Different effects of Fixed and Circulating Capital on Price.
We have seen that the price of everything depends on three elements, Wages, Rent, Capital and the Capital is either Fixed,as Machinery, or Circulating, as Wages and Materials.Fixed capital however is not absolutely fixed.All machines, forinstance, wear out in the course of time, and must be replaced as that time expires.And according to the length of timewhich any article of Fixed Capital lasts, the effect of that portion of Capital or Price is different.
We will take examples.
A Tailor may be taken as an ex ample of a producer who has little Fixed Capital.He requires only needles, thread, ashop-board and his goose.
A Linen Manufacturer (who both spins and weaves) has much Fixed Capital, as Spinning Jennies, Looms, &c.; probablySteam Engines.
Suppose the Tailor pays annually, to io men, L500 in wages, and pays ?oo for materials (cloth) suppose profits to be tenper cent, and he makes 100 suits of clothes, what is the price of each suit?
And if any of the elements changc,numnber of labourers, rate of wages, rate of profits, duration of Fixed Capital,we cancalculate the effect upon price in the same manner as in these examples.
The mode of calculating the effect of Fixed Capital, by considering the sum needed to replace it as the present value of anannuity, is plainly right.To replace a Fixed Capital of ?00 which is exhausted in 10 years, an annual payment of ?0 in eachfuture year will suffice.But the Manufacturer will riot give this ?0 at present except he can have it returned with profit: andfor that purpose not ?0, but ?4 a year is requisite.
This correction of the mode of calculating the result of Fixed Capital was, I believe, first introduced by Mr Ricardo, in his Principles of Political Economy published in 1817.
Profits are not the result of Labour.
In his Principles of Political Economy , Mr Ricardo maintained that commodities universally exchange for each otheraccording to the quantity of labour worked up in them.
Mr McCulloch attempted further to support this assertion, by maintaining that what are commonly called Profits may becalled Labour; and thus he held that Profits and Labour are not distinct elements of Price.
Upon this Mr Malthus observes ( Def p.100), "There is nothing that may not be proved by a new definition.A compositionof flour, milk, suet, and stones is a plum-pudding; if by stones be meant plums.Upon this principle, Mr McCullochundertakes to show, that commodities do really exchange with each other according to the quantity of labour employedupon them; and it must be acknowledged, that in the instances which he has chosen he has not been deterred by apparentdifficulties.He has taken the bull by the horns.The cases are nearly as strong as that of the plum-pudding.
"They are the two followingnamely, that the increase of value which a cask of wine acquires, by being kept a certainnumber of years untouched in a cellar, is occasioned by the increased quantity of labour employed upon it; and that anoak-tree of a hundred years' growth, worth ?5, which may not have been touched by man, beast, or machine for a century,derives its whole value from labour.
"Mr McCulloch acknowledges that Mr Ricardo was inclined to modify his grand principle, that the exchangeable value ofcommodities depended on the quantity of labour required for their production, so far as to allow that the additionalexchangeable value that is sometimes given to commodities, by kceping them after they have been purchased or produceduntil they become fit to be used, was not to be considered as an effect of labour, but as an equivalent for the profits whichthe capital laid out on the commodities would have yielded had it been actually employed.This was looking at the subject inthe true point of view, and showing that he would not get out of the difficulty by changing the meaning of the term labour;but Mr McCulloch says I confess, however, notwithstanding the hesitation I cannot but feel in differing from so great an authority, that I see nogood reason for ****** this exception.Suppose, to illustrate the principle, that a cask of new wine, which cost ?0, is putinto a cellar, and that at the end of twelve months it is worth the question is, whether ought the ? of additional value givento the wine to be considered as a compensation for the time the ?0 worth of capital has been locked up, or ought it to beconsidered as the value of additional labour actually laid out on the wine.I think that it ought to be considered in the latterpoint of view, and for this, as it appears to me a most satisfactory and conclusive reason, that if we keep a commodity, as acask of wine which has not arrived at maturity, and on which therefore a change or effect is to be produced, it will bepossessed of additional value at the year's end; whereas, had we kept a cask of wine which had already arrived at maturity,and on which no beneficial or desirable effect could be produced for a hundred or a thousand years, it would not have beenworth a single additional farthing.This seems to prove incontrovertibly that the additional value acquired by the wine duringthe period it has been kept in the cellar is not a compensation or return for time, but for the effect or change that has beenproduced on it.Time cannot of itself produce any effect, it merely affords space for really efficient causes to operate; and itis therefore clear, that it can have nothing to do with the value.'
