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later on.

At present it must suffice to recognise that the primary advantages of free exchange to a number of farmers, manufacturers, merchants, and others buying and selling in common markets, are nowise affected by the fact that some of them are citizens of Great Britain, others of France or Germany, and others again of the United States. Free Exchange, whatever the area, and regardless of political boundaries, is the first condition and instrument of that application of industrial energy by all participants, which shall secure the greatest aggregate of wealth and the absolutely largest amount for each member of this industrial commonwealth.

This conclusion is very far from implying that any actual practice of Free Exchange affords a guarantee of a fair and equal distribution of the enlarged product which division of labour secures, either among individuals, trades, or among industrial individuals grouped politically as nations. It is, indeed, these apparent imperfections in distribution of wealth by so-called Free Exchange that are often made the pretexts of political regulations in the form of Tariffs, Bounties, etc.

CHAPTER III

EXCHANGE BETWEEN “NON-COMPETING

GROUPS"

SI IN N order to understand the economic impediments

in the way of Free Exchange with a view to considering how far the claims of Protectionists and Tariff Reformers to remove them are valid, it is first necessary to study closely the play of the forces which determine the conditions of exchange of goods in our small primitive community.

Let us then return to this split society with several farmers on each side of the creek, and with (say) one tailor, one carpenter, one shoemaker, and one miller in each village.

In such an industrial society in what ratio would commodities exchange with one another, and in what proportion would the advantages of such exchange be divided among the participants? If F, the tailor, puts twice as much time and trouble (i.e. cost) into making a coat as H, the shoemaker, puts into making a pair of boots, it is evident that these two commodities exchange in the ratio of two

to one. For if F tried to demand three pairs of boots for a coat instead of two, he could not get them. The other tailor across the creek would under-bid him; or H would rather do without a new coat than make an exorbitant exchange; or finally, a handy man himself, he would make a coat for himself. It is easy to see that given free competition, mobility and adaptability of labour-power, a coat and a pair of boots must exchange according to the trouble or cost incurred in making them. And if a coat and boots, then other commodities-a sack of flour, a hatchet, a table-must exchange in proportion to the trouble they respectively cost to make. In the cruder stage of such barter the rate of exchange would be a rough average of this cost, each separate act of exchange being liable to diverge from this "rate" to meet some special case of cost. So, though the rate of exchange between coat and boots might be one coat to two pairs of boots, a shoemaker who had some stock in hand might give three pairs for a coat, if the tailor were very busy and had to work extra time to make the coat. If, however, this was not an accidental situation, but due to an industrial improvement which enabled the shoemaker to produce shoes more easily than before, it is evident that this over-supply of shoes in relation to coats would establish a new ratio in the exchange rate of coats and shoes to accord with a new cost rate.

If the mechanism of barter is somewhat more organised, so that several tailors and several shoemakers with different degrees of skill and industry are at work, it is quite evident that the rate of exchange between coats and boots will be directly measured by the relation between the "cost" of making the coat made by the slowest tailor at the end of his day's work, and the cost of making the boots made by the least efficient shoemaker under the same circumstances. For if there were complete mobility of labour and equal general aptitude for the two kinds of work, and on account of some increased demand for coats or the sudden death of the best tailor, the day's work of the least efficient tailor purchased more boots and other commodities than before, the next boy who reached working years would take to tailoring, or some shoemaker would take on some tailoring work. It is indeed manifest that any increased or decreased difficulty in buying coats, by paying boots, or flour, or hatchets, will draw industrial energy from the margin of other pursuits into tailoring, or will draw the least productive tailors into some other craft. If an hour's tailoring by a new “hand” is able to exchange its product against a larger quantity of other commodities than an hour's work by a new “hand” at any other craft, it is clear that there will be a set made into tailoring until the level is once more reached. This rate of exchange will not depend upon the relative cost of

the most efficient workers in each craft. The most skilful tailor may be able to get twice as much flour in exchange for his day's product as the most skilful shoemaker, provided the least skilful tailor is only able to get the same quantity as the least skilful shoemaker.1

§ 2. In other words, given mobility and free exchange goods will exchange according to the “final” or “marginal" cost of production, i.e, the cost of the most costly portion of the supply. The exchange of these marginal goods brings the minimum gain to those who make the exchange: the coat which the least efficient tailor makes when he is most tired, exchanges against the two pairs of boots made by. the least efficient shoemaker under similar circumstances; and each of them finds it only just worth while to do the work and make the exchange. The other tailors and shoemakers, however, find it well worth while to make and exchange their goods, and even the least skilful, in exchanging the coats or shoes he makes in the earlier and lighter portion of his day's work, makes a considerable profit by exchange. Such gains appear in the economic textbooks as producers' rents.

They are also consumers' rents, if we now reverse

1 The skill and industry of the superior tailor are not, however, without their due effect as determinants of the marginal cost of tailoring, for where they are great a small number of tailors will be employed, and so the least skilful, or marginal, tailor will be a better tailor than where they are small.

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