[770] Stuart Mill admitted that trade unions might modify the relations between demand and supply, forgetting for the moment that this meant a contradiction of the Classical theory.
The unions might limit the number of available men. He feared that this would result in high wages for the small number of organised labourers and in low wages for the others. They might check the birth-rate, their members becoming accustomed to such a degree of comfort and well-being as would raise their standard of life. He was always a strict Malthusian.
[771] See the quarterlies of Harvard and Columbia. It was an American, however, Francis Walker, in his Wages Question (1876), who did more than anyone to destroy the old wage fund theory.
[772] “The cost value of a thing means the cost value of the most costly portion of it.” (Principles, Book III, chap. 6, § 1, prop. 7.)
“The extra gains which any producer or dealer obtains through superior talents for business or superior business arrangements are very much of a similar kind. If all his competitors had the same advantages, and used them, the benefit would be transferred to their customers through the diminished value of the article: he only retains it for himself because he is able to bring his commodity to market at a lower cost while its value is determined by a higher.” (Ibid., Book III, chap. 5, § 4.)
Senior had already emphasised one important difference between agricultural and industrial production, namely that whilst the law of diminishing returns operates in the former case, the law of increasing returns is operative in the second. In other words, the cost of production diminishes as the quantity produced increases. The result is, as Mill points out elsewhere, that the industrial employer is anxious to reduce the sale price in order to produce more and to recoup himself for a reduction in price by a reduced cost of production.
[773] Ricardo, moreover, gives an exposition of the advantages of international trade in terms that Bastiat might have adopted. “Under a system of perfectly free commerce each country naturally devotes its capital and labour to such employments as are most beneficial to each. This pursuit of individual advantage is admirably connected with the universal good of the whole. By stimulating industry, by rewarding ingenuity, and by using most efficaciously the peculiar powers bestowed by nature, it distributes labour most effectively and most economically: while by increasing the general mass of productions it diffuses general benefit and binds together, by one common tie of interest and intercourse, the universal society of nations throughout the civilised world. It is this principle which determines that wine shall be made in France and Portugal, that corn shall be grown in America and Poland, and that hardware and other goods shall be manufactured in England.” (Ricardo, Works, p. 75.)
[774] The following apparent paradox may be deduced from Ricardo’s theory. A country is wise in importing not only those commodities which it can only produce at a disadvantage as compared with its rivals, but also those goods in which it has a distinct advantage in the matter of production, though not so great as the advantage enjoyed in some other case. Under those circumstances it is better that it should produce that product in the making of which it has the greater advantage and exchange it for some other product in which it has less.
“Two men can both make shoes and hats, and one is superior to the other in both employments; but in making hats, he can only exceed his competitor by one-fifth, or 20 per cent., and in making shoes he can excel him by one-third, or 33 per cent. Will it not be for the interest of both, that the superior man should employ himself exclusively in making shoes, and the inferior man in making hats.” (Ricardo, Works, p. 77, note.)
And so England might find it advantageous to exchange her coal for French cloths, although she may be able to produce those cloths cheaper herself.