We have seen, § 106, that the cost of production of a commodity, considered from the point of view of individual economy, may be reduced to the payment for the use of the requisite productive forces rented or loaned to the producer. Hence every great variation in the relation of the three branches of income to one another must produce a corresponding variation in the price of commodities.[197-1] When, for instance, the rate of wages increases because they absorb a larger part of the national income, those commodities in the production of which human labor, directly employed, is the chief factor, must become dearer as compared with others. Whether this difference shall be felt principally by the products of nature or of capital (compare § 46 seq.), depends on the causes which brought about the enhancement of the rate of wages. Thus, a large decrease of population, or emigration on a large scale, will usually lower rent as well as the rate of interest;[197-2] an extraordinary improvement made in the art of agriculture, only the former; and an extraordinary increase of capital, only the latter. The usual course of things, namely that the growth of population necessitates a heavier draft on the resources of the soil, and thus causes rents to go up, and makes labor dear, must have the effect of raising the price of the products of labor and of natural forces, as compared with the products of capital; and all the more as it causes the rate of interest to suffer a positive decline. The products of mechanical labor become relatively cheaper; and cheaper in proportion as the producing machinery is more durable; therefore in proportion as, in the price of the services it renders, mere interest preponderates over compensation for its wear and tear.[197-3]
Let us, for a moment, leave ground-rent out of the question entirely, and suppose a nation's economy whose production is conducted by eleven undertakers employed on different commodities. Let us suppose that undertaker No. 1 uses machinery exclusively and employs only as many workmen as are strictly necessary to look after it, that undertaker No. 2 has a somewhat larger number of workmen and a somewhat smaller amount of fixed capital, etc.; and that this increase in the number of workmen and decrease in the amount of fixed capital continues until we reach undertaker No. 11, who employs all his capital in the payment of wages. If now, the rate of wages were to rise, and the interest on capital to fall in the same proportion, the commodities produced by undertaker No. 11 would rise most in price, and those of No. 1 decline most. In the case of undertaker No. 6, the opposing influences would probably balance each other, and if the producers of money belonged to this sixth class, it would be very easy to get a view of the whole change in the circumstances of production, in the money-price of the different commodities.[197-4]
[197-1] Compare Adam Smith, I, ch. 7, fin. This relative increase or decrease of one branch of income at the expense or to the advantage of another, should be distinguished from the absolute change of its amount which does not affect the cost of production. Thus, for instance, when the rent of land indeed increases, but in consequence of a simultaneous improvement in agriculture, a decline in the rate of interest, and an enhancement of the price of wheat is avoided (§ 157). So, too, when individual wages increase on account of the greater skill and energy of labor, but the same quantity and quality of labor do not become dearer (§ 172 seq.); and lastly, when the rate of interest remaining unaltered, the receipts of capitalists are increased by reason of an increase of their capital (§ 185).
[197-2] After the great plague in the 14th century in England, when all the products of labor became dearer, skins and wool fell largely in price: Rogers, I, § 400.
[197-3] Anyone who carefully reads all the five divisions of Ricardo's first chapter will soon find that this great thinker rightly understood the foregoing, although the great abstractness and hypothetical nature of his conclusions might easily lead the reader astray. The proposition which closes the second part, and which has been so frequently misunderstood by his disciples, can be maintained only on the supposition that the prices of all commodities hitherto have been made up of equal proportions of rent, capital and wages. But think of Brussels lace and South American skins!
[197-4] Compare J. Mill, Anfangsgründe der polit. Oekonomie, Jacob's translation, § 13 ff.; McCulloch, Principles, III, 6. Adam Smith was of opinion, that higher wages enhanced the price of commodities in an arithmetical ratio, a higher rate of interest in a geometrical one (I, ch. 9). Similarly Child, Discourse of Trade, 38. This last Kraus, Staatswirthschaft, better expresses by saying that an increase in the rate of interest operates in the ratio of the compounded interests.
REMEDY IN CASE ONE FACTOR OF PRODUCTION HAS BECOME DEARER.
When one of the three branches of income has grown as compared with the others; in other words, when the factor of production which it represents has become relatively dearer, it is to the interest of the undertaker and of the public, that it should be replaced where possible by another and cheaper productive force. (§ 47.) On this depends the advantageousness of intensive agriculture (high farming) in every higher stage of civilization. There land is dear and labor cheap. Hence, efforts are made to get along with the least amount of land-surface, and this minimum of land is made more productive by a number of expedients in cultivation, by manuring it, by seed-corn, etc., of course also by the employment of journeymen laborers, oxen, etc. And since the price of land is intimately connected with the price of most raw material, remains are here saved as much as possible, often with a great deal of trouble.[198-1] In a lower stage of civilization, such savings would be considered extravagance. As land is here cheap, and capital dear, it is necessary to carry on the cultivation of land extensively; that is, save in capital and labor, and allow the factor nature to perform the most possible. The clearing up of untilled land, or the draining of swampy land etc., would be frequently injurious here; for it would require the use of a very large amount of capital to obtain land of comparatively little value.
In large cities, it is customary to build houses high in proportion to the dearness of the land.[198-2] Thus, in England, where the rate of interest is low and wages high, labor is readily supplanted by capital. In countries like the East Indies or China, the reverse is the case. I need only call attention to the palanquins used in Asia instead of carriages; to the men who in South America carried ore down eighteen hundred steps to the smelting furnaces,[198-3] and, on the other hand, to the "elevators," so much in favor in England, which are used in factories to carry people from one story to another inside to save them the trouble of going up stairs.[198-4]