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value, and the formula is both true and convenient. All the same, it is merely a particular instance of the universal law of Marginal Utility. In all cases the marginal utility of the last product economically produced determines the value of the means of production; these means of production then become the intermediate standard; and the value of goods produced from them cannot, in the long run, be higher than the value got from the marginal product.

The practical working of the law may be seen from a personal experience of the writer. In the cotton thread trade there was for years a demand for a thread which should be a fair substitute for the much more expensive article, sewing silk. The prices of cotton thread and of silk thread respectively gave housewives and shopkeepers a rough guide to a subjective valuation, and the figure put upon this demand was something like 20/. (It could not be more for the reason that no cotton substitute was able to take the place of silk in any but a few of its least important uses.) This price, offered by shopkeepers to travellers, told the cotton-thread manufacturers what they could offer to cotton spinners for superior yarns, and what they could afford for more expensive chemicals and polishing machinery. As a consequence, after many experiments the silk substitute was produced, and sent into the market at a price of 20/ per gross. But once those superior yarns were made, the cotton spinners, increasing the production of them, found other outlets. Before long the thread makers saw that this silk substitute was not the marginal product of those particular yarns: that in fact other cotton threads of lower quality price were being made from the same yarns. These yarns then entered into the cost of silk substitute with the predetermined lower value given them by the other finished goods, and in a short time the price of the silk substitute fell from 20/ to 18/, in conformity with the value put upon the yarns by the new marginal product. The same phenomenon occurs whenever a demand for a new article or a modification of an old one arises, and is interpreted by the enterprise of manufacturers.

If, finally, we take the case of those most many-sided productive goods, Iron and Labour, the proof of our theory may be considered fully tested.

Leaving out complimentary factors, which do not disturb the action of the law and would complicate our statement, suppose that iron is the sole productive good in the making of those various iron wares we find selling at different prices in the ironmongers' shops. The general opinion is that it is the price of iron-disregarding other factors -that determines the price of iron wares, from nails to kitchen ranges. And what we have to prove is that the conduction of value really runs in the opposite directionfrom nails and ranges to raw iron.

Suppose for the moment that the prices obtainable for these products range from 40/ to 48/ for a given unit. That is to say: the ton of iron, when manufactured into, say, nails fetches 40/, when manufactured into other articles, it fetches respectively 42/, 44/, 46/, 48/. These prices are the result of the condition of the market at the moment. The manufacturers of these products-we shall call them respectively A, B, C, D, and E-represent the demand for iron, and the price they will be able to offer for iron depends on the prices obtained by these articles.

On the other hand, the supply of raw iron held in store will naturally pass to the most capable buyers-the most capable manufacturers of iron wares-at the valuation of the last buyer. Suppose the stocks of iron are sufficient to meet the demand of E, D, and C, the valuation of C, the last buyer, will determine the price of iron at 44/ per ton. So far all has gone to show that it is the iron wares-through the marginal product-which determine the price of the productive good, iron.

But now we come to a feature which gives countenance to the old theory. So long as the prices of iron wares— -always assuming that iron is the sole productive group employed in the manufacture-range from 40/ to 48/, while the market price of iron stands at 44/, it is a proof that competition has not done its work. What naturally follows? Producers D and E who are getting respectively 2/ and 4/ advantage over cost will increase the output of their par

ticular iron wares till over-supply brings down the price to 44/. On the other hand, producers A and B, who get respectively 4/ and 2/ less than cost, will curtail their production, till decrease of supply raises their prices to 44/ Thus from above and from below, competition is always levelling prices to the cost of production. Here it is quite true that cost of production imposes itself on product. What is forgotten is that the cost of production is itself first determined by the marginal product.

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Thus we have found that what determines the value of productive goods where the product is one single good directly connected with them, and what determines it in the most complicated cases where the conduction of value is, first, to means of production and, then, back again to product, is always the marginal utility, the utility of the marginal product. As the vineyards of Tokay get their value from the wine of their grapes, and as cotton gets its value from the bare backs it covers, so do iron, coal, and labour get their value in the last resort-far as may be the course from post to finish-from the last employment into which they enter.

But the emphasis necessary to prove a difficult proposition may have given the impression that the present law is put forward in opposition to the old law of costs of production, and that both laws cannot be true. It may, then, be as well to remember that the whole of this book is a quest for the fundamental law of value. In the complicated circumstances of modern industry it is not easy to see the real nexus of cause and effect. In a developed market, where production speculates on demand, value naturally assumes the appearance of being determined beforehand. Human wants are tempted, as it were, instead of giving the initiative. Thus the impression is easily got, and with difficulty got rid of, that human want will pay the price which production dictates, the fact being that production must, in the long run, conform to the nature and measure of human want. And thus also, I am afraid, comes the idea, certainly common among the employing classes, that wages are dictated by them from above, instead of being produced by

the labourers themselves-an idea degenerating in many cases into the belief that combinations of workers to secure their share in the product are illegitimate interferences with capital.

What is contended is that the Law of Cost is a good working secondary law as regards articles reproducible at will under large and organised production; that is, of course, as regards the vast majority of goods produced. But it has always been taught by economists that it did not hold outside these cases. On the other hand, the Law of Margina! Utility is claimed as the universal and fundamental law of value. It has not been difficult to prove its validity in the simpler cases, and if now, in the later chapters, our law has been shown to be the real background of the empirical Law of Cost, the contention of the book is justified.

READING XIX.

THE LABOR THEORY OF VALUE.

An erroneous theory with respect to the determination of value which has acquired considerable importance because of its being much used by the advocates of socialism, is known as the labor theory of value. It teaches that the comparative values of objects are determined exclusively by the comparative amounts of labor entering into them. Thus, if a certain kind of watch costs forty days' labor while a certain kind of stove costs five days' labor, then the watch will be worth just eight times as much as the stove. In interpreting these statements, however, the student must guard against one very common misunderstanding. The word labor in the theory before us includes all the labor spent on the commodity in question, past labor as well as present, the labor spent in getting out the gold or iron ore, in transporting them to where they are wanted, preparing tools to work them, putting up buildings to work in, etc., etc. To illustrate, if the material for a coat costs $15, and the labor of making it costs $10, while the material for a desk costs $2 and the labor of making it costs $10, the socialist does not say that the coat and the desk have the same labor cost and so will have the same value. The quantities of labor spent on the materials for the coat and the desk must be taken into account as well as the quantities of labor spent in making desk and coat. The coat, therefore, should be worth $25; the desk $12.

But perhaps the reader will now wonder wherein advocates of the labor theory differ from other people. If they take into account the material of which the coat is made

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