their respective cost of production. When the wine of the last vintage that a month before sold at 40 dollars the tun, will fetch no more than 30 dollars, money and all other objects of desire to the wine-vender have actually advanced in price to him; for the productive agency exerted in raising the wine, receives a recompense of but 30 dollars, instead of 40 dollars in money, and of commodities in a like Proportion, which is an abatement of ¼; whereas, in the instance above cited, an equal amount of productive agency will receive an equal rec- ompense in all other products; for a degree of agency, which has both cost and received 6 dollars, will be equally well paid with one that cost and received 8 dollars. A fall of price may be general and affect all commodities at once; or it may be partial and affect certain commodities only; as I shall endeavour to explain by example. Suppose that, when stockings were made by knitting only, thread-stockings, of a given quality, amounted to the price of 1 dollar the pair. Hence, we should infer, that the rent of the land whereon the flax was grown, the profits upon the labour and capital of the cultivators, those of the flax-dresser and spinner, with those likewise of the stocking-knitter, amounted altogether to the sum of a dollar for each pair of stockings. Suppose that, in consequence of the invention of a stocking- machine, 1 dollar will buy two pair of stockings instead of one. As the competition has a tendency to bring the price to a level with the cost of production, we may infer from this re- In the former case, then, of a real variation, the wealth of the community will have received an accession; in the latter, of relative variation, it will have remained stationary; and for this plain reason; because, in the one case all the purchasers of cloth, will be so much the richer, without the seller being any poorer; while in the other, the gain of the one class will be exactly equipoised by the corresponding loss of the other. In the former case, a larger amount of products will be pro- 163Jean-Baptise Say, A Treatise on Political Economy duced price, that the outlay in land, capital, and labour, nec- essary to produce two pair of stockings, is still no more than 1 dollar; thus, with equal means of production, the product raised is doubled in quantity. And what is a convincing proof that this fall is positive, is the fact, that every person, of what profession soever, may thenceforward obtain a pair of stock- ings with half the quantity of his own particular product. A capitalist, the holder of 5 per cent stock, was before obliged to devote the annual interest of 20 dollars to the purchase of a pair of stockings; he now gives the interest of 10 dollars only. A tradesman selling his sugar at 33 1/3 cents per lb. must before have sold 3 lb. of sugar to buy a pair of stock- ings, now he need but sell 1½ lb.= he therefore sacrifices in the pair of stockings only half the means of production he formerly devoted to the acquisition of the same object. diminution of value; and that the same individuals are more scantily supplied with others, as with butcher’s meat and game, 12 because they have sustained a real increase of value. Every saving in the cost of production implies the procure- ment, either of an equal product by the exertion of a smaller amount of productive agency, or of a larger product by the exertion of equal agency, which are both the same thing; and it is sure to be followed by an enlargement of the product. It may be thought, perhaps, that this increase of production may possibly take place without any corresponding increase of demand; and, therefore, that the price current of the product may fall below the cost of its production, even on its reduced scale. But this is a groundless apprehension; for the fall of price tends so strongly to expand the sphere of consumption, that, in all the instances I have been able to meet with, the increase of demand has invariably outrun the increasing pow- ers of an improved production, operating upon the same pro- ductive means; so that every enlargement of the power of productive agency has created a demand for more of that agency, in the preparation of the product cheapened by the improvement. We have hitherto supposed this product alone to have fallen in price. Let us suppose two products to fall, stockings and sugar= that by an improvement of commerce, 1 lb. of sugar cost 22 cents instead of 33 cents. In this case all purchasers of sugar, including the stocking-maker, whose product has likewise fallen, will sacrifice, in the purchase of 1 lb. of sugar, but half the productive means, which they before allotted for that purpose. Of this a striking example has been afforded by the invention of the art of printing. By this expeditious method of multiply- ing the copies o. a literary work, each copy costs but a twen- tieth part of what was before paid for manuscript; an equal intensity of total demand, would, therefore, take off only twenty times the number of copies; but probably it is within the mark to say, that a hundred times as many are now con- sumed. So that, where there was formerly one copy only of the value of 12 dollars of present money, there are now a hundred copies, the aggregate value of which is 60 dollars, though that of each single copy be reduced to 1-20. Thus the reduction of price, consequent upon a real variation, does not occasion even a nominal diminution of wealth. 13 The truth of this position may be easily ascertained. When sugar was at 33 1/3 cents per lb. and stockings at a dollar the pair, the stocking-maker was obliged to sell one pair of stock- ings, before he could buy 3 lbs. of sugar= and, as the charges of producing this pair of stockings were one dollar, he in re- ality bought 3 lbs. of sugar at the, price of a dollar value in his own productive means; in like manner as the grocer bought a pair of stockings for 3 lbs. of sugar, that is to say, in his case also for one dollar value of his peculiar productive means. But when both these commodities have fallen to half their price, one pair only, or productive means equivalent to 50 cents, would buy 3 lbs. of sugar; and 3 lbs. of sugar, procur- able at a charge of production amounting to 50 cents, will suffice to purchase a pair of stockings. Wherefore, if two kinds of products, which we have set one against the other, and supposed to pass in exchange the one for the other, can both have fallen in price at the same time, are we not authorised to infer, that this fall is a positive fall, and has no reference or relation to the prices of commodities one to another? that commodities in general may fall at one and the same time, some more, some less, and yet that the diminution of price may be no loss to any body? On the other hand, and by the rule of contraries, as a real advance of price must always proceed from a deficiency in the product raised by equal productive means, it is attended by a diminution in the general stock of wealth; for the rise of price upon each portion does not counterpoise the reduction that takes place in the total quantity of the commodity; to say nothing of the greater relative dearness of the object of con- sumption to the consumer, and of his consequent impover- ishment in comparison. Suppose a murrain, or a bad system of management, to cause a scarcity of any kind of live stock, of sheep for instance, the price will rise, but not in proportion to the reduction of the supply; because in proportion as they grow dearer, the de- mand will decrease. If there were but one-fifth of the present number of sheep, it is very probable their price would ad- It is for this reason, that, in modern times, although wages stand in nearly the same relation to corn as they did four or five hundred years ago, yet the lower classes now enjoy many luxuries, that were then denied them; many articles of dress and household furniture, for instance, have suffered a real 164Book II= On Distribution Although there be no instance of a product falling to nothing in prize, and becoming worth po more than mere water, yet some kinds have undergone prodigious abatements; as fuel in those places where coal-pits have been discovered; and such abatements are so many approximations to that imagi- nary state of complete abundance, I have just been speaking of.

vance to no more than double; so, that in place of five sheep, which might together be worth 20 dollars at 4 dollars each, there would remain but one valued at 8 dollars. The diminu- tion of wealth in the article of sheep, notwithstanding the in- creased price, must therefore be computed at 60 per cent, which is considerably more than a moiety. 14 Thus, it may be affirmed, that every real reduction of price, instead of reducing the nominal value of produce raised, in point of fact, augments it; and that a real increase of price reduces, instead of adding to the general wealth; to say noth- ing of the quantum of human enjoyment, which in the former case is multiplied, and in the latter abridged. Besides it would be a capital error to imagine, that a real fall of price, or in other words, a reduction in the price paid to productive exer- tion, occasions as much loss to the producer as gain to the consumer. A real depreciation of commodities is a benefit to the consumer, without curtailing the profits of the producer. The stocking-maker, who for one dollar manufactures two pair of stockings instead of one, gains as much upon that sum as if it were the price of a single pair. The landed proprietor receives the same rent, although, by a better rotation of crops, the tenant should multiply and cheapen the produce of his land. Whenever, without additional fatigue to the labourer, means are devised to double the quantity of work he can per- form, the ratio of his daily gains is not reduced, although his product is sold at a lower price. 15

If different commodities have fallen in different ratios, some more, others less, it is plain they must have varied in relative value to each other. That which has fallen, stockings, for in- stance, has changed its value relatively to that which has not fallen, as butcher’s meat; and such as have fallen in equal proportion, like stockings and sugar in our hypothesis, have varied in real though not in relative value. There is this dif- ference between a real and a relative variation of price= that the former is a change of value, arising from an alteration of the charges of production; the latter, a change, arising from an alteration of the ratio of value of one particular commod- ity to other commodities. Real variations are beneficial to buyers, without injury to sellers; and vice versa; but in rela- tive ones, what is gained by the seller is lost by the purchaser, and vice versa. A dealer, having in his warehouse 100,000 lbs. of wool at 20 cents per lb., is worth 20,000 dollars; if, by reason of an extraordinary demand, wool should rise to 40 cents per lb., that portion of his capital will be doubled, but all goods brought to be exchanged for wool will lose as much in relative value as the wool will gain. A person in want of 100 lbs. of wool, who could before have obtained it by dis- posing, say of 20 bushels of wheat valued at 20 dollars, must now dispose of twice that quantity. He will lose the 20 dollars gained by the wool-dealer; and the nation be neither enriched nor impoverished. 17

This will serve to confirm and explain a maxim, which has been hitherto imperfectly understood, and even disputed by many writers, and sects of political reasoners; namely, that a country is rich and plentiful, in proportion as the price of commodities is low. 16 When sales of this kind take place between one nation and another, the nation, that sells the commodity, which has ad- vanced in relative price, gains to the amount of the advance, and the purchasing nation loses precisely to the same extent. Such a rise of price adds nothing to the general stock of wealth, existing in the world, which can only be enlarged by the pro- duction of some new utility, that may become the object of price or estimation; whereas, in other cases, one always loses what another gains= and so it is with all kinds of jobbing trans- actions, founded upon the fluctuations of prices one upon another.

For argument’s sake, I will put the matter in the most favourable light for those who dispute this maxim, and sup- pose them to urge an extreme case, namely, that, by succes- sive economical reductions, the charges of production are at length reduced to nothing; in which case, it is evident there can no longer be rent for land, interest upon capital, or wages on labour, and consequently, no longer any revenue to the productive classes. What then? Why then, I say, these classes would no longer exist. Every object of human want would stand in the same predicament as the air or the water, which are consumed without the necessity of being either produced or purchased. In like manner as every one is rich enough to provide himself with air, so would he be to provide himself’ with every other imaginable product. This would be the very acme of wealth. Political economy would no longer be a sci- ence; we should have no occasion to learn the mode of ac- quiring wealth; for we should find it ready made to our hands. In all probability, the time is not very distant, when the Euro- pean states, awake at length to their real interests, will re- nounce the costly rights of colonial dominion, and aim at the independent colonization of those tropical regions nearest to Europe; as of some parts of Africa. The vast cultivation of what are called colonial products, that would ensue, could not fail to supply Europe in the greatest abundance, and prob- 165Jean-Baptise Say, A Treatise on Political Economy ably at most moderate prices. Such merchants as shall then have stock on hand, purchased at the old prices, certainly will make a loss upon that stock; but their loss will be a clear gain to the consumer, who will for a time enjoy this kind of produce, at a price inferior to the charge of production; the merchants will gradually replace their dear- bought produce, by other of equal quality, raised with superior intelligence; and the consumer will then reap the advantage of superior cheapness and multiplied enjoyment, with no loss to any body; for the merchant will both buy and sell cheaper; and human industry will have made a rapid stride, and opened a new road to affluence and abundance. 18 in value; but having itself lost one-half its value, it is sold for but 2 oz.; that is to say, for twice as much silver as at the former period.

Such is the effect of real and of relative variation in the price of silver. But, independently of these variations, there have been vast alterations in the denomination given, at different periods during the interim, to the same quantity of pure metal, which should make us place very little reliance on the accu- racy of our estimate of real and relative variation. In 1514, an ounce of silver would purchase 1 setier of wheat, which is now worth 4 oz.; this was a relative variation of silver to wheat. This quantity of silver then was denominated 30 sous; 19 and, had the same quantity of silver still preserved the same de- nomination, 4 oz. would now be called 120s. or 6 fr. Thus, wheat at 6 fr. the setier would have risen in relation to silver, or silver have fallen in comparison with wheat. There would, however, have been no nominal variation. But 4 oz. of silver are now denominated 24 fr. instead of 6 fr.; so that there has been a nominal as well as a relative variation, — a mere ver- bal alteration. The real and relative variation has been in the ratio of 4 to 1; but the nominal value of money has declined in the ratio of 16 to 1, since 1514.


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