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affect the Normal wages of unskilled labour. But in any given phase of civilization the Normal Task Wages of unskilled labour are nearly constant.

So with regard to the earnings of skilled labour, including the incomes of professional men, and of all others who render skilled service for payment. The earnings of each kind of skilled labour depend on the scope for its employment_on the one hand, and on the supply of it on the other. The expensiveness of the education, and the rarity of the natural qualities required for it are the chief of the conditions which determine the supply that will be called forth by any given rate of wages; so that the supply is governed by laws similar in many respects to the Law of Normal Supply of commodities. The Normal wages of skilled labour of any given degree of difficulty, may vary slowly. But at any time and place they are determined by the social and economic condition of the people, and they may be said to measure the efforts involved in the work. The fact that Earnings of Management can be obtained only by those who have the control of capital, does not prevent their Normal value from being determined substantially in the same way as the wages of skilled labour. That part of the Normal Earnings of Management which can be got by a man who works with borrowed capital, measures the difficulty of his business. A man who conducts a similar business with his own capital obtains in addition the equivalent of Personal Risks.

Thus the Cost of production of a thing is measured by its Normal Expenses of production. If the difficulty of producing a thing, or its Cost of production is independent of the amount produced, Cost of production determines Expenses of production and therefore determines Normal value. But when the amount produced is increased, the Cost of production may increase according to the Law of Diminishing Return, or may diminish according to that of Increasing Return. In order to cover these cases, the Law of Normal Value must be stated thus :-"The Normal supply of the commodity is such, that its Normal Expenses of production equal the value, which will call forth a demand for this amount; and the price so determined is the Normal value." Normal value still measures Cost of production, but is not determined simply by it.

C$ 2. This is an instance of the rule that in Nature changes generally react on one another. For instance it is not true that the state of a man's lungs is determined by that of his heart, or vice versa; but subject to external influences, the conditions of his heart, lungs and other parts of his body determine one another. So when two unequal balls A and B are put into a smooth basin, it is not right to regard A's position as determining the position of B. For though it is true that if we

know exactly where A is, we can tell at once where B it is equally true that if we know where B is, we can te where A is. The positions of A and B are determined simu taneously by the action of the Law of Gravitation.

So it is with regard to Normal value. It is true that in the exceptional case in which the difficulty of production of a thing is fixed independently of amount produced, Cost of production determines Normal value. But as a rule the Cost of production of a thing is not fixed: the amount produced and its Norma value are to be regarded as determined simultaneously under the action of Economic Laws.

It is then incorrect to say, as Ricardo did, that Cost of production alone determines value: but it is no less incorrect to make utility alone, as others have done, the basis of value It is certainly true that utility is a condition of value always and that in cases in which the supply of the commodity is fixed utility determines price. It is true that the price of every commodity must be the measure of its Final utility; that i of its value in use to those who are only just induced to purchas it. But it is not true that this Final utility determines value: it changes itself, according to the Law of Demand, with ever change in the amount of the commodity that is offered sale. This amount, and therefore the Final utility of the commodity, depend upon the relation between the circumstance of supply and those of demand.]

$3. We have now to pass from the theory of Normal valu to that of Market value. Normal results are those which wou be brought about by competition if it acted freely, and alway had time to cause those effects which it has a tendency to caus Market results are those which actually are brought about the complex social and economic forces of the world in whi we live.

We have compared Normal value to the Normal growth a tree. Let us now compare it to the Normal tides which the would be if there were no disturbing wind, and no irregulariti of coast line. Observation tells us that waves driven by ti wind over the sea make its surface rapidly rise and fall; an that the irregularities of coast line pile up the tidal waves i some places ten times as high as they are in the mide of th ocean. The theory of the Normal tides does not tell us what i the highest point that the tide reaches at any place in (say) th Bristol Channel. We cannot find out this without examining the special circumstances of the case, and allowing for the influence of the winds, and the peculiar nature of the shores But on the other hand we can make no progress in explaining the movements of the sea unless we first understand which of them are due to local or transitional causes, and which to the

And

ormal influence of the attractions of the Moon and Sun.
e cannot do this until we have first worked out the abstract
eory of the tides that would be formed in a world in which
ere were no disturbing winds and no irregular shores.
So with regard to the theory of Normal value. It does not
11 us what will be the wages of a certain work, or the price of a
ertain thing at any particular time. We cannot discover the
[arket value of a thing without allowing for the fluctuations of
ipply and demand, and for the resistance which local obstacles
opose to the free movement of the stream of competition. But
the other hand we can make no progress in explaining the
ovements of wages and prices, unless we first understand which
f them are due to local or transitional causes, and which to the
formal action of free competition. The theory of Normal value
the starting point from which we must set out to explore all
e various irregularities and unevennesses of Market values. It
aches how the great tidal waves of wages and prices would
Love if every one were careful to forecast the future, and
eliberately to shape his course so as to obtain the greatest
conomic advantages for himself and his family. It puts us in
he right position for examining how man's action is modified
y custom, or apathy, or generally by motives other than the
esire for wealth.

We can then apply our theory to explain facts, so far s it will go; and those facts which cannot be explained y our theory are "light-giving" facts, and shew us how to orrect and enlarge our theory. Thus the science of Economics rogresses step by step, alternately applying theory in the search or and explanation of new facts, and applying new facts in orrecting and broadening and strengthening theory.

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BOOK III.

MARKET VALUE.

CHAPTER I.

CHANGES IN THE PURCHASING POWER OF MONEY.

§ 1. THROUGHOUT the discussion of the Theory of Normal value it was assumed that the purchasing power of money remained unchanged1; so that a rise or fall in the exchange value or general purchasing power of a thing could always be shortly expressed as a rise or fall of its price. We must now inquire briefly how the value or general purchasing power of money changes from time to time. But a full discussion of the theory of the value of money belongs to the "Economics of Trade and Finance."

The most obvious of the causes that affect the purchasing power of the precious metals in a country is the quantity of them that is available for use as money. If this increases very fast, there will be more than is wanted to carry on the business of the country at the old prices, and prices will rise. On the other hand, if the amount of the precious metals remains stationary while the population and wealth of the country increases, there will be a great demand for money to carry on the business of the country; the purchasing power of the precious metals will rise, and prices will fall.

For instance at the beginning of the sixteenth century when the new supplies from the American silver mines made themselves felt, the purchasing power of silver began to fall; and early in the seventeenth century prices in London were on the average three times as high as they were in 1500. Again prices were high at the beginning of the present century.

1 Bk. II. ch. i. § 4.

But no

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diminished by their use in the industrial arts and by wear and tear; and meanwhile population and wealth were increasing rapidly. So the purchasing power of gold rose; and prices fell to about half what they were in 1800-10. About 1850 the gold mines of California and Australia were discovered, there was a great increase in the supply of the precious metals, and prices rose again.

§ 2. But though the amount of the precious metals in circulation is the most obvious of the causes that affect the purchasing power of money, a no less important cause is the growth of artificial substitutes for the precious metals as a medium of exchange.

The most familiar of these substitutes are bank notes. They pass freely from hand to hand, and exert nearly the same influence over prices as an equivalent amount of coined money does. But in England this influence is not as important as that exercised by cheques, which have displaced both coin and bank notes in nearly all wholesale and in many retail transactions. A cheque does not circulate freely, but is generally given by the person who receives it to his banker, who demands payment of it for him. But though cheques do not act as substitutes for coin in the same way as bank notes do, yet the total amount of them is so great as to exercise a very powerful influence over prices. Again the modern system of credit enables a man who has neither money nor anything that immediately represents money, to obtain from a banker or other money dealer the means of purchasing goods. He can do this not only on his own credit (as when a bank allows him a "Book credit"), but on the credit of others who have undertaken to pay him money at a future date (as when he "discounts a Bill").

The business of the civilized world has increased very rapidly during the present century; and an enormous amount of coin would have been required to carry it on with the present prices. If credit had not found substitutes for coin, there would have been so great a demand for the precious metals, that their purchasing power would have become many times as great as it actually is; prices would have been very low. The growth of credit supplies a permanent substitute for the precious metals, and therefore affects their Normal values. But credit fluctuates, and each fluctuation alters their Market values.

For instance, an expansion of credit coincided with the influx of precious metals consequent on the discovery of the Californian and Australian mines, and increased the upward tendency of prices. But in 1857 there was a crisis; that is, many trading

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