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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.

the picture and regard it, not from the "costs" side, but from the "utility" side. For as goods in a “free” market exchange according to their "final" costs, so they likewise exchange according to their "final' utilities. The last and most "costly" coats that are made are those least needed, i.e. they furnish the least satisfaction in their use; so with the last and most costly" shoes; and the utility of the product of the least efficient tailor will equal the utility of the product of the least efficient shoemaker. For, assuming complete mobility and free exchange, it is easy to see that if, owing to some new emergency, the utility of the marginal supply of shoes should come to exceed that of the marginal supply of coats, that fact, causing increased demand for shoes, would enable the least efficient shoemaker to obtain more coats and other goods than before for his shoes, and so new free labour would drift into shoemaking rather than into any other work, until the equality of its marginal utility with that of other crafts was re-established. So, on the basis of complete mobility of labour, the rate of exchange established by barter between different sorts of commodities will accord with the ratio of marginal cost or of marginal utility. Neither cost nor utility can be rightly regarded as the sole cause or determinant of value or exchange rate; the value, or relative importance, of goods for exchange is affected by forces operating either on the cost side or the utility side. But any cause which increases or decreases final cost,

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also increases or decreases final utility, and conversely any cause which increases or decreases final utility, increases or decreases final cost. They vary directly and proportionately. If tailors, hitherto sewing by hand, get hold of sewing machines, their marginal cost of production falls; it "pays" to produce more coats; this increased supply of coats exchanges at a lower rate for boots and other commodities, and by its consumption supplies less utility. A fall of marginal cost thus automatically, under free exchange, brings about a corresponding fall of marginal utility. Or take the converse case. A loss of cattle, causing a shortage of hides, raises the "cost" of producing shoes, so that it no longer "pays" to make the most "costly" shoes, which were formerly just worth while making; the supply of shoes is less and will exchange at a higher rate for coats and other commodities, the marginal shoes supplying by their consumption a greater utility. So a rise of marginal cost produces a rise of marginal utility.

§3. Since rates of exchange are seen to vary either with marginal costs or with marginal utility, it is theoretically a matter of indifference which we take for our notation in processes of exchange. By modern theorists of value, utility is commonly preferred, chiefly for two reasons: first, because, consumption being regarded as the end of industry, utility seems the most direct mode of measurement; secondly, because certain sorts of wealth exist, the

value of which does not appear to vary with "cost." When a stock of goods is strictly limited by a natural or artificial scarcity, so that it is not open to "free" industry to add to the supply, rate of exchange seems to have no direct dependence upon "cost."

But too much is commonly made of these exceptions, which are over-emphasised by a too rigid interpretation of what constitutes a single supply or "market." When the law of substitution is taken into proper account, it cannot be contended that the value of goods whose "scarcity" is most absolute, e.g. "old masters," is unaffected by the "cost" of producing other articles which appeal to the same order of taste. If "cost" be interpreted as the difficulty of adding to supply, it becomes virtually identical with "scarcity," for "scarcity" is governed either by human inertia or the "niggardliness of nature."

But however preferable utility may be for the general setting of theories of value, there can be little hesitation in preferring "cost" for handling the principles and practices of commercial exchange, even if we have to give separate treatment to the case of "monopolies." The main reason of this preference is a "practical" one, the fact that commerce is more organised as a producer's than as a consumer's business, and that the more numerous and changing forces are those which affect directly the processes of production and the "cost" side of the

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