chapter  3
9 Pages


Hitherto we have been reasoning on the assumption that production is carried on at given prices for all products. We must now drop this assumption and approach the real world-in which production and exchange mutually affect each other. Whilst we thus obtain a more complete theory of distribution, modified in some respects from that set out above, we shall also have an opportunity of resuming and completing our discussion of the theory of exchange value, which we were compelled to interrupt at the point at which its dependence upon, and connection with, the theory of production and distribution became clear. We shall, however, restrict our observations to the problem of the production and exchange of only two articles ; the argument is much facilitated by such a simplification and there is no theoretical difficulty in subsequently extending it to all the infinitely varied products which are actually exchanged. In spite of this simplification, however, the problem resolves itself into two essentially different questions, which are best surveyed and treated separately. On the one hand, we may assume that the two articles exchanged are produced in different countries or districts, between which there is no transfer of labour or capital, so that all the resources available in each community are engaged in the production of one article. On the other hand, we may assume that the production of both articles takes place in a closed economy in such a way that land, labour, and capital can be transferred from one industry to the other. The former case is typical of what is usually called in economics the theory of international trade and international values ; the latter of the theory of internal exchange under free competition. It is unnecessary to add that neither of these abstract assumptions corresponds to the phenomena of the real world. Perfect mobility of labour and capital within one country is just as improbable as is the complete absence of such mobility between countries.