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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

ment; and many fields to which access is not absolutely forbidden he can only enter upon terms of purchase which prune his profit to a low level for the exclusive benefit of the group of capitalists who have fenced round for themselves this particular preserve. Labour notoriously is more restricted: the ordinary labourer even in England to-day has choice of employment only within a narrow limit, not so much of place (for cheapness of transport has extended the spatial area of his market) as of grade; the labour market is broken up into many markets, alike of "skilled" and "unskilled" trades, and a labourer is practically precluded by poverty, lack of education, family associations, etc., from exercising a wide choice; while, once fixed in a trade, he finds it difficult to change into another. Though an English worker today has more mobility and wider real choice than his ancestors, much stratification still survives.

$5. When in such a society different sorts of goods and services come to be exchanged in elaborate processes of barter, the results of this stratification are very evident. The guarantee, provided by complete mobility of capital and labour, that goods would exchange on a basis of equality of "costs," or human "trouble" of production, no longer exists. If everyone were equally free to be a miller or a shoemaker, we saw that flour and shoes must exchange on terms which gave each man the same reward for his "trouble"; but if milling becomes a

close corporation which no man can enter without an expensive education and large capital, there is no security that flour will exchange with shoes upon terms which distribute the gain of barter equally. Or again, if every boy were really free to get education and equip himself for medical work, medical service would exchange for domestic service, or for porterage, upon the basis of a comparison of "final" costs, and the ordinary surgeon might get no more pay per diem than the ordinary porter. But so long as the opportunity of equipment for the medical profession is less free than that for ordinary manual work, there is nothing to prevent the average or the marginal doctor getting twice, ten times, or a hundred times more service from the porter who employs him than the service he renders in return, as measured by "cost" or trouble. The fee paid by the porter for medical service may represent fifty units of "cost" as compared with one unit received in return. It is clear that in barter of goods and services between members of different groups in such a society, the goods and services do not exchange in accordance with their final cost, in the sense hitherto accorded to that term.

What does determine the rate of exchange, or value, of different sorts of goods in a society composed of non-competing groups? At first sight two circumstances would seem to have equal weight, the degree of intensity of demand, the degree of scarcity

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of supply. Two persons confronting one another, each with a monopoly of an absolute necessity of life, could have no basis for bargain, unless it be urged that a perception by each of the equal necessity of obtaining a unit of the supply belonging to the other would determine the rate of exchange on a firm basis of utility, a day's necessary supply of the one commodity exchanging for a day's supply of the other. If for two persons in this situation we substitute two groups, competing only among themselves, and with the same aggregate surplus of the two necessaries available for exchange, it is clear that, since ex hypothesi each act of exchange has the same importance for one party as for the other, the exchange will again be on a basis of equal utility, with no reference to respective costs. If, however, the intensity of demand is greater for one of the commodities than for the other, the one being a physical necessity, the other only a prime convenience of life, or if, on the other hand, both being necessary, the available surplus of the one was greater than that of the other, it is clear that the commodity to whose demand the greater necessity, or to whose supply the greater scarcity attached, would have a higher rate of exchange than where the conditions were equal. But though it here seems as if intensity of demand played an equal part with scarcity of supply in determining rate of exchange, it can easily be shown that this is not the case. For if the surplus constantly available

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