CHAPTER X

CAIRNES

1. The political economy of J. E. Cairnes is virtually a treatise on value and distribution.[170] The points in his work which are of interest to our present purpose are his analysis of cost of production and his famous innovation, the theory of non-competing groups.[171] The views of Cairnes resemble those of Senior in many ways, and are exceedingly destructive of the labor-cost theory, more so than he seemed to realize or cared to admit.

The conditions essential to the existence of value are given as utility, difficulty of attainment, and transferableness.[172] This is Senior’s statement with the inferior term, “difficulty of attainment” substituted for “limitation in supply.” How the substitution could be made in the face of Senior’s reasons against it, is one of the ever-recurring riddles in the history of the philosophy that in some way cost is the essence of value. The theory of value is, according to the best usage of the day, initiated by a discussion of supply and demand. Cairnes posed as a critic of Mill’s conception of the law of supply and demand, but Professor Marshall has shown conclusively that Mill was correct in substance while Cairnes was not.[173] Following Mill, Cairnes next proceeds to cost of production as an influence fundamental to that of supply and demand. “The supply of a commodity tends to adapt itself to the demand at the normal price,” or at that price which just suffices to yield to the producers “the average and usual remuneration on such sacrifices as they undergo.”[174] These sacrifices are the elements which constitute cost of production. In the formal definition of cost, Cairnes makes it include “the ultimate elements—labour, abstinence, and risk.”[175] But the coördinate position of risk is not maintained. For, in the discussion of cost in detail, risk to laborers is held to be a factor in labor cost, and risk to capitalists a factor in abstinence cost.

“We find labour as an element of cost of production measurable by reference to three of its incidents, and to three of its incidents only—1st. the duration of the exertion, or the quantity of labour, 2d. its severity, or irksomeness; and 3d. the risk attending it.”[176]

As for abstinence:

“the sacrifice will be measured by the quantity of wealth abstained from, taken in connection with the risk incurred, and multiplied by the duration of the abstinence.”[177]

With this much said, Cairnes drops risk from consideration. We may follow his example in the present chapter, since the precise relation of risk or risk-taking to cost of production need not be decided in order to determine the import of Cairnes’s work for the labor theory.

2. In Cairnes we find a repetition of the protest of Senior against the definition of cost from the point of view of the capitalist-entrepreneur. Thus Cairnes is “compelled to dissent” from the “radically unsound” doctrine of Mill, that wages and profits compose cost of production.

“Of all ideas within the range of economic speculation, the two most profoundly opposed to each other are cost and the reward of cost.... Cost and remuneration are economic antitheses of each other.... Now in the analysis of cost of production which I have quoted [_i. e._ Mill’s] these two opposites are identified.”[178]

Cost cannot be defined from “the partial and limited standpoint of the capitalist-employer.”[179] Cairnes makes an excellent and eloquent plea for his idea, but truly all that can be conceded to him is that the two kinds of cost must be scrupulously distinguished, and that propositions true only of disutility costs must not be affirmed of entrepreneur’s costs, and _vice versâ_. As for the views of Mill, this economist stated that wages and interest are rewards as well as costs. The gross inconsistencies, however, of Mill’s language in different parts of his book justify scathing criticism.

3. Cairnes does not quit the subject of the measurement of the subjective cost without turning his attention to an incidental problem not touched, I believe, by his predecessors. He states that the effort required to produce a given result does not represent the same sacrifice for different persons, being one thing for the strong or experienced and another for the weak or untrained. Similarly a given sum of capital may stand for no appreciable self-denial on the part of the person contributing it, if he be rich, but for very rigid self-denial if he be poor or in moderate circumstances. How are such differences, Cairnes asks, to be dealt with in computing the cost of production?

“The sacrifices to be taken account of, and which govern exchange value, are, not those undergone by A, B, or C, but the average sacrifices undergone by the class of labourers or capitalists to which the producers of the commodity belong.”[180]

In view of the fact that the word _average_ as often serves to cover up the lack of an explanation as it serves to explain, Cairnes would have done well to be a little more explicit. As the present writer understands it, a few additional words will place his idea beyond possible misconception. If we call the capitalists who can furnish a given sum of capital at a small sacrifice, and the laborers who can furnish a given amount of labor (in the sense of productive power) at a small sacrifice, strong producers, and call others who are situated in reverse circumstances from these, weak producers, Cairnes’s proposition about “average sacrifice” means that “within a given field of competition” we may expect the individually strong and individually weak producers to be thoroughly and uniformly intermingled. With this meaning, the statement certainly commands assent. With this idea understood, we are able to speak of the labor of coal miners as being harder than that of dry-goods salesmen, without thought of the unusual cases where a very healthy miner suffers less fatigue and discomfort than an invalid salesman.

4. Proceeding with labor and abstinence as cost of production, Cairnes describes the relation of cost to value in terms clearer than any before attained in the regular line of English “_Principles_.” Wages and “profits” are derived from the value of the product, and “absorb the whole of that value,”

“with the exception of the case where rent is also an element in the value of commodities—a case which, those acquainted with the economic theory of rent will perceive, does not affect the general argument.”[181]

These words make the sum total of Cairnes’s discussion of rent, though he has written a large volume devoted chiefly to value and distribution. Value is then everywhere divided into wages and profits. If these wages and profits are in proportion to the sacrifices remunerated, value is in proportion to the sum of these sacrifices, or cost of production. The question, then, becomes definite. Are wages everywhere in proportion to the labor for which they are paid, and is interest an amount proportionate to the abstinence remunerated? Strange as it may seem, this simple question—the affirmative answer to which is necessary to establish the regulation of exchange value by “real” or subjective cost of production—was never proposed by Mill or any of his classical predecessors.

5. To answer this question, it is first necessary to inquire how far effective competition is realized in actual industry (_i. e._, in English industry, and for purposes of present-day theory, English industry of Cairnes’s time is a very proper system to consider); for wages and profits will be in proportion to the sacrifices undergone “wherever, and only so far as competition prevails among producers,” and laborers and capitalists have an “effective choice” in selecting from the various occupations in the industrial field. First, Cairnes gives a very clear explanation of the process by which the flow of capital and labor can be redistributed over the industrial field without the transfer of individual units already specialized.[182] This disposes of some exaggerated and erroneous ideas regarding the failure of competition; but the next step is taken by Cairnes himself, who points out an important limitation of competition not emphasized by previous writers. This limitation applies only to the competition of laborers:

“The competition of capital being as we have seen, effective over the entire industry of each commercial country, it follows that so much of the value of commodities as goes to remunerate the capitalist’s sacrifice ... will correspond throughout the range of domestic industry with that portion of the cost which falls to the capitalist.”[183]

Not so in the case of labor:

“What we find, in effect, is, not a whole population competing indiscriminately for all occupations, but a series of industrial layers, superposed on one another, within each of which the various candidates for employment possess a real and effective power of selection, while those occupying the several strata are, for all purposes of effective competition, practically isolated from each other.” ... “We are thus compelled to recognize the existence of non-competing industrial groups as a feature of our social economy.”[184]

6. It follows from this that the exchange relations of commodities produced by laborers in different industrial groups are “not governed by the principle of cost of production.” And the result is much complicated, because even a single commodity is “very frequently” the product of the labor of more than one industrial group.[185] The terms of exchange between two commodities will be “governed by more than one principle.”

“So far as the two commodities are the products of workmen in competition with each other, their values will be governed by cost of production, but so far as they proceed from workmen not in mutual competition, they will be governed by that other principle, yet to be ascertained, which governs normal values in the absence of competition.”[186]

It “generally happens that the bulk of the value of each commodity follows one law, ... while a small remaining element is governed” by the other law.[187] This unsatisfactory idea is at times better expressed in another way, namely, the law of costs governs a good’s value in exchange with commodities produced by the same order of laborers, but not in exchange with commodities produced by different orders.

“The true conception of the law of cost is thus, not of a law governing universally the values of any class of commodities, but that of one governing the values of certain commodities in certain exchanges.”[188]

7. We come now to the second coördinate principle of value, existing in addition to the principle of cost of production, and held to divide with it the control of actual values. This is the so-called law of reciprocal demand. It is simply Mill’s law of reciprocal demand as developed by him to explain international values, applied by Cairnes to the “strictly parallel case” of inter-group values. International and inter-group values, or the relative prices of the products of different nations or of different groups,

“do not vary at random irrespective of rule or measure, but exhibit precisely the same tendency to gravitate towards a central point as is manifested in those exchanges which are governed by cost of production.”[189]

These words surely attribute a very exact control of values to the “principle of reciprocal demand.” But after perusing a very interesting piece of text (pp. 99-105), in which Cairnes applies Mill’s doctrine of international value, point by point, to the problem of non-competing groups, we come upon a very important difference between this principle and that of cost in respect to control of values.

“They each ... furnish a centre about which market values gravitate; but there is this difference between the two cases: The centre furnished by Cost of Production stands related to the fluctuations of the individual commodity; that supplied by Reciprocal Demand to the average fluctuations of considerable aggregates of commodities. A reduction in the cost of producing a hat will lower its price.... But an alteration in the reciprocal demand of two trading nations (or of two non-competing groups) will act upon the price not of any commodity in particular but of every commodity which enters into the trade. What such an alteration necessitates is a change in the _average_ terms on which the trade is carried on; but _it decides nothing as to the details by which the required average shall be attained and maintained_.... In the interchanges of non-competing domestic groups, what the reciprocal demand of the groups determines is the average relative level of prices within each group; the distribution of price among the individual products being regulated by the cause which governs value within it, namely, cost of production.”[190]

It develops that the law of reciprocal demand fails completely of being a principle coördinate with, and similar to, that of costs. Instead of ruling exchange values in the same way as cost of production, only in another field, it turns out that the force of reciprocal demand is incapable of determining the value of any single good. The principle of reciprocal demand fails signally of fulfilling Cairnes’s promise of a principle other than that of cost, which will provide for a central point of gravitation of inter-group exchange ratios. The purport of the argument of Cairnes is no more than this: the law of reciprocal demand merely requires the general level of international exchange values to be such that in the long run the exports of a nation just discharge its liabilities, or, in other words, that its exports and imports will be led to balance, except for the payment of interest on foreign debts, cost of carriage to foreign ship-owners, _etc._ Cairnes applies the law without changing line or point to interchange between non-competing groups.

8. It is not necessary, in view of our present purpose, to enter further into the nature of the law of reciprocal demand. The question of importance to us is the effect on the labor-cost theory of value of the doctrine of non-competing groups. Cairnes’s famous doctrine merely adds emphasis to a point already made by Senior, namely, that the wages of skilled labor are out of proportion to the amount of labor cost remunerated. Though Cairnes rejects the definition of cost as entrepreneur’s cost, his whole argument signifies that subjective cost, or pain cost, can control market value only by way of controlling the wages and interest elements which compose entrepreneur’s cost. As for the element of interest, Cairnes, like Senior, holding interest to be paid for abstinence, places it upon an independent basis of subjective cost, and makes it logically coördinate with wages; and Cairnes would treat the difficulty of interest, or the difficulty of “the different proportions of fixed and circulating capital,” not as Ricardo did, but precisely as Senior did.[191] As for the element of wages cost, the doctrine of non-competing groups signifies that the comparative wages cost of different commodities may fail to represent their comparative labor costs, or specifically, that they do so fail, when we compare the cost of commodities produced by different non-competing groups. Even if labor cost were the only kind of subjective cost that the entrepreneur has to remunerate, true labor cost would still fail to control exchange values, because the comparative wage expenses of entrepreneurs are not in proportion to the true amount of labor remunerated in each case.

In the view of Cairnes, skill as such cannot be called an element in cost of production. But skill may be, and generally is, he continues,

“an indication of that which is an element in cost—namely, the sacrifice whether in the form of labor or abstinence, undergone in acquiring the skill.... The point to be attended to is that the addition made to the cost of production [_i. e._ by the employment of skilled labor] is in proportion ... [only] to the sacrifice.”[192]

If competition were effective between groups of laborers, it would result that wages would be forced to correspond with the disutility of labor in all employments, skilled or unskilled (the disutility of acquiring the skill being weighed by the competitors along with the daily disutility of the occupation). In the absence of effective competition—namely, under the actual conditions of non-competing groups—skilled labor generally receives a wage beyond that proportionate to the comparative disutility, past and present, incidental to it.

Cairnes himself refused to regard his innovations as causing any substantial damage to the older theories, for of his whole doctrine of non-competing groups, he says:

“In effect the point in question is of little more than theoretic importance. As a point of theory it is proper to notice it, but the circumstance it deals with has little sensible effect on the facts of exchange.”[193]

9. In the opinion of Cairnes, then, there is a failure of the law of costs due to a _failure of competition_. Since Ricardo expressly postulated “perfect competition” as a condition essential to his theory, it might seem as if the difficulty of non-competing groups is one against which he has taken the necessary precautions. This, however, can hardly be the case. Ricardo’s discussion of the subject of skilled labor is so indefinite that his intentions, with respect to the meaning of the words “perfect competition” in this connection, are not obvious. But, in all probability, Ricardo could not have meant that the postulate of perfect competition provides against the wages of skilled labor being in excess of those of common labor. For if he had meant this, he would not have written the section he gives us on skilled labor.[194] In this he says, in effect, that the degree in which different kinds of skilled labor enjoy higher wages does not change greatly from time to time (this itself an error), and that nothing more need be said, since he is considering only the causes of _change of “relative” values_ (this is also incorrect).

We will take it for granted, then, that by his assumption of free competition Ricardo did not intend to abstract from the difficulty of skilled labor. We certainly could not approve of such a procedure if he had adopted it; for there is so little tendency for actual competition to remove the superior remuneration of skill, that this tendency should not be recognized among legitimate or effective static forces.[195]

The conclusion is that Ricardo did not examine the problem of skilled labor sufficiently, and that the work of Senior, and especially of Cairnes, shows that in this problem there resides a grave difficulty for the labor theory. Neither Senior nor Cairnes took occasion specifically to point this out themselves. To discover that such is the effect of their writings becomes the task of the historian of theory. Though Cairnes refuses to give the name “cost” to entrepreneur’s expenses, at bottom his teaching means that the labor cost “philosophy” of value cannot be true, because it is in conflict with the more certain “empirical” laws of value.