50 VALUE General cases enumerated and others may, however, be deduced formula from a general formula. Let E^ represent the total ex- " f penses of production of commodity A. Let Q l be the produc- quantity of fixed capital employed, and let i be the rate tion. of Avear and tear per annum, so that the loss is QJr^ Let P l be the rate of profits per cent per annum which must be obtained on the whole capital. Let Q. 2 be the number of labourers, and w z the rate of wages per annum. Let ^ represent the time taken for production reckoned in years (^ may be less than unity, thus tJQ 2 would be weeks). Then the total expenses of production are This simply means that the commodity must return in the normal case profits on the fixed capital with repair of waste, and also the wages expended (the amount depend ing on the number of labourers and the rate of wages), with profit on the circulating capital over all the time necessary to complete production. In some cases, it may be observed, it would be necessary to take t differently for the fixed capital and the labour or circulating capital. Then, in a similar way E^ the expenses of production of B, may be expressed : Thus the relative values of A and B will be found by comparing the aggregate of these several elements ex- Changes pressed on the right hand sides of the equations. It will in re- n0 w be evident on what a number of variable elements lative relative values must depend, even when we consider that the commodities can be indefinitely increased by the proper expenditure of capital and employment of labour. With the progress of invention and the develop ment of industrial competition, constant changes are taking place in the various elements, and in the somewhat complicated formula given certain practical elements have been eliminated. Even if we suppose, for the sake of simplicity, that P l and P 3 are equal, as also iv. 2 and w and ^ and t. 2 , that is, if we suppose a uniform rate of wages and profits, and the same amount of time required, still any change in these general rates will affect relative values, owing to the different proportions in which fixed and circulating capital may be employed in the two cases. Thus, for example, we arrive at Mill s statement : " All commodities in the production of which machinery bears a large part, especially if the machinery is very durable, are lowered in their relative value when profits fall." And it will be found on trial that by making various supposi tions as to the identity of certain of the elements, or as to their disappearance, many other causes of changes in rela tive values may be deduced. Two important practical conclusions of a general character may be drawn from this analysis. (1) Relative values are liable to constant dis turbances, and accordingly, since relative prices tend to be adjusted to relative values, relative prices must be con stantly changing. (2) It is extremely difficult to measure changes in the value of the monetary standard, or move ments in the general level of prices, or variations in the purchasing power of money incomes. Value These difficulties are further increased by the importance and rent. O f the group of commodities which can only be increased (the arts of production remaining the same) at an increas ing cost, and which are placed by Mill under a third law of value. The most important examples of this &vr are agricultural and mining produce. In order to make the principles on which this law depends clear and intelligible, it is necessary to proceed at first by the abstract method so well described by Cairnes (Logical Method of Pol. Econ., 2d ed., London, 1885). Assume then that there is an isolated country and that its agricultural produce consists of corn. Then at any given stage of the growth of wealth and population the amount of corn may be increased (the art of agriculture remaining stationary) either by taking into cultivation inferior lands or else by cultivating with greater care and expense the lands already in cultivation. But in either case what is known as the law of diminishing return would come into play, and the additional supply could only be obtained at an additional cost. It may be assumed that at any stage of development the cultivation would be carried to such a point as to give just the ordinary return to capital on the last "dose" of capital expended. Further it. cannot be carried, for no farmer will work at a continuous loss ; and competition will insure that it is carried so far, for, if this last application of capital yields ordinary profit, the former " doses " must yield more, that is to say, rent as well as profit. It thus becomes manifest that, under the conditions supposed, the extent to which " the margin of cultivation " will extend depends upon the price of the produce, and in the normal case The price must be equal to the expenses of production of that part which is produced under the most unfavourable circum stances. This then is the third law of value, from which the economic theory of rent is an immediate deduction. For, if the last dose obtains just a sufficient return, the former doses must yield more, and the sum of these extra profits is rent. It thus appears, also, that rent depends upon price and not price upon rent. 1 The pure theory of rent is arrived at by making certain Qualifi- hypotheses and abstractions, and accordingly it must not cations be applied to particular practical cases without further of l nire consideration. The theory certainly indicates the effect of very important causes, but requires in practice a certain amount of qualification. (1) The essence of the theory is that the return to each dose of capital applied can be separated, and that the application of capital will cease when the last dose yields only ordinary profits ; and no doubt it is roughly true to say that a farmer will discover on trial at what point he should cease applying capital, and that this will depend upon the price of the produce. At the same time, however, it is quite possible that a farmer who owns the land which he tills may find it ad vantageous to carry cultivation to a further pitch than if he only rented his land. For he will apply his own labour and capital at a less return on his own land. There can be little doubt that very many important improvements made by landowners have yielded less than the ordinary rate of profit, just as peasant proprietors obtain a poor return by way of wages for their own labour. A land owner cultivating his own land has the whole margin of economic rent to fall back upon, but a farmer has to pay his rent as a first charge. Thus it is possible, provided always that the land is cultivated in both cases with the same skill, that food would be cheaper if all the land were cultivated by the owner and not by tenants farming for a profit, and thus the fact that the American farmers pay no rent may account partially for the lower prices at which they sell their corn. (2) Again, the pure theory takes no account of the size of the portions into which the land is divided, nor of the kind of crops which are grown. But, when most of the land of a country is rented, both of these factors have to be considered, and it may be more convenient to the landowner to let the land with certain restrictions, which again indirectly operate on the price. (3) It has been well observed by Passy 2 that the principal 1 Aii excellent account of the economic theory of rent, in which recent criticisms from different points of view (e.g., by P. Leroy- Beaulieu, Henry George, &c.) are examined, is Land and its Rent, by Francis A. Walker, London, 1884.
2 Syslbnes de Culture en France.