The Ultimate Standard of Value [16]
According to this law of cost, the price of the means of maintaining the laborer (as bread, meat, shoe, coats, etc.), is to be explained by the value and price of the labor expended in the production of these commodities. If we start with this proposition, we can hardly continue, and say that the price of the labor is to be resolved into the cost or price of the means of maintaining the laborer. I have elsewhere dwelt upon the unsatisfactory nature of this explanation, (33*) and so need not elaborate upon it at this point. Nor have I any ground for thinking that Professor Marshall and the other moderate representatives of the modern English school would accept the "iron law of wage" in any literal sense, with all the theoretic and practical consequences which this would involve. Under these circumstances I do not believe it is possible to give a scientific explanation of the absolute height of wages, without some reference to that standard upon which, in the first of the above quoted statements, Professor Marshall seems inclined to base the market or demand price of labor. This is the marginal utility of the labor, or, otherwise stated, the value of the product of the last or marginal laborer. This explanation must, however, be supplemented in many and in part important details, by reference to the influence of the painfulness of labor and the cost of maintenance, though these can never entirely replace the above explanation. Even though for scientific purse we were permitted to neglect the periods of short and moderate length, we could not explain those long periods to which we had limited ourselves without reference to other elements, beside the painfulness of labor and the cost of maintenance. But we are not permitted, even for scientific purse, to neglect these short and moderate length periods. On the contrary, any serviceable explanation of the value of wares, which could be included under the law of cost, must be based, clearly and distinctly, upon the actual rate of wages during the periods under consideration, periods which are really long, though they may seem relatively short. The important point is that wages during these periods still come under the influence of that determinant, to which Professor Marshall refers as the "demand price for labor." This point is just as important as it is simple. In order to convince ourselves of its truth, we need only keep clearly in mind what it is, that the law of cost really accomplishes, in relation to the price of goods, and how this result is brought about. The typical effect of the law of cost is to change the chance and uncertain fluctuations which the price of goods undergoes, into a regular oscillating motion like that of a pendulum. In this motion the price always tends to return to the cost as to an ideal resting-place. Though the price seldom remains for any long time at this point, yet in a general way this might be called the normal position about which the price oscillate. The wonderfully simple mechanism by which the law of cost brings about this result is as familiar as the law itself. It rests upon the very simple motive of self-interest. If in any branch of production the price sinks below the cost, or in other words, if the market price of the product is lower than the value of the means of production, men will withdraw from that branch and engage in some better paying branch of production. Conversely, if in one branch of production, the market price of the finished good is considerably higher than the value of the sacrificed or expended means of production, then will men be drawn from less profitable industries. They will press into the better paying branch of production, until through the increased supply, the price is again forced down to cost. The law of cost operates, therefore, by changing the occupation of the productive power.(34*) So long as the price tends to cause a change in the occupation of the productive power, it is itself not in a state of equilibrium. On the other hand, a condition of at least relatively stable