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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,
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 identi. cal 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
equation. Therefore, although it will be necessary in the more intimate discussions of problems of exchange, especially as regards the effects produced by tariffs, to give close attention to the "utility” of goods in the hands of consumers, the general principles of exchange are more easily grasped by approaching them from the “costs” side.
The first of these principles then is, that in a community where full mobility of capital and labour coexists with freedom of exchange, goods will exchange according to the "cost" of producing that portion of the supply of each kind which is produced most expensively. In such a community the enlightened self-interest of the individual members, as we have seen, will likewise so harmonise the interests of the members that each will gain most for himself by doing that work whereby he contributes most to the general wealth.
Under these circumstances the most economical division and co-operation of labour is effected by the instrumentality of free exchange.
$ 4. Since complete mobility of capital and labour is a condition of this economy of energy and harmony of interests, we have next to ask, “ How if this mobility be not present?” If by custom, caste-system, or unequal apportionment of natural resources, capital and labour be not free to flow into any industry which seems to afford greater net advantages than other industries, but are virtually
fixed in their mode of employment, how will free exchange operate in the formation of productive industry and the distribution of the gains of barter ? This is the problem of the economy of exchange between members of “non-competing groups”-to adopt the term to which Professor J. E. Cairnes first gave currency.
Since it will be found that the claim of " scientific tariff-makers” to manipulate international exchange for the benefit of their own nation hinges almost entirely upon the attribution of the economic characteristics of non-competing groups to modern commercial nations, it is important to consider closely the economics of exchange among such groups.
It is quite evident that even in the freest of modern industrial societies the mobility of capital and labour is very imperfect, and the hypothesis of virtually "non-competing groups," if not ultimately valid, is at any rate plausible.
So far as existing forms of capital and labour are concerned, they are specialised in certain kinds of material and human agents incapable of transfer to any other sort of use except at great loss; and new "fluid” capital and labour is impeded in the free choice of its most profitable use by various inequalities of economic opportunity. Though now capital has greater mobility than labour, many real barriers limit for the ordinary man the area of invest