The Components of Commodity Prices

In that early and rude state of society which precedes both the accumulation of stock and the appropriation of land, the proportion between the quantities of labour necessary for acquiring different objects, seems to be the only circumstance which can afford any rule for exchanging them for one another. If among a nation of hunters, for example, it usually costs twice the labour to kill a beaver which it does to kill a deer, one beaver should naturally exchange for or be worth two deer. It is natural that what is usually the produce of two days or two hours labour, should be worth double of what is usually the produce of one day’s or one hour’s labour.

In the early, undeveloped stage of society, before people accumulate capital or claim ownership of land, exchange seems to have only one possible rule. The rule is the amount of labor needed to obtain each object. Among a nation of hunters, for example, killing a beaver may usually take twice as much labor as killing a deer. If so, one beaver should naturally exchange for, or be worth, two deer. What usually takes two days or two hours of labor to produce is naturally worth twice as much as what usually takes one day or one hour.

If the one species of labour should be more severe than the other, some allowance will naturally be made for this superior hardship; and the produce of one hour’s labour in the one way may frequently exchange for that of two hour’s labour in the other.

If one kind of work is harder than another, people will naturally make some allowance for the extra hardship. As a result, the product of one hour of harder work may often be exchanged for that of two hours of easier work.

Or if the one species of labour requires an uncommon degree of dexterity and ingenuity, the esteem which men have for such talents, will naturally give a value to their produce, superior to what would be due to the time employed about it. Such talents can seldom be acquired but in consequence of long application, and the superior value of their produce may frequently be no more than a reasonable compensation for the time and labour which must be spent in acquiring them. In the advanced state of society, allowances of this kind, for superior hardship and superior skill, are commonly made in the wages of labour; and something of the same kind must probably have taken place in its earliest and rudest period.

Or one kind of work may require unusual skill and ingenuity. If so, people’s respect for those talents will naturally give its products more value than the time spent making them alone would justify. Such talents can rarely be acquired without long practice. The higher value of their products may often be no more than fair compensation for the time and labor needed to acquire those talents. In advanced societies, wages commonly take account of greater hardship and skill. Something similar probably happened in society’s earliest and most primitive period.

In this state of things, the whole produce of labour belongs to the labourer; and the quantity of labour commonly employed in acquiring or producing any commodity, is the only circumstance which can regulate the quantity of labour which it ought commonly to purchase, command, or exchange for.

In this situation, everything produced by labor belongs to the laborer. The labor normally needed to acquire or produce a commodity is the only factor that should determine how much labor it normally buys, commands, or exchanges for.

As soon as stock has accumulated in the hands of particular persons, some of them will naturally employ it in setting to work industrious people, whom they will supply with materials and subsistence, in order to make a profit by the sale of their work, or by what their labour adds to the value of the materials. In exchanging the complete manufacture either for money, for labour, or for other goods, over and above what may be sufficient to pay the price of the materials, and the wages of the workmen, something must be given for the profits of the undertaker of the work, who hazards his stock in this adventure. The value which the workmen add to the materials, therefore, resolves itself in this case into two parts, of which the one pays their wages, the other the profits of their employer upon the whole stock of materials and wages which he advanced. He could have no interest to employ them, unless he expected from the sale of their work something more than what was sufficient to replace his stock to him; and he could have no interest to employ a great stock rather than a small one, unless his profits were to bear some proportion to the extent of his stock.

Once some people have accumulated capital, some will naturally use it to employ industrious workers. They will provide the workers with materials and the means to live. Their aim is to profit by selling the finished goods, or from the value the workers add to the materials. When the finished goods are exchanged for money, labor, or other goods, the return must cover the materials and wages. It must also provide a profit for the person who undertakes the work and risks capital in the venture. The value the workers add to the materials therefore divides into two parts. One pays their wages. The other provides the employer’s profit on all the capital advanced for materials and wages. The employer would have no reason to hire workers without expecting the sale of their work to do more than replace that capital. Nor would the employer have any reason to use a large amount of capital rather than a small one unless profits were proportionate to the amount used.

The profits of stock, it may perhaps be thought, are only a different name for the wages of a particular sort of labour, the labour of inspection and direction. They are, however, altogether different, are regulated by quite different principles, and bear no proportion to the quantity, the hardship, or the ingenuity of this supposed labour of inspection and direction. They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock. Let us suppose, for example, that in some particular place, where the common annual profits of manufacturing stock are ten per cent. there are two different manufactures, in each of which twenty workmen are employed, at the rate of fifteen pounds a year each, or at the expense of three hundred a-year in each manufactory. Let us suppose, too, that the coarse materials annually wrought up in the one cost only seven hundred pounds, while the finer materials in the other cost seven thousand. The capital annually employed in the one will, in this case, amount only to one thousand pounds; whereas that employed in the other will amount to seven thousand three hundred pounds. At the rate of ten per cent. therefore, the undertaker of the one will expect a yearly profit of about one hundred pounds only; while that of the other will expect about seven hundred and thirty pounds. But though their profits are so very different, their labour of inspection and direction may be either altogether or very nearly the same. In many great works, almost the whole labour of this kind is committed to some principal clerk. His wages properly express the value of this labour of inspection and direction. Though in settling them some regard is had commonly, not only to his labour and skill, but to the trust which is reposed in him, yet they never bear any regular proportion to the capital of which he oversees the management; and the owner of this capital, though he is thus discharged of almost all labour, still expects that his profit should bear a regular proportion to his capital. In the price of commodities, therefore, the profits of stock constitute a component part altogether different from the wages of labour, and regulated by quite different principles.

Some may think that profits on capital are simply another name for wages. On this view, they are wages for a particular kind of work, supervision and management. But profits are altogether different from wages and are governed by quite different principles. They bear no proportion to the amount, difficulty, or skill involved in this supposed work of supervision and management. Instead, profits are governed entirely by the value of the capital invested. They rise or fall in proportion to the amount of capital. Suppose, for example, that the usual annual profit on manufacturing capital is ten percent in a particular place. There are two manufacturers there, each employing twenty workers at fifteen pounds a year. Each manufacturer thus spends three hundred pounds a year on wages. Suppose, too, that the coarse materials processed each year by one manufacturer cost only seven hundred pounds. The finer materials processed by the other cost seven thousand pounds. The capital invested each year in the first business will therefore amount to only one thousand pounds. In the other, it will amount to seven thousand three hundred pounds. At ten percent, the first business owner will expect a yearly profit of only about one hundred pounds. The other will expect about seven hundred and thirty pounds. Yet, though their profits are so different, their work of supervision and management may be exactly or nearly the same. In many large businesses, almost all such work is entrusted to a chief clerk. The clerk's wages properly express the value of this work of supervision and management. In setting those wages, the owner usually considers not only the clerk's work and skill but also the trust placed in him. Yet his wages never bear any regular proportion to the capital whose management he oversees. And though the owner of that capital is thus freed from almost all work, he still expects a profit regularly proportionate to his capital. Profits on capital are therefore a part of the price of goods. They are altogether different from wages for labor and are governed by quite different principles.

In this state of things, the whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him. Neither is the quantity of labour commonly employed in acquiring or producing any commodity, the only circumstance which can regulate the quantity which it ought commonly to purchase, command or exchange for. An additional quantity, it is evident, must be due for the profits of the stock which advanced the wages and furnished the materials of that labour.

In these circumstances, the whole product of a worker’s labor does not always belong to the worker. In most cases, the worker must share it with the owner of the capital that provides employment. The labor usually needed to obtain or produce a commodity is not the only factor that determines its usual exchange value. Clearly, an additional amount must be allowed for profit on the capital used to pay wages in advance and supply materials.

As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. The wood of the forest, the grass of the field, and all the natural fruits of the earth, which, when land was in common, cost the labourer only the trouble of gathering them, come, even to him, to have an additional price fixed upon them. He must then pay for the licence to gather them, and must give up to the landlord a portion of what his labour either collects or produces. This portion, or, what comes to the same thing, the price of this portion, constitutes the rent of land, and in the price of the greater part of commodities, makes a third component part.

As soon as all the land in a country becomes private property, landlords, like everyone else, love to reap where they never sowed. They demand rent even for what the land produces naturally. When land was held in common, workers had only to gather wood from the forest, grass from the fields, and all the earth's natural fruits. Now even they must pay an additional price for these things. They must pay for permission to gather them. They must give the landlord a share of what their labor gathers or produces. This share, or its price, which amounts to the same thing, constitutes the rent of land. It makes up a third part of the price of most goods.

The real value of all the different component parts of price, it must be observed, is measured by the quantity of labour which they can, each of them, purchase or command. Labour measures the value, not only of that part of price which resolves itself into labour, but of that which resolves itself into rent, and of that which resolves itself into profit.

The real value of each component of price is measured by the amount of labor it can purchase or command. Labor measures the value of the part of the price that goes to labor. It also measures the value of the parts that go to rent and profit.

In every society, the price of every commodity finally resolves itself into some one or other, or all of those three parts; and in every improved society, all the three enter, more or less, as component parts, into the price of the far greater part of commodities.

In every society, the price of every commodity ultimately consists of one or more of those three parts. In every developed society, all three parts make up some share of the price of the vast majority of commodities.

In the price of corn, for example, one part pays the rent of the landlord, another pays the wages or maintenance of the labourers and labouring cattle employed in producing it, and the third pays the profit of the farmer. These three parts seem either immediately or ultimately to make up the whole price of corn. A fourth part, it may perhaps be thought is necessary for replacing the stock of the farmer, or for compensating the wear and tear of his labouring cattle, and other instruments of husbandry. But it must be considered, that the price of any instrument of husbandry, such as a labouring horse, is itself made up of the same time parts; the rent of the land upon which he is reared, the labour of tending and rearing him, and the profits of the farmer, who advances both the rent of this land, and the wages of this labour. Though the price of the corn, therefore, may pay the price as well as the maintenance of the horse, the whole price still resolves itself, either immediately or ultimately, into the same three parts of rent, labour, and profit.

Take the price of corn, for example. One part pays the landlord’s rent. Another pays the wages or upkeep of the workers and working animals employed in producing it. The third pays the farmer’s profit. These three parts seem to make up the whole price of corn, either directly or ultimately. One might perhaps think a fourth part is needed to replace the farmer’s capital. Or it might be needed to compensate for wear and tear on his working animals and other farming equipment. But consider the price of any piece of farming equipment, such as a working horse. Its price is itself made up of the same three parts. These are the rent of the land where the horse is raised, the labor of tending and raising it, and the farmer’s profit. The farmer advances both the rent for the land and the wages for the labor. The price of the corn may therefore cover both the price and the upkeep of the horse. Even so, the whole price still comes down, directly or ultimately, to the same three parts: rent, labor, and profit.

In the price of flour or meal, we must add to the price of the corn, the profits of the miller, and the wages of his servants; in the price of bread, the profits of the baker, and the wages of his servants; and in the price of both, the labour of transporting the corn from the house of the farmer to that of the miller, and from that of the miller to that of the baker, together with the profits of those who advance the wages of that labour.

The price of flour or meal includes the price of the grain, the miller's profits, and the miller's workers' wages. The price of bread also includes the baker's profits and workers' wages. Both prices include the labor of transporting the grain from the farmer's house to the miller's, and from there to the baker's. They also include the profits of those who advance the wages for that labor.

The price of flax resolves itself into the same three parts as that of corn. In the price of linen we must add to this price the wages of the flax-dresser, of the spinner, of the weaver, of the bleacher, etc. together with the profits of their respective employers.

The price of flax is made up of the same three parts as the price of grain. The price of linen also includes the wages of the flax dresser, spinner, weaver, bleacher, and others. It includes the profits of their respective employers as well.

As any particular commodity comes to be more manufactured, that part of the price which resolves itself into wages and profit, comes to be greater in proportion to that which resolves itself into rent. In the progress of the manufacture, not only the number of profits increase, but every subsequent profit is greater than the foregoing; because the capital from which it is derived must always be greater. The capital which employs the weavers, for example, must be greater than that which employs the spinners; because it not only replaces that capital with its profits, but pays, besides, the wages of the weavers: and the profits must always bear some proportion to the capital.

As a particular commodity goes through more manufacturing, wages and profit make up a larger share of its price compared with rent. As manufacturing progresses, not only does the number of profits increase, but each successive profit is greater than the one before it. This is because the capital from which each profit comes must always be greater. For example, the capital that employs weavers must be greater than the capital that employs spinners. It must replace the spinners' capital and its profits, and also pay the weavers' wages. Profits must always bear some proportion to the capital.

In the most improved societies, however, there are always a few commodities of which the price resolves itself into two parts only: the wages of labour, and the profits of stock; and a still smaller number, in which it consists altogether in the wages of labour. In the price of sea-fish, for example, one part pays the labour of the fisherman, and the other the profits of the capital employed in the fishery. Rent very seldom makes any part of it, though it does sometimes, as I shall shew hereafter. It is otherwise, at least through the greater part of Europe, in river fisheries. A salmon fishery pays a rent; and rent, though it cannot well be called the rent of land, makes a part of the price of a salmon, as well as wares and profit. In some parts of Scotland, a few poor people make a trade of gathering, along the sea-shore, those little variegated stones commonly known by the name of Scotch pebbles. The price which is paid to them by the stone-cutter, is altogether the wages of their labour; neither rent nor profit makes any part of it.

Even in the most developed societies, a few goods have prices made up of only two parts: wages and profits on capital. An even smaller number have prices made up entirely of wages. For example, part of the price of sea fish pays for the fisherman's labor. The other part pays the profits on the capital invested in fishing. Rent very seldom forms any part of the price, though it sometimes does, as I will show later. River fisheries are different, at least in most of Europe. A salmon fishery pays rent. Although this rent can hardly be called rent on land, it forms part of the price of salmon, along with wages and profit. In some parts of Scotland, a few poor people make a living gathering small, multicolored stones along the seashore. These stones are commonly known as Scotch pebbles. The price the stonecutter pays them consists entirely of wages for their labor. Neither rent nor profit forms any part of it.

But the whole price of any commodity must still finally resolve itself into some one or other or all of those three parts; as whatever part of it remains after paying the rent of the land, and the price of the whole labour employed in raising, manufacturing, and bringing it to market, must necessarily be profit to somebody.

But the full price of any commodity must ultimately consist of one or more of those three parts. After paying the rent for the land and the cost of all the labor used to grow, manufacture, and bring the commodity to market, whatever remains must be profit for someone.

As the price or exchangeable value of every particular commodity, taken separately, resolves itself into some one or other, or all of those three parts; so that of all the commodities which compose the whole annual produce of the labour of every country, taken complexly, must resolve itself into the same three parts, and be parcelled out among different inhabitants of the country, either as the wages of their labour, the profits of their stock, or the rent of their land. The whole of what is annually either collected or produced by the labour of every society, or, what comes to the same thing, the whole price of it, is in this manner originally distributed among some of its different members. Wages, profit, and rent, are the three original sources of all revenue, as well as of all exchangeable value. All other revenue is ultimately derived from some one or other of these.

The price or exchange value of each individual commodity consists of one or more of these three parts. The same must be true of all the commodities that make up a country's total annual labor output. Their value must be divided among different inhabitants as wages for their labor, profits from their capital, or rent from their land. Everything a society's labor collects or produces each year is originally distributed among some of its members in this way. The same is true of the total price of everything collected or produced. Wages, profit, and rent are the three original sources of all income and all exchange value. All other income ultimately comes from one or more of these sources.

Whoever derives his revenue from a fund which is his own, must draw it either from his labour, from his stock, or from his land. The revenue derived from labour is called wages; that derived from stock, by the person who manages or employs it, is called profit; that derived from it by the person who does not employ it himself, but lends it to another, is called the interest or the use of money. It is the compensation which the borrower pays to the lender, for the profit which he has an opportunity of making by the use of the money. Part of that profit naturally belongs to the borrower, who runs the risk and takes the trouble of employing it, and part to the lender, who affords him the opportunity of making this profit. The interest of money is always a derivative revenue, which, if it is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue, unless perhaps the borrower is a spendthrift, who contracts a second debt in order to pay the interest of the first. The revenue which proceeds altogether from land, is called rent, and belongs to the landlord. The revenue of the farmer is derived partly from his labour, and partly from his stock. To him, land is only the instrument which enables him to earn the wages of this labour, and to make the profits of this stock. All taxes, and all the revenue which is founded upon them, all salaries, pensions, and annuities of every kind, are ultimately derived from some one or other of those three original sources of revenue, and are paid either immediately or mediately from the wages of labour, the profits of stock, or the rent of land.

Anyone who earns income from resources they own must draw it from their labor, their capital, or their land. Income from labor is called wages. Income from capital is called profit when earned by the person who manages or uses it. When a person lends capital to someone else instead of using it personally, the income is called interest. It is also called the return for the use of money. Interest is the payment a borrower makes to a lender for the opportunity to profit from using the money. Part of that profit naturally belongs to the borrower, who takes the risk and trouble of using the money. Part belongs to the lender, who provides the opportunity to make the profit. Interest on money is always income derived from another source. If it is not paid from the profit made by using the money, it must come from some other income. There may be an exception if the borrower is a spendthrift who takes on a second debt to pay interest on the first. Income that comes entirely from land is called rent, and it belongs to the landlord. A farmer’s income comes partly from labor and partly from capital. For the farmer, land is only the means of earning wages for that labor and profits from that capital. All taxes, and all income based on them, ultimately come from one or another of these three original sources. The same is true of all salaries, pensions, and annuities of every kind. They are paid, directly or indirectly, from wages of labor, profits from capital, or rent from land.

When those three different sorts of revenue belong to different persons, they are readily distinguished; but when they belong to the same, they are sometimes confounded with one another, at least in common language.

When the three types of revenue belong to different people, they are easy to distinguish. But when they belong to the same person, they are sometimes confused with one another, at least in everyday language.

A gentleman who farms a part of his own estate, after paying the expense of cultivation, should gain both the rent of the landlord and the profit of the farmer. He is apt to denominate, however, his whole gain, profit, and thus confounds rent with profit, at least in common language. The greater part of our North American and West Indian planters are in this situation. They farm, the greater part of them, their own estates: and accordingly we seldom hear of the rent of a plantation, but frequently of its profit.

A gentleman who farms part of his own estate should earn both the landlord’s rent and the farmer’s profit, after paying cultivation costs. But he tends to call his entire gain profit. In everyday language, at least, he confuses rent with profit. Most of our North American and West Indian planters are in this position. Most farm their own estates. So we seldom hear about the rent of a plantation, but often hear about its profit.

Common farmers seldom employ any overseer to direct the general operations of the farm. They generally, too, work a good deal with their own hands, as ploughmen, harrowers, etc. What remains of the crop, after paying the rent, therefore, should not only replace to them their stock employed in cultivation, together with its ordinary profits, but pay them the wages which are due to them, both as labourers and overseers. Whatever remains, however, after paying the rent and keeping up the stock, is called profit. But wages evidently make a part of it. The farmer, by saving these wages, must necessarily gain them. Wages, therefore, are in this case confounded with profit.

Ordinary farmers rarely hire an overseer to direct the overall work of the farm. They also usually do a good deal of manual work themselves, such as plowing and harrowing. After paying the rent, the remaining crop should therefore cover the capital they invested in cultivation and its usual profits. It should also pay them the wages they deserve as both laborers and overseers. But whatever remains after paying the rent and maintaining the capital is called profit. Yet wages clearly make up part of that amount. By saving those wages, the farmer must necessarily gain them. In this case, therefore, wages are confused with profit.

An independent manufacturer, who has stock enough both to purchase materials, and to maintain himself till he can carry his work to market, should gain both the wages of a journeyman who works under a master, and the profit which that master makes by the sale of that journeyman’s work. His whole gains, however, are commonly called profit, and wages are, in this case, too, confounded with profit.

An independent manufacturer may have enough capital to buy materials and support himself until he can bring his work to market. If so, he should earn both the wages of a worker employed by a master and the profit the master makes from selling that worker’s work. However, all his earnings are usually called profit. In this case, too, wages are confused with profit.

A gardener who cultivates his own garden with his own hands, unites in his own person the three different characters, of landlord, farmer, and labourer. His produce, therefore, should pay him the rent of the first, the profit of the second, and the wages of the third. The whole, however, is commonly considered as the earnings of his labour. Both rent and profit are, in this case, confounded with wages.

A gardener who works in his own garden takes on three roles: landlord, farmer, and laborer. His produce should therefore pay him rent as a landlord, profit as a farmer, and wages as a laborer. Yet the whole amount is usually considered earnings from his labor. In this case, both rent and profit are confused with wages.

As in a civilized country there are but few commodities of which the exchangeable value arises from labour only, rent and profit contributing largely to that of the far greater part of them, so the annual produce of its labour will always be sufficient to purchase or command a much greater quantity of labour than what was employed in raising, preparing, and bringing that produce to market. If the society were annually to employ all the labour which it can annually purchase, as the quantity of labour would increase greatly every year, so the produce of every succeeding year would be of vastly greater value than that of the foregoing. But there is no country in which the whole annual produce is employed in maintaining the industrious. The idle everywhere consume a great part of it; and, according to the different proportions in which it is annually divided between those two different orders of people, its ordinary or average value must either annually increase or diminish, or continue the same from one year to another.

In a civilized country, the exchange value of only a few goods comes from labor alone. Rent and profit contribute greatly to the value of most goods. So the annual product of a country's labor can always purchase or command much more labor than went into producing, preparing, and bringing it to market. Suppose a society employed all the labor it could purchase each year. The amount of labor would increase greatly every year. As a result, each year's product would be worth vastly more than the previous year's. But no country uses its entire annual product to support working people. Idle people everywhere consume a large part of it. The ordinary or average value of the annual product must therefore rise, fall, or remain the same each year. This depends on the proportions in which it is divided each year between working people and idle people.