BOOK III. The utility can be the sole element ope rative, only when the supply is absolutely limited. Exempli former in stance. article confers upon the individual who purchases it. A person buys a coat for three pounds, because at this price a coat of the quality he requires is offered to him; but three pounds does not represent the use which the person who purchases the coat derives from it, for if he had the money he would no doubt give thirty guineas, rather than be without a coat; therefore, in this case, the element U only exerts a small portion of its whole force in determining the price of a coat. The price is in this case almost entirely regulated by D, or, in other words, by the difficulty of obtaining the coat. As, however, before remarked, U, although only partially operative, can never be entirely absent. The example just quoted illustrates the manner in which the two elements U and D combine to produce the price of a commodity. U is in fact almost invariably only partially operative; this is the general rule, for the case may be regarded as a very rare exception when U as well as D both exert their full influence upon the price of an article. When such a case does occur, the purchaser of a commodity is guided, in the price which he offers for it, solely and entirely by the consideration of the use he expects to derive from the article. This can only happen when the supply of a commodity is absolutely limited. To explain this still further, let us revert to our original ed by the example, which supposes that three persons, A, B and C, are each anxious to purchase some particular picture by Turner; C will not give more than 1,500 guineas for it, B not more than 1,900, and A ultimately purchases it at a price between 1,900 and 2,000 guineas. With regard to C and B, 1,500 guineas and 1,900 guineas represent the value in use, which C and B respectively place upon the picture. This, therefore, is the monetary value of the element U, according to the individual opinion of C and B. In A's estimation, the value of the element U is greater, for to him the picture has a value of 2,000 guineas. As before remarked, the price which the picture actually realises will be some amount between 1,900 and 2,000 guineas, because if the price sank below the inferior limit there would be a greater demand for the picture than the supply; if the price exceeded the superior limit the demand would entirely cease, because this superior limit denotes the greatest value in use placed upon the picture by the person who is most anxious to possess it. To recapitulate, therefore, it may be stated, that the following principle regulates the price of all those commodities whose supply is absolutely limited. The demand depends upon the price; the price must be such that the demand will exactly equal the supply. The value in use which an individual may happen to set upon some particular article is the result of various motives, which it is almost impossible to analyse. Thus to one individual, A, the value in use of one of Turner's pictures is 2,000 guineas, for A would rather give this sum than be without the picture. To B, however, the value in use of the same picture is only 1,900 guineas. It is quite evident that various motives may induce a greater value in use to be attributed to this picture by A than by B; A may be a wealthier man. than B, and money may consequently not be of so much importance to him. A may perhaps also have a superior taste for art, which makes his appreciation of a painting greater than that of B. A may also be influenced by a hope of future gain, since he may expect to realise considerable sums by granting permission to have the picture engraved, or he may think that after a few years have elapsed the demand for the works of the particular artist may so increase as greatly to enhance the value of the picture. In every case, a great variety of motives operate upon different individuals in determining the value in use which each may place upon any particular article. The articles, the supply of which is absolutely limited, are so few in number, that it may be thought that the above example has been too minutely investigated. It is, however, somewhat curious that those principles of economic science which are apparently the most simple are usually treated with the greatest obscurity. With few exceptions, political economists have failed clearly to explain the principles which regulate the price of such a commodity as the one just considered. In the succeeding chapter the causes will be analysed which determine the price of those commodities comprised in the second of the three classes previously enumerated at the commencement of this chapter. BOOK III. CH. II. Value in use cannot be ana lysed. The value of the class absolutely limited is often obscurely ex of articles plained. CHAPTER III. ON THE PRICE OF AGRICULTURAL AND MINERAL PRODUCE. BOOK III. CH. III. Agricultu ral produce is subject to consider. able fluctuations in price. Determi nation of the ordi nary profits of farming. IT [T is desirable to devote a separate chapter to the consideration of the laws which determine the price of agricultural produce. In all questions relating to price, a broad distinction must be drawn between agricultural and manufactured produce. As previously stated, an increase in the demand for the former usually causes an advance in price: whereas the supply of manufactured commodities can be, as a general rule, increased without producing any material advance in their price. Many causes make the price of agricultural produce vary from year to year. Our corn markets are influenced not only by the productiveness of the last harvest, and by the prospects of the next, but they are also sensibly affected by the good or bad crops of other countries. Since so many circumstances cause a great fluctuation in price, it may perhaps appear impossible to establish any general laws with regard to the price of agricultural produce. It will however be shown that the variations in the price of such produce, though constant and great, obey certain laws with strict regularity. No farmer will rent land unless he believes that the price which the produce realises will, on the average of years, suffice to pay his rent and all the expenses of cultivation; a surplus must also remain adequate to remunerate him, not only for the capital he has invested in the business, but also for his own labour of superintendence. When the farmer is fairly remunerated for his labour and capital he may be considered to realise the ordinary profits of trade. It is quite impossible that the prices in any particular trade can permanently be so low as to prevent these ordinary profits being realised; because no traders would be satisfied to continue investing their capital in a business if much smaller profits were realised from this business than from others. From these considerations the following principle may be deduced-the price of agricultural produce must be such as will enable farmers on the average of years to realise the ordinary profits of trade. The profits of the farmer have above been described as the surplus which remains when all the expenses of cultivation have been deducted from the pecuniary value of the annual produce of a farm. These expenses include rent, the wages of labourers, the purchase of new implements, the wear and tear of old implements, the loss which arises from the ordinary casualties to which live stock is liable, &c. It must be evident that any cause which increases the farmer's expenses must diminish his profits. Suppose the average annual value of the produce raised from a farm is 2,000l., and that the expenses of cultivation are 1,500l., the farmer having to pay 500l. in rent, 8001. the wages of his labourers, and the remaining 2001. being required for various other necessary expenses, such as the purchase of implements, &c. Deducting the 1,500l. from the 2,000l., which is the annual average value of the produce of the farm, it is evident that the 500/ which remain would be the farmer's profits. Now let it be further assumed, that this 5007. is a fair remuneration to the farmer for his capital and labour of superintendence. Consequently, when his profits are 5007., he may be considered to realise the ordinary profits of trade. In this case, the prices obtained for the produce cause everything to be in a state of perfect adjustment. It, however, frequently happens, that the rent of land in the course of a few years considerably rises. Let us enquire what will occur if the rent of this farm is increased from 500l. to 700l. a year, whilst the price of agricultural produce, and the expense of cultivating the farm, remain unchanged. This increase of rent would reduce the farmer's profits from 500l. to 300l.; but it has been above assumed, that when his profits were 500l. he obtained no more than the ordinary remuneration for his capital and labour of superintendence. He consequently receives less than the BOOK III. CH. III. They are. determined by by the average value of the produce after deducting the rent. Effects of a rise of rents. BOOK III. CH. III. Cause of a rise of rents as deduced from Ricardo's theory of rent. ordinary remuneration when his profits are reduced to 3001. He therefore virtually cultivates his farm at a loss, because he would secure a larger income if he applied his capital and energy to some other business. Under these circumstances, farmers would be induced gradually to leave their farms, and the land would be thrown out of cultivation. But as it is necessary that the people should be fed, the land must be cultivated. It may therefore be concluded, that neither rent, nor any other items of the expense of cultivating land, such as cost of labour, can be increased, unless the farmer receives a compensating remuneration from a rise in the price of agricultural produce. Let us now, however, revert to Ricardo's theory of rent, in order to understand how a rise in rent is produced. This This theory describes rent as a price which is paid for the use of an appropriated natural monopoly. monopoly arises from the fact, that the supply of fertile land which can be brought under cultivation in any particular country, cannot be increased beyond certain limits. The difference between the rents paid for two different farms represents the excess of the pecuniary value of the one farm above that of the other, whether derived from greater fertility or from superior advantages of situation. The land of each country varies so greatly in fertility, that every country possesses some barren tracts which are too poor to be cultivated, even if granted rent free. England has soils of every degree of fertility, from the barrenness of her Yorkshire and Devonshire moors, to the rich luxuriance of the Sussex wolds. There will consequently always be some land which may be considered to be on the margin of cultivation. Such land will pay for cultivation if let at a merely nominal rent. Hence Ricardo's theory of rent defines the rent of any particular land to be the pecuniary measure of the degree by which it exceeds in productiveness that land which is just upon the margin of cultivation. It is evident that the margin of cultivation descends as the population of the country increases, for it becomes necessary gradually to resort to less productive1 land, in order to supply a larger demand for food. But as 1 The epithet "productive" here includes fertility and advantages of situation. |