Book I, Chapter VI, 1

Of the Component Part of the Price of Commodities.

In the early and undeveloped state of society, before stock has accumulated and land has become private property, the relative amounts of labor needed to acquire different things seem to provide the only rule for exchanging them. If, for example, hunters generally expend twice as much labor killing a beaver as killing a deer, a beaver should naturally exchange for two deer. What ordinarily takes two days or two hours of labor to produce should naturally be worth twice what takes one day or one hour.

If one kind of labor is harder than another, some allowance will naturally be made for the greater hardship; the product of one hour's work at the harder task may often exchange for the product of two hours at the other.

Or if one kind of labor calls for exceptional skill and ingenuity, people's esteem for those abilities will naturally give its product a value beyond what its hours alone would justify. Such abilities can rarely be gained without long practice, and the extra value of their product may often amount only to fair compensation for the time and labor spent acquiring them. In an advanced society, allowances for greater hardship and skill are commonly included in wages; something similar probably occurred even in society's earliest and least developed period.

Under these conditions the whole product of labor belongs to the laborer. The amount of labor commonly needed to acquire or produce a commodity is the only thing that can govern how much labor it should ordinarily purchase, command, or exchange for.

Once stock accumulates in the hands of particular people, some will naturally use it to employ industrious workers, providing their materials and subsistence in order to profit from the sale of their work, or from the value their labor adds to the materials. Whether the finished product is exchanged for money, labor, or other goods, its price must cover not only the materials and the workers' wages but something for the profit of the person who undertakes the work and risks stock on the venture. The value workers add to their materials thus divides into two parts: one pays their wages, the other pays their employer's profit on all the stock advanced for materials and wages. The employer would have no reason to hire them unless the sale of their work promised more than enough to replace that stock; nor would there be reason to employ a large stock instead of a small one unless profit bore some relation to its size.

It might be thought that the profits of stock are merely another name for the wages of a particular kind of labor: supervision and management. They are altogether different, however, governed by different principles and bearing no relation to the amount, hardship, or skill of this supposed labor. Profit depends entirely on the value of stock employed and grows or shrinks with that stock. Suppose, for example, that the ordinary annual profit on manufacturing stock in a certain place is ten per cent. and that two manufacturers each employ twenty workers at fifteen pounds a year, spending three hundred a-year on wages in each establishment. Suppose also that one spends only seven hundred pounds annually on coarse materials, while the other spends seven thousand on finer ones. The capital annually employed by the first is then only one thousand pounds, while the other's is seven thousand three hundred pounds. At ten per cent. the first entrepreneur expects an annual profit of about one hundred pounds, the second about seven hundred and thirty pounds. Yet their work of supervision and management may be exactly, or almost, the same. In many large works nearly all such labor is entrusted to a chief clerk. His wages properly express the value of supervising and managing. In setting those wages some account is usually taken not only of his work and skill but of the trust placed in him; still, they bear no regular proportion to the capital whose management he oversees. The owner, relieved of nearly all this labor, nevertheless expects profit in regular proportion to his capital. In the price of commodities, therefore, profits of stock form a component part quite distinct from wages of labor, governed by entirely different principles.

Under these conditions the whole product of labor does not always belong to the laborer: in most cases it must be shared with the owner of the stock that employs the worker. Nor is the labor ordinarily required to acquire or produce a commodity the only thing that governs how much labor it should ordinarily purchase, command, or exchange for. An additional amount must plainly be allowed for the profit on the stock that supplied the materials and advanced the wages.

Once all the land in a country has become private property, landlords, like other people, love to reap where they have not sown and demand rent even on what the land produces naturally. Forest wood, field grass, and all the earth's natural fruits once cost the worker, when land was held in common, nothing but the effort of gathering them. Now even that worker must pay an additional price: for permission to collect them, a share of what the labor collects or produces must be surrendered to the landlord. This share, or its price, is the rent of land, a third component in the price of most commodities.

It should be noted that the real value of each of these components of price is measured by the amount of labor it can purchase or command. Labor measures not only the value of the part going to labor, but also that going to rent and that going to profit.

In every society the price of every commodity ultimately resolves into one, another, or all three of these parts; and in every developed society all three enter, to some degree, into the price of the vast majority of commodities.

In the price of corn, for example, one part pays the landlord's rent, another the wages or maintenance of the laborers and working animals that produce it, and a third the farmer's profit. These three parts appear to make up the whole price of corn, either directly or ultimately. Perhaps a fourth seems necessary to replace the farmer's stock or compensate for wear on working animals and other farm implements. But the price of any such implement, a working horse for example, itself consists of the same three parts: rent for the land on which it was raised, labor spent tending and raising it, and profit for the farmer who advances the rent for that land and the wages for that labor. So although the price of corn may pay for both the purchase and the upkeep of the horse, the whole price still resolves, directly or ultimately, into the same three parts: rent, labor, and profit.

Of the Parts That Make Up the Price of Goods

In the early, undeveloped state of society, before stock has built up and before anyone owns land, the amount of labor usually needed to get different things seems to be the only guide for exchanging them. Suppose, for example, that hunters usually need twice as much labor to kill a beaver as to kill a deer. One beaver should naturally exchange for two deer, or be worth two deer. Something that normally takes two days or two hours of labor to produce is naturally worth twice as much as something that takes one day or one hour.

If one kind of labor is harder than another, people will naturally allow for the extra hardship. One hour's work at the harder task may often exchange for two hours' work at the other.

Or one kind of work may require unusual skill and cleverness. People value those abilities, so they naturally value the resulting product more highly than the time spent making it alone would justify. Such abilities can rarely be learned without long practice. The higher value of the product may often be no more than fair payment for the time and labor spent learning them. In a more developed society, wages commonly allow for unusual hardship and special skill. Something similar probably happened even in the earliest, least developed period.

Under those conditions, everything produced by labor belongs to the worker. The amount of labor normally needed to get or produce an item is the only thing that determines how much labor that item should normally buy, command, or exchange for.

Once stock builds up in certain people's hands, some will naturally use it to employ hard-working people. They will supply these workers with materials and food, hoping to profit by selling what the workers make, or by selling the extra value their labor adds to the materials. When the finished product is exchanged for money, labor, or other goods, its price must cover more than the materials and workers' wages. It must also provide a profit for the person running the enterprise, who risks his stock on it. The value workers add to the materials thus has two parts: one pays their wages; the other pays their employer's profit on all the stock he advanced for materials and wages. He would have no reason to employ them unless he expected to get back more from selling their work than the stock he had put in. Nor would he have a reason to put a large amount of stock to work instead of a small one unless his profit increased with the amount of stock.

It might seem that profits on stock are just another name for the wages paid for a particular kind of work: supervision and management. But they are quite different. They follow entirely different rules and bear no relation to how much supervisory work is done, how hard it is, or how much skill it takes. Profit depends entirely on the value of the stock employed and rises or falls with its size. Suppose, for example, that the usual yearly profit on stock used in manufacturing is ten per cent. in some place. Consider two manufacturers, each employing twenty workers at fifteen pounds a year apiece, for a yearly wage bill of three hundred pounds each. Suppose the rough materials used each year by one cost only seven hundred pounds, while the finer materials used by the other cost seven thousand. The stock employed each year is then one thousand pounds for the first manufacturer and seven thousand three hundred pounds for the second. At ten per cent., the first owner expects a yearly profit of only about one hundred pounds; the second expects about seven hundred and thirty pounds. Yet the work of supervising and managing each enterprise may be exactly, or almost exactly, the same. In many large operations, a head clerk does nearly all that work. His wages are the proper measure of the value of supervision and management. His pay usually reflects not just his work and skill but also the trust placed in him. Still, it is never regularly proportional to the stock whose management he oversees. The owner of that stock does almost none of the work, but still expects a profit proportional to his stock. In the price of goods, therefore, profit on stock is a part entirely separate from wages, and it follows entirely different rules.

Under these conditions, the worker does not always keep everything his labor produces. In most cases he must share it with the owner of the stock used to employ him. And the amount of labor normally needed to get or produce an item is no longer the only thing that determines how much labor the item should normally buy, command, or exchange for. Another amount must clearly go toward profit on the stock that paid the wages and supplied the materials.

Once all the land in a country becomes private property, landowners, like everyone else, like to reap what they never sowed. They demand rent even for what the land produces naturally. When land was shared, workers needed only the effort of gathering forest wood, field grass, and all the other natural products of the earth. Now even they face an extra price for those things. They must pay for permission to gather them and hand over part of what their labor gathers or produces to the landowner. That part, or its price, is rent on the land. It makes up a third part of the price of most goods.

Note that the real value of each of these parts of the price is measured by how much labor it can buy or command. Labor measures the value of the part that pays for labor, but also the parts that pay rent and profit.

The price of any item in any society ultimately consists of one, two, or all three of these parts. In every developed society, all three contribute to the price of by far the most goods, to a greater or lesser extent.

Consider the price of grain. One part pays the landowner's rent. Another pays the wages or upkeep of the workers and working animals that produce it. The third pays the farmer's profit. These three parts seem to make up the entire price, whether directly or after tracing costs back to their sources. Someone might think a fourth part is needed to replace the farmer's stock or cover wear and tear on his working animals and other farm equipment. But consider the price of any piece of farm equipment, such as a working horse. Its own price also has those same three parts: rent on the land where it was raised, labor spent tending and raising it, and the profit of the farmer who advanced both the rent and the wages. Thus, although the price of grain may pay both for the horse and for its upkeep, the entire price still ultimately consists of the same three parts: rent, labor, and profit.