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Elements of Political Economy; Mill, James
33 paragraphs found.
Chapter II, Distribution

It is very evident, that the share of the two parties is the subject of a bargain between them; and if there is a bargain, it is not difficult to see on what the terms of the bargain must depend. All bargains, when made in freedom, are determined by competition, and the terms alter according to the state of supply and demand.

Chapter III, Interchange

In small towns, where one or a few merchants can supply the wants of all the population, the shop or store of one merchant contains articles of all, or most of the kinds, in general demand. In places where the population is large, instead of a great number of shops, each dealing in almost all kinds of articles, it is found more convenient to divide the articles into classes, and that each shop should confine itself to a particular class: one, for example, to hats, another to hosiery; one to glass, another to iron; and so on.


This is, evidently, the principle of demand and supply, in the first instance. If a great quantity of corn comes to market to be exchanged for cloth, and only a small quantity of cloth to be exchanged for corn, a great quantity of corn will be given for a small quantity of cloth. If the quantity of cloth, which thus comes to market, is increased, without any increase in the quantity of corn, the quantity of corn which is exchanged for a given quantity of cloth will be proportionally diminished.


This answer, however, does not resolve the whole of the question. The quantity in which commodities exchange for one another depends upon the proportion of supply to demand. It is evidently therefore necessary to ascertain upon what that proportion depends. What are the laws according to which supply is furnished to demand, is one of the most important inquiries in Political Economy.


Demand creates, and the loss of demand annihilates, supply. When an increased demand arises for any commodity, an increase of supply, if the supply is capable of increase, follows, as a regular effect. If the demand for any commodity altogether ceases, the commodity is no longer produced.


It thus appears that the relative value of commodities, or in other words, the quantity of one which exchanges for a given quantity of another, depends upon demand and supply, in the first instance; but upon cost of production, ultimately; and hence, in accurate language, upon cost of production, entirely. An increase or diminution of demand or supply, may temporarily increase or diminish, beyond the point of productive cost, the quantity of one commodity which exchanges for a given quantity of another; but the law of competition, wherever it is not obstructed, tends invariably to bring it to that point, and to keep it there.

Chapter III, Interchange, Section XI

We have already seen, in treating of the properties which recommended the precious metals for the instrument of exchange, that they are less than almost any other commodity subject to fluctuation of value. They are not, however, exempt from changes, partly temporary, and partly permanent. The permanent changes take place, chiefly in consequence of a change in the cost of procuring them. The greatest change of this kind, recorded in history, is that which took place on the discovery of the mines of America, from which, with the same quantity of labour a greater quantity of the metals was obtained. The temporary changes take place, like the temporary changes in the value of other commodities, by a derangement of the balance of demand and supply. For the payment of troops in a foreign country, or subsidies to foreign governments and other operations, a great quantity of gold or silver is sometimes bought up, and sent out of the country. This enhances the price, till the balance is restored by importation. The profit which may be acquired operates immediately as a motive to restore it. In the interval, however, an advantage may be derived from a paper money not convertible immediately into the metals. If convertible, gold will be demanded, paper will be diminished, and the value of the currency will be raised. If not convertible, the currency may be retained of the same or nearly the same value as it was before. This, indeed, can scarcely be done, and the remedy applied with safety, unless where the whole is paper, and government has the supply in its own hands. In that case the sameness in the quantity of the currency, as it would be perfectly known, would be a sufficient index and security. If the price of gold rose suddenly above the mint price, or, in other words, above the rate of the bank notes, without any alteration in the quantity of the currency, the sameness in the quantity of currency would be a sufficient index that the rise was owing to a sudden absorption of the gold; which, after a time, would return. If in such circumstances the obligation of keeping up the value of the paper to that of the gold were suspended for a short time, a sufficient security against any considerable alteration in the value of the currency would be found in the obligation of keeping the quantity of it the same; because, during any short period of time, there can be no such diminution or increase of the quantity of business to be done by it, as to require any material alteration. That in the hands of an irresponsible government such power of suspension would be dangerous, is true. But an irresponsible government involves all kinds of danger, and this among the rest.


Next, let us observe what happens, when the state of the exchange is disturbed. Let us suppose that a demand is suddenly created in A, for the means of making payments in B, greatly beyond the value of the former exportations. The demand for bills on B is consequently increased beyond the supply, and the price rises. The question is, what is the limit to that rise in the price of bills? At first it is evident the rise of price is limited to the cost of sending the precious metal. As the metal, however, departs, the value of it rises. If the currency is paper, and its value stationary, the gold will rise, and rise equally, both in currency and commodities. The final question, then, is, what is the limit to the rise in the value of gold?


The cases of production and of exchange require to be considered separately; for, in the case of production, there is hardly any difference of opinion. If a country had no commercial intercourse with other countries, and employed the whole of its productive powers exclusively for the supply of its own consumption, nothing could be more obviously absurd, than to give premiums for the production of one set of commodities, and oppose obstructions of any sort to the production of another; I mean, in the view of Political Economy, or, on account of production: for if any country opposes obstructions to certain commodities, as spirituous liquors, because the use of them is hurtful; this regards morality, and has, for its end, to regulate not production, but consumption. Wherever it is not intended to limit consumption, it seems admitted, even in practice, that the demand will always regulate the supply, in the manner in which the benefit of the community is best consulted. The most stupid governments have not thought of giving a premium for the making of shoes, or imposing a preventive tax upon the production of stockings, in order to enrich the country by making a greater quantity of shoes, and a less quantity of stockings. With a view to the internal supply, it seems to be understood that just as many shoes, and just as many stockings, should be made, as there is a demand for. If a different policy were pursued; if a premium were bestowed upon the production of shoes, a tax or other burthen imposed upon the production of stockings, the effect would only be, that shoes would be afforded to the people cheaper, and stockings dearer, than they otherwise would be: that the people would be better supplied with shoes, worse supplied with stockings, than they would have been, if things had been left to their natural course, that is, if the people had been left to consult freely their own convenience, in other words, if the greatest quantity of benefit, from their labour, had been allowed to be obtained.


If there be any peculiar advantage, therefore, to the mother country, it must be derived from the cheapness of the goods, with which the colony supplies her. It is evident, that if the quantity of goods, sugar, for example, which the colony sends to the mother country, is so great as to glut the mother country; that is to supply its demand beyond the measure of other countries, and make the price of them in the mother country lower than it is in other countries, the mother country profits by compelling the colony to bring its goods exclusively to her market, since she would have to pay for them as high as other countries, if the people of the colony were at liberty to sell wherever they could obtain the greatest price.

Chapter IV, Consumption, Sections I-III

A man produces, only because he wishes to possess. If the commodity, which he produces, is the commodity which he desires to possess, he stops when he has produced as much as he desires; and his supply is exactly proportioned to his demand. The savage, who makes his own bow and arrows, does not make bows and arrows beyond what he wishes to possess.


So far as a man consumes that which he produces, there is, properly speaking, neither supply nor demand. Demand and supply, it is evident, are terms which have reference to exchange; to a buyer and a seller. But in the case of the man who produces for himself, there is no exchange. He neither offers to buy any thing nor to sell any thing. He has the property; he has produced it; and does not mean to part with it. If we apply, by a sort of metaphor, the terms demand and supply to this case, it is implied, in the very terms of the supposition, that the demand and supply are exactly proportioned to one another. As far then as regards the demand and supply of the market, we may leave that portion of the annual produce, which each of the owners consumes in the shape in which he produces or receives it, altogether out of the question.


In speaking here of demand and supply, it is evident that we speak of aggregates. When we say of any particular nation, at any particular time, that its supply is equal to its demand, we do not mean in any one commodity, or any two commodities. We mean, that the amount of its demand, in all commodities taken together, is equal to the amount of its supply in all commodities taken together. It may very well happen, notwithstanding this equality in the general sum of demands and supplies, that some one commodity or commodities may have been produced in a quantity either above or below the demand for those particular commodities.


As every man's demand, therefore, is equal to that part of the annual produce, or of the property generally, which he has to dispose of, and each man's supply is exactly the same thing, the supply and demand of every individual are of necessity equal.


Demand and supply are terms related in a peculiar manner. A commodity which is supplied, is always, at the same time, a commodity which is the instrument of demand. A commodity which is the instrument of demand, is always, at the same time, a commodity added to the stock of supply. Every commodity is always, at one and the same time, matter of demand, and matter of supply. Of two men who perform an exchange, the one does not come with only a supply, the other with only a demand; each of them comes with both a demand and a supply. The supply, which he brings, is the instrument of his demand; and his demand and supply are of course exactly equal to one another.


But if the demand and supply of every individual are always equal to one another, the demand and supply of all the individuals in the nation, taken aggregately, must be equal. Whatever, therefore, be the amount of the annual produce, it never can exceed the amount of the annual demand. The whole of the annual produce is divided into a number of shares, equal to that of the people to whom it is distributed. The whole of the demand is equal to as much of the whole of the shares as the owners do not keep for their own consumption. But the whole of the shares is equal to the whole of the produce. The demonstration, therefore, is complete.


How complete soever the demonstration may appear to be, that the demand of a nation must always be equal to its supply, and that it never can be without a market sufficiently enlarged for the whole of its produce, this proposition is seldom well understood, and is sometimes expressly contradicted.


Though it be undeniable, that the demand, which every man brings, is equal to the supply, which he brings, he may not find in the market the sort of purchaser, which he wants. No man may have come desiring that sort of commodity, of which he has to dispose. It is not the less necessarily true, that he came with a demand equal to his supply; for he wanted something in return for the goods which he brought. It makes no difference to say, that perhaps he only wanted money; for money is itself goods; and, besides, no man wants money but in order to lay it out, either in articles of productive, or articles of unproductive consumption.


Every man having a demand and a supply, both equal; if any commodity be in greater quantity than the demand, some other commodity must be in less.


If every man has a demand and supply both equal, the demand and supply in the aggregate are always equal. Suppose, that of these two equal quantities, demand and supply, the one is divided into a certain number of parts, and the other into as many parts, all equal; and that these parts correspond exactly with one another; that as many parts of the demand as are for corn, just so many parts of the supply are of corn; as many of the one as are for cloth, so many of the other are of cloth, and so on: it is evident, in this case, that there will be no glut of any thing whether the amount of the annual produce be great or small. Let us next suppose, that this exact adaptation to one another of the parts of demand and supply is disturbed; let us suppose that, the demand for cloth remaining the same, the supply of it is considerably increased: there will of course be a glut of cloth, because there has been no increase of demand. But to the very same amount there must of necessity be a deficiency of other things; for the additional quantity of cloth, which has been made, could be made by one means only, by withdrawing capital from the production of other commodities, and thereby lessening the quantity produced. But if the quantity of any commodity is diminished, a demand equal to the greater quantity remaining, the quantity of that commodity is defective. It is, therefore, impossible, that there should ever be in any country a commodity or commodities in quantity greater than the demand, without there being, to an equal amount, some other commodity or commodities in quantity less than the demand.


The effects, which are produced, in practice, by the want of adaptation in the parts of demand and supply, are familiar. The commodity, which happens to be in superabundance, declines in price; the commodity, which is defective in quantity, rises. This is the fluctuation of the market, which every body sufficiently understands. The lowness of the price, in the article which is superabundant, soon removes, by the diminution of profits, a portion of capital from that line of production: The highness of price, in the article which is scarce, invites a quantity of capital to that branch of production, till profits are equalized, that is, till the demand and supply are adapted to one another.


In such a case, what came to every man's share of the annual produce, bating his own consumption of necessaries, would be devoted to production. All production would of course be directed to raw produce and a few of the coarser manufactures; because these are the articles for which alone there would be any demand. As every man's share of the annual produce, bating his own consumption would be laid out for the sake of production, it would be laid out in the articles subservient to the production of raw produce and the coarser manufactures. But these articles are precisely raw produce and a few of the coarser manufactures themselves. Every man's demand, therefore, would consist wholly in these articles; but the whole of the supply would consist also in the same articles. And it has been proved, that the aggregate demand and aggregate supply are equal of necessity; because the whole or the annual produce, bating the portion consumed by the shareholders, is brought as the instrument of demand; and the whole of the annual produce, with the same abatement, is brought as supply.


It appears, therefore, by accumulated proof, that production can never be too rapid for demand. Production is the cause, and the sole cause, of demand. It never furnishes supply, without furnishing demand, both at the same time, and both to an equal extent.


What is it that we mean, when we say the demand of a nation, speaking of the aggregate, and including a definite circle of production and consumption, such as that of a year? Do we, or can we, mean any thing but its power of purchasing? And what is its power of purchasing? Of course, the goods which come to market. What, on the other hand, is it we mean, when, speaking in like manner aggregately, and including the same circle, we say the supply of the nation? Do we, or can we mean any thing, but the goods which come to market? The conclusion is too obvious to need to be drawn.


What produces the confusion of ideas, which so often occurs in the consideration of this subject, is the glut, which may, and does take place, of particular commodities. Does it follow from this, that there can be a glut of commodities in the aggregate, when it is necessarily true that there cannot be an aggregate supply without an equal aggregate demand, equal both in quantity and in value?


What is it that is necessarily meant, when we say that the supply and the demand are accommodated to one another? It is this: that goods which have been produced by a certain quantity of labour, exchange for goods which have been produced by an equal quantity of labour. Let this proposition be duly attended to, and all the rest is clear.


Thus, if a pair of shoes is produced with an equal quantity of labour as a hat, so long as a hat exchanges for a pair of shoes, so long the supply and demand are accommodated to one another. If it should so happen that shoes fell in value, as compared with hats, which is the same thing as hats rising in value compared with shoes, this would imply that more shoes had been brought to market, as compared with hats. Shoes would then be in more than the due abundance. Why? Because in them the produce of a certain quantity of labour would not exchange for the produce of an equal quantity. But for the very same reason hats would be in less than the due abundance, because the produce of a certain quantity of labour in them would exchange for the produce of more than an equal quantity in shoes.


What is true of any one instance is true of any number of instances. It is therefore universally true, that, as the aggregate demand and aggregate supply of a nation never can be unequal to one another, so there never can be a superabundant supply in particular instances, and hence a fall in exchangeable value below the cost of production, without a corresponding deficiency of supply, and hence a rise in exchangeable value, beyond cost of production, in other instances. The doctrine of the glut, therefore, seems to be disproved by reasoning perfectly conclusive.


Let us recapitulate the points. A glut, as it is supposed in this doctrine, namely an excess of production in the aggregate, can take place only by a continued increase of production. Let us imagine that we have just come to the supposed point, when, the supply being full, any additional production will be so much of glut. The additional production takes place, and comes to market. What is the consequence? This new product seeks an equivalent. That is to say, it is a new demand. How then is it possible to say that every new supply is a glut, when a new demand is created equal to it? It is obviously nugatory to say, that this new supply may not find purchasers, or the new demand may not find the commodities to which it is directed; for this is only to say that in particular instances there may, from miscalculation, be superabundance or defect. The natural effects, in such a case, may be easily traced, and they afford decisive evidence. The commodities, of which the additional production consists, may be naturally supposed to consist of some of the sorts which are previously in the market. By supposition, the goods previously in the market were accommodated to one another, no species being either in defective, or superabundant supply. The addition which is made to some sorts of these goods, by the new production, would render them superabundant, if there was not a new demand created. These goods would fall in exchangeable value as compared with others, others would rise in exchangeable value as compared with them. But there is a new demand created; for the owner of the new produce, as he has come into the market to sell goods of some kinds, so he has come to buy goods of some other kinds. As the supply, which he brought, of certain kinds of goods tended to reduce their value, so the demand, which he brings, for other kinds tends to increase their value. The result is, that now there are certain kinds of goods, which it is less profitable than usual to produce; others, which it is more profitable than usual to produce: and this is an inequality, which tends immediately to correct itself. This is the mode, in which every addition is made to the productions of a country, and it is a mode, which is evidently the same at every stage of the progress, from the greatest defect, to the greatest excess, of national riches. It commonly, of course, happens, that the man, who brings into the market an addition of produce, endeavours to bring it in goods that are in defective supply, and to purchase goods that are in superabundant supply; and the state of the market generally enables him to do so: so that an addition of produce brought into the market may just as often remedy a glut as be in any degree the cause of it.

Chapter IV, Consumption, Sections IV-XVII

There would, therefore, be the same demand, and the same supply: there would also be the same quantity of money, and the same rapidity of circulation; and therefore the value of money would remain the same as before.


Wages, like the price of any other commodity, rise or fall, in proportion as the demand for labour rises or falls, compared with the supply.


In the case of wages above this level, there is no necessary reduction of the number of labourers in consequence of a tax imposed upon wages. There is no alteration, therefore, in the state of supply. From this it follows, that if there is not an increase of demand for labourers, in consequence of such a tax, there can be no rise of wages; and if there be no rise of wages, the tax must fall upon the labourers. The solution, therefore, of the question, whether a tax upon wages falls upon the labourer, depends upon the inquiry, whether there is, or is not, such increase of demand.


In the case in which wages do rise, it may also be seen, that the capital and produce of the country remain the same, the amount of demand and supply the same, and the value of money the same. The aggregate of prices, therefore, one thing being compensated by another, is the same. That change, indeed, which takes place in the relative value of certain kinds of commodities, as often as wages rise and profits fall, is necessarily produced on this occasion. Those commodities, which are chiefly produced by fixed capital, and where little payment of wages is required, fall in price, as compared with those in producing which immediate labour is the principal instrument, and where little or nothing of fixed capital is required. The compensation, however, is complete; for as much as the one of these two sets of commodities falls in price, the other rises; and the price of both, taken aggregately, or the medium of the two, remains the same as before.