If there had been one currency for the whole world issued by universally recognised monetary authorities, or if all countries accepted one another’s currency as legal tender, payments for goods among nations would have been the same as amongst individuals in a country. But as we know, each country, in the exercise of its undoubted sovereignty, has its own currency and does not recognise as legal tender or even as valid the currency of another country.
When, therefore, A has to pay to B, he must pay either in the currency of B which A hasn’t got or in some form of internationally recognised medium of exchange. In the illustration which we have given, we see that C also imports goods from A. It is possible that B also imports goods from C. In this case, one would have expected that B would accept A’s currency in order to pay for goods bought from C, so that C may use this in paying for goods bought from A. But, unfortunately, this is very seldom the case. B definitely would not do this unless he has confidence in the stability of the government of A and in the constant value of its currency. Nor unless these same conditions are fulfilled would C be willing to hold A’s currency, even for a moment. Up to the first quarter of this century, the internationally recognised medium of exchange was gold. Apart from being a medium of exchange, it also formed the basis of currency issues in all the countries of the world. The more gold a country had, the more currency it put or was expected to put into circulation; and the less gold, the less currency.
For two important reasons, however, gold has now ceased to be the only internationally recognised medium of exchange. In the first place, there is no longer enough of it available to cope with the size of payments dictated by the volume of international trading transactions. In the second place, some countries, in order that they might continue as creditor nations, refused to reflect the increase in their holdings of gold in the quantity of domestic currency they put into circulation.
Now, it is an accepted principle or rule of International Trade that exports and imports as between countries must, over a period of time, cancel each other out. If a country continually had an increasing surplus of exports over imports, it.would sooner or later face an uncontrollable inflation internally. On the other hand, if a country continually had an increasing surplus of imports over exports, apart from becoming a miserable debtor nation, it would sooner or later face disastrous deflation and depression at home. Though international trading transactions must, as we have said, cancel one another out over a period of time, so that no country would be debtor or creditor to another permanently, yet in the short run this is not the case, and payments for current transactions must be made. As we have noted, gold is no longer able to play, single-handed, the role of the international medium of exchange.
It has become necessary, therefore, to supplement gold with the national currencies of the United States of America and Britain- that is dollar and pound sterling – which are internationally recognised.
The reasons for the international” acceptability of Dollar and Sterling are the same. Over a long period of years, the governments of U.S.A. and Britain have been exceptionally stable and their two currencies have shown comparative constancy in their values. In addition, the two countries are comparatively wealthier than their
compeers and their trading activities are farflung and global. There is scarcely any country in the world which does not have direct trade relations with both of them. With the exception of the currencies of the common market countries which are now just emerging as possible rivals, no other currency attracts anything resembling the absolute confidence which the countries of the world repose in dollar and sterling. As a result, there are today
three universally accepted media of international payment: gold, dollar, and sterling.
FOUR: As we have noted, no person, family partnership, or company can produce all that it or the community requires. We have also noted that as a result of this, and because of climatic and other physical differences, there is a division oflabour among individuals in a firm, among firms in an industry, among industries, between one region and another in a country, and between independent sovereign countries. In consequence of these individual,
technological, territorial, and international divisions of labour, it becomes necessary for exchange to take place between producers inter se, and between producers and consumers. In this way, all the people in a society are in a position to get all that they require.
But there are other significant advantages of division of labour which are pertinent to our present discussion. Adam Smith, in his Wealth of Nations, 1776, gives us the classical example of division of labour in a pin-making factory. Here, the making of a pin is divided into ‘eighteen distinct operations’. Because of this, it is possible for ten workers ‘indifferently accommodated’ to make among them 48,000 pins in one working day, an average of 4,800
pins per worker. Without this intensive division of labour, one worker doing all the 18 operations by himself would have produced one pin or at the very most 20 pins in one working day. Division of labour such as this requires education, training, and a little bit of native talent, on the part of the worker, before he can achieve dexterity and expertness. In some cases, it tends to and does in fact stimulate the inventive genius of the worker, resulting in actual invention which makes further division of labour possible. It will be seen from Adam Smith’s example that division of labour makes for maximum efficiency, and for ‘the greatest improvement in the productive powers of labour’. But it is now a far cry from Adam Smith. Today, as a result of scientific and technological advancement, division of labour has progressed so phenomenally that the productivity of a worker in a pin-making factory is much
higher than that of the worker in that old factory of Adam Smith’s illustration. Generally speaking, division of labour has been raised to such a stage of perfection that each worker, from the unskilled manual labourer to the most deft and highly qualified technician, plays only an infinitesimal but integral and indispensable part in the production of anything from an office pin to a jet airliner.
It is obvious from what we have said that the beneficial effects of division of labour go to confirm and emphasize, most eloquently, the dignity of all forms of labour. Without the unskilled workers – even the ordinary cleaners and tool-bearers – the most skilled workers cannot accomplish successfully and with the same amount of productivity and exquisiteness, their own parts in the varied and complicated processes of modem production.
It is important, however, to point out that division of labour is not an unmixed blessing. It has its disadvantages, the most significant of which is that it seriously hampers the vertical mobility of labour.
FIVE: Utility and productivity are relative terms. They denote the same concept. A quantity of raw cotton has utility for the manufacturer just in the same way as the finished textile has for the consumer. The textile manufacturer is also a consumer: in his case he consumes not the finished product but raw cotton. He also consumes such finished products – like machinery for instance – as enable him to manufacture textiles. He is, however, a consumer with a difference. Whilst to the final consumer marginal utility is measurable only in subjective terms, to the producer or manufacturer marginal utility can be measured in objective terms. He has, from time to time, to relate the marginal utility of any commodity, including labour, to marginal productivity. Which means, in simple terms, the point at which the cost of production is equal to the price prevailing in the market for the finished products. In other words, it is the consumer’s marginal utility that determines the producer’s marginal productivity. Ifthe consumers will only absorb 1,000 pieces of textile of 6 yards each, for which they will pay not more than 20/ – per piece, it will be unprofitable for the manufacturer to produce 1,010 pieces of textile which, because of the increase in supply, will fetch only 16/- per piece. Unless of course he is able to produce these pieces of textile under conditions of increasing returns – that is, if he is able to produce more pieces of textile at a lower cost per piece.
Under these conditions, he may produce 2,000 pieces at 10/- per piece for which the consumers are prepared to pay only as much as 12/- per piece. But, sooner or later, a stage is reached when diminishing ‘returns set in, that is, when the more he produces the higher the cost per piece. ,
In this illustration, we are assuming that the demand for textile is elastic. But there are instances where the demand for certain goods is inelastic. If consumers will onlypay 5/- per bag when there is a supply of 1,000 bags of yam flour in the market, it will be difficult, other things being equal, to stimulate the’purchase of ~ , 2,000 bags at 2/- per bag, even if it is possible to produce 2,000.
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