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VALUE (0. Fr. value, from valoir, to be worth, Lat. valere ), in general usage a term signifying worth. It has, however, a special meaning in economics, which is the subject of this article.

In some departments of economic theory it is still convenient to use as the basis of the exposition the opinions of J. S. Mill, because he embodied in his treatise on Political Economy in a remarkable manner nearly everything of importance from the theoretical standpoint in the work of his predecessors, and to a considerable extent subsequent advances in economic science have been made by way of criticism or development of his version. This observation is especially true of the theory of value. In this subject Mill had digested the mass of previous learning with such effect that he commences his treatment with the remark: "Happily there is nothing in the laws of value which remains for the present or any future writer to clear up; the theory of the subject is complete. The only difficulty to be overcome is that of so stating it as to solve by anticipation the chief perplexities which occur in applying it." Curiously enough this part of economic theory was the first to receive at the hands of Jevons and others serious modification, the nature and need for which can, however, only be properly understood after a preliminary examination of the old orthodox position.

As regards the question of definition, Mill starts with the distinction somewhat loosely drawn by Adam Smith between value in use and value in exchange. When we say that a thing possesses a certain value in use, we say in more words than are necessary that it is useful: that is to say, value in use is an awkward phrase for utility. The conception of utility (see Wealth) is the most fundamental in economics. It is held by Mill to mean the capacity to satisfy a desire or serve a purpose, and thus "useful," the corresponding adjective, is as fitly applied to ices as to steam-engines. It has always seemed rather paradoxical to apply the term utility (with its adjective useful) to things which the common sense of mankind (or of any representative section) considers to be deleterious or trivial. Accordingly V. Pareto has proposed the term ophelimite (Gr. c'00 Xipos) for this wider interpretation of "utility." But utility in this sense is obviously much wider than value, and Mill proceeds to say that by value in political economy we should always understand exchange value. This language seems familiar and definite, but on analysis it is clear that exchange implies two terms at least. If we say that a thing can be exchanged, we imply that it can be exchanged for something else, and when we speak of the exchange value of a thing we must directly or indirectly refer to the value of some other thing or things. In practice in modern societies this other thing is standard money: an Englishman who talks of the exchange * value of anything means the number of pounds sterling (or parts thereof) which it will fetch in the market or be appraised at by a fair arbitrator. On this view then the value of a thing is its price; but a very little experience in the theory or history of economics will show that it is often desirable, and sometimes necessary, to contrast value with price. "At the same time and place," says Adam Smith, "money is the exact measure of the real exchangeable value of all commodities. It is so, however, at the same time and place only." If, however, the exchange value of a thing is not its price, what is it? According to Mill, "The value of a thing is its general power of purchasing, the command which its possession gives over purchasable commodities in general." But what, we may well ask with Mill, is meant by command over commodities in general? Are we to understand the complete national inventory of wealth, or the total of things consumed in a given time by a nation? Obviously such conceptions are extremely vague and possibly unworkable. If, however, we make a selection on any representative principle, this selection will be more or less arbitrary.

The elaborate work of C. M. Walsh on the Measurement of General Exchange Value (190t) gives a critical analysis of the views of the chief writers on the subject and indicates the advances made since Mill. Mill is to some extent aware of the difficulties, although he never subjected them Lo a rigorous analysis; and he points to the obvious fact that a coat, for example, may exchange for less bread this year than last, but for more glass or iron, and so on through the whole range of commodities it may obtain more of some and less of others. But in this case are we to say that the value of the coat has risen or fallen? On what principles are we to strike an average? The attempt to answer these questions in a satisfactory manner is at present engaging the attention of economists more than any other problem in the pure theory. Mill, however, instead of attempting to solve the problem, frankly assumed that it is impossible to say except in one simple case. If, owing to some improvement in manufacture, the coat exchanges for less of all other things, we should certainly say that its value had fallen. This line of argument leads to the position: "The idea of general exchange value originates in the fact that there really are causes which tend to alter the value of a thing in exchange for things generally, that is, for all things that are not themselves acted upon by causes of similar tendency." There can be no doubt as to the truth of the latter part of this statement, especially if we substitute for one commodity groups of commodities. But it is doubtful if the idea of general exchange value arises from a consideration of the causes of value; and later writers have constantly emphasized the distinction between any change and the causes of the change. Following out the idea in the last sentence quoted, Mill goes on to say that any change in the value of one thing compared with things in general may be due either to causes affecting the one thing or the large group of all other things, and that in order to investigate the former it is convenient to assume that all commodities but the one in question remain invariable in their relative values. On this assumption any one of them may be taken as representing all the rest, and thus the money value of the thing will represent its general purchasing power. That is to say, if for the sake of simplicity we assume that the prices of all other things remain constant, but that one thing falls or rises in price, the fall or rise in price in this thing will indicate the extent of the change in its value compared with things in general. There can be no doubt that, in discussing any practical problem as to the changes in the relative value of any particular thing, it is desirable to take the changes in price as the basis, and much confusion and cumbrousness of expression would have been avoided in the theory of the subject if, to adapt a phrase of Cournot's, money had by Mill and others been used to oil the wheels of thought, just as in practice it is used to oil the wheels of trade.

By this method of abstraction the treatment of the theory of value becomes essentially an examination of the causes which determine the values of particular commodities relatively to a standard which is assumed to be fixed.

Cournot compares this hypothetical point of the standard of value to the "mean sun" of astronomers. In order that anything may possess value in this sense, that it may exchange for any portion of standard money or its representatives, it is evident on the first analysis that two conditions must be satisfied. First, the thing must have some utility; and secondly, there must be some difficulty in its attainment. As regards utility, Mill apparently regards it simply as a kind of entrance examination which every commodity must pass to enter the list of valuables, whilst the place in the list is determined by variations in the degree of the difficulty of attainment. Later writers, however, have given much more prominence to utility, and have drawn a careful distinction between final or marginal and total utility. Following Jevons, most economists have adopted this distinction, and the writers of the Austrian school in particular have made it of vital importance, and by attempting to introduce it when the conception is inappropriate have often caused much unnecessary complexity. The distinction is certainly useful in throwing light on the advantages of, and motives for, exchanging commodities. Suppose that on a desert island A possesses all the food, so many measures - (say) pecks - of corn, and B all the drinking water, so many measures - (say) pints. Then A, taking into account present and future needs, might ascribe to the possession of each portion of his stock so much utility. The utility of the first few pecks of corn might be regarded as practically infinite; but, if his stock were abundant, and a speedy rescue probable, the utility ascribed to successive portions would be less and less. In the same way B might make an estimate of the utility of successive measures of the drinking water. Now, if we regard only total utilities from the point of view of each, both are infinite. If an exchange were made of the total stocks of both men, the position of neither would be improved. But, if A sets aside (say) half his stock, then it may well happen that he could advantageously exchange the rest against part of B's drinking water. In precisely the same way B might set aside so much of his stock for his own consumption, and then the utility of the remaining portion would be much less than the utility he would gain if he obtained in exchange A's surplus. Thus, if the two men exchange their remainders, both will gain in utility; in the case supposed they will make an enormous gain. For simplicity we have supposed each stock to be divided into two portions, but nothing has been said of the principles of the division. It is, however, clear that A can advantageously go on exchanging a measure of corn for a measure of water so long as by doing so he makes a gain of utility. Conversely B can advantageously offer water so long as he gains greater utility from the corn received in exchange. The utility of the last portion of corn retained by A (or of water by B) is the final or marginal utility ofthe stock retained, and similarly the utility of the last measure obtained in exchange may be called the final utility of the stock purchased. A will have done his best if these utilities are just equal. For at this point, if he were to offer (at the same rate of exchange) more corn, it is clear that he would lose more utility than he would gain. Mutatis mutandis, the same reasoning applies to B; and thus the rate of exchange will be so adjusted as to bring about this equality of marginal utilities on both sides. It follows that, if A gains on the last portion received just as much utility as he loses on the portion parted with, on all the other portions received he will have gained more than he lost. The total of these gains over successive portions has been called by Professor Marshall consumer's rent or surplus.

However useful this theory of marginal utility may be in throwing light on the fundamental nature of value, and on the advantages of exchange, it is obviously too abstract - to be applied to the explanation of the relative values of of the endless series of commodities and services which constitute a nation's stock of valuables at any time. For this purpose we must resort to the law of supply and demand,. which requires a very careful statement owing to the ambiguities of popular language. Mill has succeeded in getting rid of most of these ambiguities, but he has hardly given due emphasis to the fundamental character of the law. He argues, after the brief consideration allotted to the element of utility, that the other preliminary condition necessary for value difficulty of attainment - is not always the same kind of difficulty, and he arrives at three distinct laws of value, according to three forms or degrees of this difficulty. (r) In the first place, the difficulty may consist in an absolute limitation of the supply, Three and in this case the corresponding law is said to be the Jaws of law of supply and demand. Even on Mill's view the value. class of commodities which comes under this heading is both large and important, for it includes not only the favourite examples of old pictures, china, &c., but also land, and especially building sites in large cities. Again, it is pointed out that, although comparatively few commodities may be absolutely limited, almost all commodities may be so locally and temporarily, which is really only another way of saying that the law of supply and demand governs all market values; for it is obvious that the supply actually forthcoming or obtainable in a specified time in any market is limited - a point which may be well illustrated by the extreme case of a "corner." Again, under certain circumstances the supply may be artificially limited, as in the case of monopolies, the classical example being the destruction by the Dutch of some of their spice, in order that the limited quantity might sell for a total higher price. Besides all these important instances of the operation of the law of supply and demand, Mill is compelled also to bring under the same law the wages of labour, the values of the staples of international trade, and some other peculiar cases of value. In fact, step by step he is almost forced to the conclusion, now generally accepted, that the law of supply and demand is the fundamental law of value, of which the other laws are only particular cases. At the outset, however, he appears to consider the two others as of co-ordinate importance. (2) When the difficulty of attainment consists not in the absolute limitation but simply in the fact that the article requires labour and capital to produce it, the normal or natural value is said to be determined by the cost of production. (3) In the last case taken by Mill it is supposed that an article can be increased in quantity, but only at an increasing cost, and in this case the corresponding law of value is the cost of production of that portion which is obtained under the most unfavourable circumstances. These three laws of value may now be examined critically and their mutual relations discussed, for the last two, if not properly of co-ordinate importance with the first, are at any rate wide generalizations.

In order to understand the law of supply and demand, it is best to take separately the general law of demand and the Supply general law of supply, and then effect a combination.

and Demand must be defined as the quantity of any article demand. demanded at some particular price, it being assumed of course that the bidder of the price can meet his engagements, or, as is sometimes said, that the demand is an effectual demand. It is quite clear that by demand we cannot simply mean desire to possess, because in a sense every one desires everything, and the less the means of payment so much greater in general is the desire. Again, it is obviously necessary to insert the qualifying clause "at some particular price," because, as a rule, with a change in price a different quantity will be demanded. It is, indeed, this variation of quantity demanded, according to variation in price, which gives rise to the statement of the general law of demand, namely: As the price of any article falls, other things remaining conversely, as the price rises the quantity demanded decreases. A very good example of this law is found in the effects of the remission of taxes. The repeal of a tax leads to a fall in price, and the fall in price is accompanied by increased consumption. Conversely, it has often been found that to increase the amount of a tax does not increase the revenue from it, because the demand for the article falls off. The general law of demand is best expressed as by Cournot by saying that the quantity demanded is a function of the price. If we suppose that corresponding to the smallest change in price there is a change in the quantity demanded the law of demand may be illustrated by curves. Marshall has introduced the idea of demand schedules, the quantities demanded being written in one column and the corresponding prices in another. The precise connexion between the price and the quantity demanded differs in different cases, and, strictly speaking, is probably never the same for any two commodities. Every commodity has its own curve or schedule. At the same time, however, commodities may be placed in large classes according to the general character of the variation. The variation of quantity demanded according to price will ultimately rest on the principle of marginal utility explained above. A person with a limited amount of money to spend will hit the economic mark in the centre if the final utilities of his several purchases are equal. This is a rather technical way of saying that a prudent man will not spend a penny more on any particular thing if the penny spent upon some new object would give him a little greater satisfaction. Reverting to the variations of demand according to price, a contrast will at once be observed between necessaries and luxuries. However much the price rises, so long as people have the means they must consume a certain amount of necessaries, but, however much the price falls, the limit of consumption of bread, for example, must soon be reached. On the other hand, a great fall in price of many luxuries may cause an enormous increase in the demand, whilst a great rise may almost destroy the demand. The rate of charge - the quantity demanded according to the changes in price - is referred to as elasticity of demand. If for a small change in price there is a considerable increase in the quantity demanded, the demand is said to be very elastic. Other characteristics of demand are indicated by the terms direct, derived, compounded, &c,, the demand for any one thing being obviously affected by the possible use of substitutes on the one side and on the other by the emergence of other uses. Recent writers, notably Marshall, have given much attention to the development of the law of demand in its various aspects, which has been too much neglected in the Ricardian analysis followed by Mill. A great deal of light might be thrown on many interesting problems in the progress of a nation and of its various component classes, if the laws of demand, or the statistics of consumption according to price, were obtainable.

Turning to the element of supply, this term in a similar way may be defined as the quantity offered for sale at some particular price, and the general law of supply may be stated thus: As the price rises, other things remaining the Law of P ? g g Supply, same, the quantity offered tends to increase, and, con versely, as the price falls the quantity offered tends to diminish. Expressed in this manner, supply appears to be exactly analogous to demand, and the analogy seems to hold good even when we push the analysis up to the utility to the seller as compared with the utility to the buyer. For, as the price rises, the seller will obtain greater utility, and will thus retain less for his own use or will be induced to produce more. On closer inspection, however, the law of supply is found to be not so simple as the law of demand. It would only be so if the seller had simply to compare the relative advantages of exchanging his commodity and of retaining it for his own use, without any further reference to the conditions of, or the motives for, production. In most commodities, however, the determining influence is not the comparative utility of consumption by the owner on the one hand or of the consumption of something else obtained by exchange on the other, but it is rather a comparison of the trouble of producing with the advantage of selling the article when produced. Of course, if we are considering finished products in any market the case is more simple; but even here the question of the relative advantages of present sale and reservation for a future market or distant place must be determined, and then the element of cost of production will again be brought back. The law of supply may be developed on lines corresponding to the law of demand, and we may construct supply schedules on curves indicating the relations between the range of prices and the quantities offered at those prices.

Before considering the relation of cost of production to supply, it will be convenient to combine the laws of supply and demand, taking the former in its simplest aspect, and Law of the same, the quantity demanded increases, and, demand. to state the general law of supply and demand as governing value. Excluding the simple case of the barter of two commodities of which the rate of exchange will be determined as explained above in reference to marginal utility, and meaning by demand the quantity demanded in a market at a certain price, and by supply the quantity there and then offered at a certain price, the general law may be stated thus: In any market the price of any article will be so adjusted that the quantity demanded will exactly equal the quantity offered at that price. The force by which the adjustment is made is, in general, competition. Thus, if the price were above the point indicated by the law, there would be a lessened demand, and the competition of sellers would tend to lower the price. Conversely, if the price were lower the competition caused by the increased demand would tend to raise it. The law as thus stated corresponds to what Mill calls the equation between demand and supply. He was induced to adopt this phrase in place of the more popular expression, the ratio of demand to supply, on the ground of its greater accuracy. And, if the term ratio is to be taken strictly, no doubt Mill's criticism is perfectly just. At the same time the equation must be stated very carefully to avoid falling into the truism suggested by Cairnes, namely, that in any market the quantity bought at any price is equal to the quantity sold at that price. The point is that in accordance with the general principles of supply and demand the quantities offered and demanded vary with the price. And, however inaccurate the literal use of the term ratio may be, it has the advantage of suggesting a change of price according to changes in demand and supply. The equilibrium between demand and supply was illustrated by Cournot by the intersection of the demand and supply curves, and for purposes of theory this mathematical method offers great advantages.

It may be useful at this point to consider the principles by which monopoly values are regulated. The simplest case is when one individual possesses the whole stock, and the cost of production is so small that it may be neglected. Take the case, for example, of some natural well having a unique character for the mineral waters it supplies. The monopolist will, in the first place, have to discover the law of demand for his article. If he fixes a very high price, he may only occasionally sell a pint to a king or a millionaire; whilst, if he fixes a very low price, he may sell to every peasant and yet get a very poor return. He will, in fact, have to work out a problem in mathematics, and must so adjust his price that the quantity sold multiplied by the price per unit will be a maximum. The same kind of difficulty is found in the case in which the expenses of production, although considerable, are practically fixed or only increase slightly in proportion to the quantity furnished. The minimum price will be given by the expenses of production, whilst the actual price will tend to be such as to yield the maximum profit. Take, for example, the case of a steamer which has a practical monopoly and is not controlled by government. The owner will not send out the steamer at all unless the passengers and cargo pay the expenses; but, if there is a great demand, he will raise the price so as to secure a maximum profit. In general, however, any increase in the quantity of the article produced (or the service rendered) will be accompanied by an increase in the necessary outlays, and this increase may be greater or less per unit. In these cases the calculation of the maximum profit is a matter of great difficulty. Take, for example, the case of a railway which has a monopoly in a certain tract of country. The manager may aim at keeping down expenses and charging high rates, being contented with a moderate traffic; or he may lower his charges and incur additional expense to increase the gross income. It is worthy of remark that in many cases the monopolist has a choice of two methods which give practically equally good results, one starting with low and the other with high prices. But it is clear that the mass of the general public or the great body of consumers have an interest in low prices being adopted, whilst, on the other hand, the tendency is usually for the monopolist to charge higher prices than are really profitable in a maximum degree. The simplicity of the method of high prices is always attractive and often deceptive. Accordingly, even on these very general grounds, the interference of government with monopolies may sometimes be defended as being in the interests of the public and not against the interests of the monopolists. The case of the parliamentary third-class tickets furnishes an instructive example. At first the railways made their parliamentary trains as slow and inconvenient as possible, whereas now there is hardly a train which does not carry passengers at parliamentary rates without compulsion. As a rule, however, in modern commercial countries legal monopolies are an exception. Any one, for example, can prosecute tion any trade or manufacture if he can provide the requisite skill, labour and capital; and even as regards land - at any rate in the greater part of England and Scotland - there is from the point of view of cultivation no real monopoly. But although legal monopolies (apart from patents and the like) are not general, and in most countries the law is adverse to the creation of monopolies,' as a matter of fact in modern times there has been an increasing tendency to the amalgamation of businesses of all kinds into large combinations (trusts, kartells, &c.), which have the power of monopolies. In the same way in the relation of labour and capital the method of collective bargaining partakes of the character of monopoly. There may be buyers' as well as sellers' monopoly, and capitalistic combinations operate by this method in dealing with the production of raw material or other requisites and also with labour.

The theory of monopolies being a case of the determination of maxima is essentially mathematical, and many of the problems, especially as regards the incidence of taxes and the benefits of the public acquisition of "natural" monopolies, can only be fully explained mathematically as by Marshall. In recent years great attention has been given to the realistic study of monopolies (J. W. Jenks, H. W. Macrosty, &c.; see Trusts). When competition arises, and is effective, exceptional profit ceases, and thus a new principle for determining values comes into play. If the producer of any article is obtaining more than the usual rate of profit, he at once provokes competition, and thus even the dread of this possible competition may keep down prices. This is often expressed by saying that the potential supply affects prices almost as much as the actual supply. It thus becomes obvious that, as regards freely produced commodities the production of which may be extended indefinitely at the same or at a decreasing cost, the value tends to conform to the minimum cost of production, and that any other value is consequently unstable. It will be observed, however, that cost of production only determines values by operating through the actual or potential supply, and thus that the law of demand and supply is fundamental. Once a thing is made, the actual cost of production has no influence on its value, except as indicating the conditions of future possible supply.

At this point it becomes necessary to analyse and explain the nature of cost of production. In the last resort it will be found that nothing can be produced without labour, and in a modern society capital must be produc- added. Thus the component elements of production are labour and capital acting by natural forces upon raw material. But, since both the forces and the produce of nature require labour and capital for their exploitation, the elements that must be considered primary and fundamental in the case of commodities that can be indefinitely increased are labour and capital. Capital, again, is itself a product of labour, and it is also wealth set aside by the owner for future use instead 1 The general theory of monopolies was admirably treated by the French mathematician and economist Cournot, Recherches sur les principes mathe'matiques de la the'orie des richesses (1838), and as far as possible without mathematics in the Revue sommaire des doctrines economiques (1877). of for present consumption. Accordingly, in order that a thing may be continuously produced, labour must obtain a sufficient reward for toil, and capital a sufficient reward for "abstinence" or "waiting," or for preservation and accumulation of wealth. Thus the ultimate elements in the real cost of production are the toil and trouble and irksomeness of labour and of saving. But this toil and trouble will not be submitted to unless in any particular case the fair reward of industrial competition is forthcoming. However much pleasure a good workman may take in his work or a prudent man in his savings, in the industrial world as at present constituted both labour and capital will be attracted towards the point of highest reward (compare Wages); and, accordingly, it is a necessary condition of the production of any article that the price obtained will yield the average rate of wages and profit obtainable for that species of work. Now these rates of wages and profit can be expressed in terms of money, and may be desig of pro- nated, following Marshall, the expenses of production as distinguished from the real cost. The real cost of production would on analysis consist of a confused unworkable mass of "efforts and abstinences," or "disutilities," and the relation of these mental strains to their material rewards is the problem of wages and profits. But for the purpose of relative values it is not necessary to push the analysis so far; and thus, if we regard the capitalist as the producer, we may look on the elements of production as consisting of wages and profits. And this is quite in accordance with customary thought and language: every one who asks for the details of the cost of a thing expects to have a statement of the wages and profits directly involved, and of the material, which again directly involves wages and profits. So far, then, as freely produced commodities are concerned, the general law is that they tend to sell at such a price as will yield on the average the ordinary rate of wages and profits which by industrial competition the occupation can command. It is at this point that the difficulty emerges as to the precise nature of the connexion between the prices of commodities and the money wages and profits of producers. Are we to consider that the former are determined by the latter, or the latter by the former ? If, for example, commodity A sells for twice as much as commodity B, are we to say that this is because wages are higher in the former case, or are the wages higher because the price is higher? The answer to this question is given in the theory of Wages. It is sufficient to state here that, in discussing relative values, we may assume that industrial competition has established certain relative rates of wages and profits in various employments, and that any prices of articles which yielded more than these rates, whilst in other cases no corresponding rise took place, would be unstable. Thus, in discussing the normal values of freely produced commodities, we have to consider the quantity of labour and the rates of wages and the quantity of capital and the rate of profits, the normal rates of these wages and profits being given.

The use of the term "normal" requires some explanation. The word norma properly refers to the square used by masons and carpenters, &c., and thus a thing may be said to be in its normal position when no change will be made: P g that is to say, the normal position is the stable position, or it is the position to which the workman will try to adjust his work. And, similarly, by the use of normal as applied to wages and profits, we mean the stable rate or the rate towards which they are attracted. It is thus quite possible that the normal rate may differ from the average rate or the rate obtained over a term of years. For it may easily happen that as regards wages, for example, a high rate for a short period may lead to such an increase in that kind of production that for a much longer period the rate will fall below the normal. The normal rate seems to refer to the actual conditions of industry, the rate which can be obtained for a given amount of exertion, taking the average of employments at the time, rather than to the particular rate obtained for some class of work over a period of years.

With these explanations the proposition holds good that the normal values of freely produced commodities tend to be equal to their cost, or rather expenses, of production, and any price which yields a greater or less return to labour and capital is unstable.

Marshall (Principles of Economics, bk. v. 5th ed., 1907) has treated very fully the subject of normal values and the relations of normal and market values from the side of theory; but the nature and importance of the distinction is perhaps best realized if we compare the normal relative values of important commodities over a period of centuries, as was done by Adam Smith and in the monumental work by Thorold Rogers on the History of Agriculture and Prices. At this stage in the analysis the difficulty must be met that even in a position of stable equilibrium, i.e. when the normal demand is just satisfied by the normal supply, the different portions of the aggregate supply may be produced at different costs according to differences in the natural environment or in the availability of different factors of production. In dealing with this difficulty the modern conception of marginal cost is of importance. If a commodity is produced at a uniform cost per unit whatever the amount, then the normal value depends simply on this uniform or normal cost; any temporary divergence in market prices will lead to a contraction or increase in the supply until the exceptional gains or losses are got rid of. It may happen, however, that portions of the supply can be obtained at different costs, and in this case the normal value is determined by the cost at the margin. It is this marginal cost which just gives the rates of remuneration to labour and capital which suffice to keep up the continuous supply of the requisite factors of production. If a commodity is produced according to the law of diminishing return, or, what is the same thing, if the supply can only be increased after a certain point at an increasing cost per unit, then the marginal portion just pays its expenses and the previous portions yield a differential remuneration which constitutes economic rent. If the conditions of difference in cost are natural and permanent we have the case of pure economic rent (see below), but if the factors of production in response to the stimulus of extra remuneration can be increased or improved the extra rates of remuneration tend to disappear with the increase in supply of the more advantageous factors, and instead of pure economic rent we have various species of quasi-rents. "Even the rent of land is seen not as a thing by itself but as the leading species of a large genus; though indeed it has peculiarities of its own which are of vital importance from the point of view of theory as well as of practice" (Marshall). Marshall has given special attention to the development of this application of the principle of continuity, of which Cournot was the first writer to realize the significance.

If a commodity is produced according to the law of increasing return (or diminishing cost per unit as the quantity is increased) the solution of the problem of normal value presents peculiar difficulties which cannot be treated in a preliminary survey. Two results, however, of practical importance may be noted. In the first, under increasing return the first established business can be expanded more easily than it is possible to start a new concern, and if new competing concerns are started there are obvious advantages in amalgamation, so that we arrive at the modern generalization that the natural tendency of increasing return production is to monopoly. This again gives the chief economic justification for "trusts"; it being said that through the adoption of various external and internal economies they more than neutralize the higher prices of monopoly.

The other result of importance is that under competition the less advantageous methods of production tend to be extruded and the law of increasing return gives way to that of constant return. For further consideration of these difficulties the reader may refer to the analysis by Marshall (Principles of Economics, bk. v. ch. xi.). The economic analysis of cost of production (or if we take the money measures of the various elements involved, expenses of production) involves a reference to the other great departments of economics, namely, production and distribution; and it is necessary to take account of the interconnexion and mutual dependence of these departments and that of exchange, in which the idea of value is predominant. In the last resort production will not be carried on unless labour and capital receive a sufficient reward and the sufficient reward is the normal value of the factors of production. But when we are comparing the relative values of commodities and are seeking to explain, for example, how it is that for long periods of time these relative values are stable, or conform to some regular law, we have to break up the elements of value into the constituents of the expenses of the various factors of production. This leads up to the analysis of cost (or expenses) of production as dependent on the amounts and qualities of the labour and capital required.

If all commodities were produced directly by the expenditure of labour, and in such a way that capital need not be considered, as in the simple natural state of society taken by Ricardo, then the only element to consider in value would be the quantity of labour. And in a society of a more developed character, in which wages are paid, if we consider that the rate of wages is uniform, and that profits may be disregarded in comparison with wages, the quantity of labour is the most important consideration, and a fall in the relative value of any article can only take place through some economy of labour. But, as we approach more nearly to the actual constitution of modern industrial societies, we find serious differences in the rates of wages in different employments, the use of fixed capital becomes of greater importance, and in some cases the lapse of time necessary for the completion of the commodity is considerable. Thus interest and profits, as well as the differential rates of wages, have to be taken into account just as much as the quantity of labour, and it is generally convenient to consider also the established differences in various returns to capital under different conditions (risk, irregularity, &c.). Indirectly, of course, since all capital in the ordinary sense is the result of labour, the quantity of labour is always of primary importance; but, in considering the proximate causes of relative values, it is best to consider capital and labour as independent factors. It follows, then, that, in order to compare the relative values of two commodities, A and B, freely produced in a modern industrial society, we must take into account, first of all, the relative wages and relative profits, and the relative amounts of labour and capital employed. If the producers of A are skilled workmen, and if the return to the capital is uncertain, whilst in the case of B the labour is unskilled and profit steady, then the value of A will be higher than that of B, supposing each produced by the same amount of capital and the same quantity of labour. Obviously, too, any change in the relative wages and profits will affect the relative values. If the commodities considered are not capable of division into similar parts (such as yards of cloth or silk), but must be considered in their entirety (e.g. ships and houses), then we must take into account also the different quantities of labour and capital required, for their completion, as well as the relative rates of wages and profits. As regards changes of value in this case, it will be observed that, if the proportions are different in which labour and capital are employed in the production of two commodities, then any change in the general rates of wages and profits will affect relative values. By making various suppositions as to changes in the different elements of the expenses of production, a great many cases may be obtained, as is done, for example, by Mill ( Pol. Econ. bk. iii. ch. iv.).

All the cases enumerated and others may, however, be deduced from a general formula. Let E, represent the total expenses of production of commodity A. Let Q 1 be the quantity (t i may be less than unity, thus t 1 /Q 2 would be weeks). Then the total expenses of production are Ei = (Ql IO -1 0 + / +' Q2.w2 'I + oo ) t1

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 depending 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 E2, the expenses of production of B, may be expressed: E2 = Q 3 00 + Y3/ + Q4

w4 I + 00 / t2

Thus the relative values of A and B will be found by comparing the aggregate of these several elements expressed on the righthand sides of the equations. It will now be evident Changes on what a number of variable elements relative values in re- must depend, even when we consider that the com- lative modities can be indefinitely increased by the proper values. expenditure of capital and employment of labour. With the progress of invention and the development 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 1 and P3 are equal, as also w 2 and w 4 and t i and 1 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 suppositions as to the identity of certain of the elements, or as to their disappearance, many other causes of changes in relative values may be deduced. Two important practical conclusions of a general character may be drawn from this analysis. (I) Relative values are liable to constant disturbances, and accordingly, since relative prices tend to be adjusted to relative values, relative prices must be constantly changing. (2) It is extremely difficult to measure changes in the value of the monetary standard, or movements in the general level of prices, or variations in the purchasing power of money incomes.

These difficulties are further increased by the importance of the group of commodities which can only be increased (the arts of production remaining the same) at an increasing cost, and which are placed by Mill under a third law of Value and rent. value. The most important examples of this law 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. 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 maybe 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 ensure 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" Elements of expenses of tion. General P employed, formula of fixed capital em to ed and let r 1 be the-rate of wear formula for ex- and tear per annum, so that the loss is Q l /r 1. Let P1 penses of be the rate of profits per cent. per annum which must produc- be obtained on the whole capital. Let Q2 be the number !ion. of labourers, and w 2 the rate of wages per annum. Let t 1 represent the time taken for production reckoned in years 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 circumstances. 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.

The pure theory of rent is arrived at by making certain hypotheses and abstractions, and accordingly it must not be Oualifi- applied to particular practical cases without further cations consideration. The theory certainly indicates the of pure effect of very important causes, but requires in theory practice a certain amount of qualification. (1) The of rent. 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 advantageous 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 landowner 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 many 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 kinds 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 1 that the principal effect of various land laws is to increase or diminish the amount of the gross produce, which in Ricardian phraseology would mean to extend or contract the margin of cultivation. It thus appears that it is not always true to say that the payment of rent makes no real difference to the general public, and that it is simply a necessary method of equalizing farmers' profits. At the same time, however, with the necessary qualifications, there is no doubt that price determines rents, and not rent price, especially when prices are affected by foreign competition. In Great Britain a striking example has been afforded both of the abandonment of inferior lands (the contraction of the margin) and of a heavy fall in rent under the influence of falling prices.

The hypothetical history implied in Ricardo's theory as to the effects of the progress of society upon the value of agri- Progress cultural produce also requires some criticism, such as and that given by the historian of agriculture and prices, rent. Thorold Rogers. The theory assumes that in the first place population increases, and thus there is a greater demand for food, and that therefore the margin of cultivation extends and the price rises, and rent rises also. But, as Rogers observes, history shows that agricultural improvements of all kinds have first of all increased the amount of food, and thus allowed of an increase in population. It is worth noticing that in our own times an increasing population in rural districts (e.g. the Highlands of Scotland and the west of Ireland) may indirectly tend to lower or destroy rents through minute subdivision. Ricardo's theory, however, accounts very 1 Systimes de culture en France. XXVII. 28 a well for the rise in the ground-rents of towns and cities, and it is there far more than in the rural districts that the unearned increment is to be found.

The value of mining produce is determined generally in the same way as that of agricultural produce; but similar qualifications must be introduced. The theory is that both value of extensively and intensively the produce of mines is mining subject to the law of diminishing return, that the produce. margin recedes as the price falls and extends as it rises, and that thus the price is determined by the most costly portion which it just pays to bring to market. The principal point to observe is that mines are gradually quite exhausted. In general the produce of mines is, like that of land, consumed in a comparatively short time, and thus the value is subject to fluctuations according to the conditions of the annual demand and supply.

The peculiar durability of the precious metals, however, makes them in this respect differ widely from most mining produce. It is of course undeniable that (supposing coinage free) the value of standard coins will be equal mes. s c [ to the value of the same amount of bullion, and, con versely, that the bullion will be equal in value to the same amount of coins. The older economists argued that the precious metals had their value determined by their cost of production under the most unfavourable circumstances, and then argued that in consequence the value of money (or coins) tended to be governed by the cost of production of bullion. If, however, it is remembered that the annual production does not probably amount to 2% of the quantity in the hands of man, that cost of production can only operate through actual or potential supply, and that in the case of money the increase must be real to affect prices, it will be readily seen that the value of bullion is determined by the general level of prices (or the value of money), and not that the value of money depends upon the value of the bullion. At the same time, however, it is true that, if prices become very high, - in other words, if the value of money, and thus of bullion, becomes very low, then a check is placed upon production from the mines, and, conversely, with falling prices or a rise in the value of the precious metals mining for them is extended and encouraged. But the difference in the annual supply due to this influence will be small under present or similar conditions. On the whole, this case of the precious metals furnishes perhaps the best example of the way in which the cost of production can only act through the law of supply and demand.

There is one other part of the general theory of value which requires some notice. Some articles can only be produced in conjunction with others (e.g. hides and beef, wool and Lam, mutton), and some modification of the theory is governing needed to suit this case. The law deduced is that - value of The sum of the values must be equal to the joint ex- Joint penses of production, and the relative values inter se products. are determined by demand and supply. Thus the Australian sheep-farmers will extend their sheep-farms so long as for wool and mutton together they obtain a fair profit, but the amount contributed by each portion will be determined by the relative demand. It is interesting to observe that in the progress of society the value of the meat has risen as compared with that of the hides and the wool. The same principle determines the kind of produce which will be raised from land, though the application is rather more difficult owing to rotation of crops, &c.

Much discussion has taken place recently on the question whether a distinct theory of international values is required. In the limits assigned to this article it is only possible Theory to indicate the principal points in dispute. The of inter- "orthodox" theory, as held by Ricardo, Mill and national Cairnes, has been attacked by Cournot, Sidgwick and values. others, and has been re-stated with admirable clearness and much original power by C. F. Bastable. 2 The best way to answer the question seems to be to make clear the assumptions 2 Theory of International Trade. on which the values of commodities produced within any "nation" are determined, and then to consider whether any change must be made when we bring in other nations. We are at once met with the difficulty, What is a "nation" ? The orthodox answer appears to be that within any nation (for which the term "economic area" might perhaps be advantageously substituted) there is effective industrial and commercial competition. This appears to imply no more than is contained in the principle noticed above, that relative values tend to be equal to the normal expenses of production ( commercial competition), and that the expenses tend to be proportioned to the real cost ( industrial competition). The question then arises, Do these conditions not exist in international trade? The answer appears to be, first, that commercial corn petition certainly holds good; for as soon as a trade is established the commodities will sell at the same prices in both countries (allowance being made for cost of carriage). It would plainly be absurd to say that the value of Manchester goods is determined by their expenses of production if they are consumed in England, but by something else if they are sent to India. If then there is any difference between domestic and international values, it must arise owing to the absence of effective industrial competition; that is to say, in the same country (or economic area) the real cost determines the expenses of production on account of the supposed perfect mobility of labour and capital, but between different economic areas these agents of production do not pass with sufficient readiness to secure a similar correspondence. It thus follows that a country may import articles which it could produce at less real cost, provided that it pays for these imports with exports which cost even less. A very striking example of this doctrine of comparative cost, as it is termed, was furnished by Victoria after the great gold discoveries. All kinds of produce were imported and paid for with gold, because there was less real cost involved in obtaining the gold to pay for imports than in making the articles. According to this theory every country will devote its labour and capital to its most productive uses; and, if by some new imports a domestic industry is checked or abolished, it is argued that the labour and capital will be devoted to increasing the exports so as to pay for the new imports. It must clearly be assumed as axiomatic that in the absence of loans, tributes, &c., imports can in the long run only be paid for by exports, and also that those articles will be exported which can be produced at the least comparative real cost. This theory then may be held to explain in a satisfactory manner the origin and development of international trade; but the question of values is still undetermined. Consistently with exports paying for imports many different rates of exchange are possible, and the particular rate actually adopted is said to depend entirely on reciprocal demand. And in an extreme case, in which new countries trade solely in articles of which each has a monopoly, this answer would seem to be correct; but, when we consider that under present conditions trading countries have many articles in common, and that a slight margin of profit suffices to expand or diminish an export trade, this answer seems too vague and unreal. In general it is clear that the rate will be determined independ ex- ently of the foreign trade, or at least that the foreign trade is onl y one factor to be considered. If the rate of profit falls, a trade which before was impossible becomes possible. The opinion may be hazarded that the best way of explaining the general theory of international values would be to start with the foreign exchanges; but such an investigation is too technical and difficult for this place (see Exchange).

See J. S. Nicholson's Principles of Political Economy, vol. ii. book iii. ch. 25-28, for the development of this line of criticism of the Ricardian theory; and C. F. Bastable's Theory of International Trade (Appendix) for reply to this and other criticisms. (J. S. N.)

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Bibliography Information
Chisholm, Hugh, General Editor. Entry for 'Value'. 1911 Encyclopedia Britanica. 1910.

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