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|The Common Sense of Political Economy; Wicksteed, Philip H.|
37 paragraphs found.
We shall have to abandon the favourite diagrammatic method by which prices, whether market or normal, are indicated by the intersection of a curve of demand and a curve of supply, or a curve of demand and a curve of cost of production. We shall call for a revision of the whole theory of increasing and diminishing returns as usually expounded, and this will be seen to involve either the abandonment or the restatement of much ingenious theory that has been based on the supposed phenomena presented by industries subject to the law of diminishing returns.
Let us examine this principle further. We have seen, in comparing the different applications of milk in an ordinary middle-class family, that if the administration is ideally carried out, the significance of the last small increments of milk are equal in all its ordinary applications. The first thimbleful of milk given to the baby is immensely more significant than the first thimbleful given to the children or reserved for afternoon tea; but if the last thimbleful given to the cat does not perform as important a service as the last thimbleful given to the children, there would have been a gain in giving her a little less and them a little more; and there has therefore been a failure in administration. The cost of giving more to one applicant is giving less to another, and good administration consists in avoiding any application which costs more than it is worth. But as well as balancing all the uses of milk, at the margin, one against the other, the housekeeper has to balance them all, collectively, against every other alternative expenditure of the money she paid for milk, and this opens up another source of possible mistake. In taking in the milk for the day or half-day the housewife considers, consciously or unconsciously, what the significance of the last thimblefuls applied to all the varied purposes, when properly balanced, will be. The answer to the question, "How much milk shall we take to-day, ma'am?" depends on a rapid survey of the programme of the day. If milk is 4d. a quart, the aim is to take in such an amount that the last half-pint shall be just worth 1d.; that is to say, the last thimblefuls in every application, brought into equilibrium of marginal significance with each other, should collectively be worth just as much as anything else on which the 1d. might be spent. But unforeseen contingencies may arise. There may be a great ink-spill, and milk may be wanted to take out the stain while fresh. A little sapling, laden with many associations, may arrive, to grow in the garden or yard, and some one may have read that milk comforts and revives the roots of trees that have felt a journey. The dog may have eaten phosphorous poison, and some one may know that the proper remedy is to drench him with milk. And these sudden and unexpected claims have not been anticipated or provided for. It may really be the case (especially if you live in the country) that more milk cannot, without great difficulty, be got for some hours; or if you live in the town, it does not occur to you (owing to mental inertia) that there is any way of getting more milk except the customary one of waiting till the milk-man comes round again. And so a new set of claimants on the day's supply of milk, of which there was no thought when the milk was taken in, has been introduced. In the case of the poisoned dog, it might well be that even the baby would be put on short allowance for a certain period, or driven to some substitute, in the hope of saving the life of an inmate of the house, whose loss would be long and sincerely mourned. Now it may be perfectly understood that there are always such risks, but it is bad economy to provide for a risk as though it were a certainty, and therefore when such a contingency occurs it will set up an urgent demand for which it would not have been reasonable to make provision. It must therefore be met out of the general stock, and all the other uses will be trenched upon. The last thimblefuls will still be kept in equilibrium, but each will meet a more clamorous demand than usual, the lower or less clamorous demands not being met at all; and if the dog has been poisoned, probably the cat will get nothing, even her initial and most urgent claim not being able to compete for a place amongst the higher demands that alone can be satisfied now.
Another problem rises immediately out of these reflections. Some of our wants are recurrent and are met by supplies which are destroyed in the process of ministering to them. I eat to-day and I shall want to eat again to-morrow. There is no sense in talking of the "amount of bread" which will satisfy my wants, unless I specify the amount of time during which it is to satisfy them. The proper form under which to consider my provision is a stream of supply, not a stock. I am well or ill supplied with bread, not according to the amount of bread I have, but according to the amount per day, week, or other unit of time, which I command. Whereas we do not talk of the rate per day or year at which I am supplied with pianos or watches. On what principle can I compare £5 spent on bread, which for a period of twelve months supplies wants which will be as keenly felt and will as urgently demand provision at the end of that time as at the beginning, with £5 spent on a watch, which will perhaps never require supplementing or renewing?
It is important to apply these considerations to the case of changing prices in a market. We have not yet examined the causes which effect these changes, but that need not prevent us from analysing the nature of their results. The considerations entered upon in the second chapter shew us that if the stock of an article should be increased and its price lowered, some of those who already bought would now buy more, and some who had not bought at all before would now begin to buy; and of these latter, some might buy a considerable quantity, and some perhaps only the smallest unit which would be commercially recognised. In this last case the marginal unit would also be the "original" or initial unit of supply; but in the case of all the new purchasers the initial demand would coincide, in its marginal significance, or place on the scale of preferences, with a unit more or less remote from the origin on the scales of those who were already possessors at the higher price; and all the marginal increments (whether initial also or not) will, as we have seen, coincide as to their objective relative significance. But what can we assert as to the vital urgency of the marginal want now gratified by the buyer of the larger quantity, compared with that of the initial or early satisfactions of the man whom the lowered price has brought into the market? Evidently we are not justified in saying that because, relatively speaking, they are all equally intense objectively they all perform equally significant vital services. Strictly speaking, no such statement could, under any circumstances, be an accurate one; for as there is no means of comparing the wants of two different minds with each other, so there could be no exact meaning in declaring that the degree of pain which one man suffers from hunger is precisely the same as that experienced by another. Nevertheless, we habitually form estimates as to the relative urgency of wants experienced by different men, and the relative intensity of the enjoyment and suffering which they experience. Philosophically we may admit that it is impossible to prove that one man suffers as much from being burnt alive as another man does from a gnat bite; but we can say that, measured by every conceivable test as to the alternatives they would accept or reject, this must be so, and we are practically troubled by no philosophic doubts on the subject. If, instead of dealing with a single individual, we are dealing with a large number, we should not strain even a philosophic doubt to the point of questioning whether collectively greater suffering would be involved by putting 100 men on the rack or by submitting 100 men to a gnat bite each. There might in one odd case be extraordinary sensitiveness, and in another extraordinary anæsthesia, but they would not be typical. Even if there were reason to suppose that the selections were not purely casual, but that a higher range of sensitiveness prevailed in one class than in the other, we should never be able to allow a metaphysical scruple or a general and vague supposition to counteract an indefinite difference in the nature of the pain inflicted.
But such transactions on an uncertain basis of price, though not unknown, are exceptional. It is the function of the sellers to name a price, though here and there an individual seller may not feel equal to the task. Let us consider, then, what would happen if the sellers collectively made an error in their judgment and named something below or above the true equilibrium price. If they made it too low they obviously stand to lose. The customers that come into the market early will buy more at the lower price than they would have done at the higher, and later in the day customers who would have bought freely at the higher price find the stock gone. But the dealers will probably see in a few hours that the stock is running out too fast; and if so, they will raise the price. If, on the other hand, they fix the price too high, the early customers who would have bought, or would have bought more, at the lower figure, go away disappointed, buying nothing, or comparatively little, and they do not appear again later in the day to renew their offers, for they have already satisfied themselves with some substitute. The housekeeper who at the natural price would have taken home with her a large stock of damsons to make jam for the year will have changed her plan of campaign, and will have taken home a small supply and determined to eke out her provision for the year with apple-and-blackberry and marrow jam. Her demand therefore has been to a great extent not deferred but destroyed, so far as the market in damsons is concerned; and to find any customers at all the dealers will be obliged ultimately to sell their stock at a still lower price than they could have obtained had they fixed it in closer accordance with the facts at the outset. This result is one of the reactions which I spoke of on page 214.
An interesting case of this occurred a few years ago. In April 1902, towards the end of the Boer War, the British Government desired to negotiate a loan of £32,000,000. They offered a nominal £100 at 2½ per cent (that is to say, a claim for £2:10s. per annum) at £93:10s., and whereas they asked for £32,000,000 only, no less than £350,000,000 was "subscribed" for; that is to say, persons representing an aggregate demand for a nominal £350,000,000 declared that they were desirous of purchasing for £93:10s. a claim for £2:10s. per annum. This would seem at first sight to mean that, whereas the Government believed that an issue of three hundred and twenty thousand fresh promises would bring the marginal significance of a Government promise to pay £2:10s. a year down to £93:10s., the buyers, who either wished to hold the promises or expected to be able to sell them at a profit, estimated that it would require three million five hundred thousand such promises to bring the marginal value down to that figure. But this is not really the case; for many of those who applied for a certain number of shares did not either expect or wish to get them all. They believed indeed that the whole three hundred and twenty thousand promises, and more, could ultimately be placed out at something above £93:10s., so that they could get a reasonable profit on any that were assigned to them, and they believed that if every individual purchaser applied for as many as he wished to hold or expected to be able to sell at a profit more than the whole issue would be applied for. In that case, obviously some would get less than they asked for. So the best chance for a man to get as many as he wanted was to apply for more. It is true that every one would not be able to get all he wanted in any case, for there would not be enough to supply them, but the man who made a modest claim for the amount he wanted might get a fraction of it only, whereas if he applied for two or three or ten or twenty times as much as he wanted he might come nearer his true mark; and if he turned out to be amongst the boldest and shrewdest he might get just what he wanted. But this is risky. It all depends on what other people ask for. A man might find that he had overshot the mark, and having asked for twenty times as much as he wanted might actually get twice as much. It is the consideration of this risk that limits his application. Thus three million five hundred thousand was not a genuine record of how many promises the buyers, speculative and other, collectively desired to hold, or expected to be able to sell at a profit over £93:10s., but was the complex resultant of each man's estimate of what he himself could profitably hold or deal in, and what he expected other men would ask for, beyond what they could profitably hold or sell. Leaving this aside, we return to the fact that the speculative buyers thought that the whole stock could be placed well above £93:10s. On the day of issue the market value of the stock was £93:15s.
The supply of one market then, so far as it is capable of regulation by the action of man, constitutes a demand upon some other market. As we go higher and higher upstream towards the ultimate sources from which all human wants are satisfied, and examine them in less and less differentiated forms, we shall find that the market in them embraces, and directly or indirectly balances, an ever-wider range of the tastes and desires of the community. But the law of the market never changes. The price is always determined by estimates of the quantity of the commodity available and estimates of the relative scales of the community. Nothing can affect the market price of anything which does not affect one of these factors.
The actual distribution of any harvest over the time which it has to cover may be shared in any proportions by the consumer and the dealer. Plums, as we have seen, may well be bought for the whole year at once by the consumer; but this is not likely to be the case with wheat. The ultimate consumer as a rule takes his wheat in the form of bread, and never stores more than the supply for a few hours, or at most days. Some few people still bake at home; and there is also a demand for flour for other cooking purposes, so that a small part of the wheat for the year will be stored by housekeepers for some weeks or months in advance, in the shape of flour. But the greater part will remain in the hands of the miller and the dealer, so that the work of distributing it over the claims of the year, which in the case of jam is (at least in old-fashioned houses) still a branch of domestic administration, is in the case of wheat a branch of commerce.
We have seen that the "demand" for advances is just like any other demand, that it follows the law of diminishing marginal significance, and that the reason why advances are demanded does not affect the market price of them. It depends upon the position they take on the collective scale and the available supply of them. We know also that the supply of one market is always a demand upon another, and that in that larger market a wider range of demands is brought into balance. Now, we see that the market on which the supply of "advances" is a demand is the whole range of the realised utilities, or desired things, that are in the circle of exchange, so far as they are capable of being used at once, and that in that market all present and future satisfactions compete with each other, the resultant being a premium to be received on relinquishing the present.
The market of services or efforts follows the general law of the market. The flow of services of every kind determines the point down to which the desire for them is satisfied, higher or lower on the collective scale according as the stream is narrower or broader. The market in human effort is characterised by the fact that effort cannot be stored (except in a secondary sense and to a limited degree) unless embodied in some material thing, animate or inanimate; and therefore it runs to waste if not used as the capacity for it rises. Further, in many cases it is impossible for the holders to maintain an effective reserve price. And again it is impossible to detach it (unless embodied) from its source. Under these restrictions the law of the market dominates the exchange of human efforts with each other and with commodities. But the markets are often imperfect. The supply of each separate market of human effort constitutes a demand on the general market, and whereas its flow into the several markets is to a large extent dominated by economic forces, the original supply or production of human raw material is to be regarded almost entirely as incidental to expenditure of resources and expression of impulses, and scarcely at all as produced in response to a demand. Economic forces tend to secure to every one in the market as much as his effort is worth to any one else at the margin. It does not follow either that he has no claims beyond this, or that his marginal worth might not be increased; but seeing that the better society is supplied with the thing he makes the lower will be its place on the collective scale, it follows that each group of workers has an interest in society being rich in all things else but poor in what it itself supplies. Hence the lump-of-labour economics and much misdirected sympathy with anti-social action. A full recognition of the hardships involved in the uneven advance and the fluctuations of industry is a necessary condition of successfully combating anti-social ways of attempting to remove them.
We have now dealt with markets of commodities under various aspects, and have seen how the same underlying principle may be traced through the whole range. No economic consideration ever urges a man to give more for any commodity than it is marginally worth to him, and every economic consideration urges him to give as much, rather than go without it. In so far as there is free communication and independence of action, economic considerations will tend to produce a uniform market price for any commodity at any given time, which price will coincide with the marginal place of the commodity on the collective scale. We have further seen that every commodity has its own market, and that, wherever the nature of a commodity allows of its being stored, or secured, for a lengthened period in advance, a class of considerations will affect its place on the scales of the consumers (and therefore on those of speculative holders) which could not affect rapidly perishable articles. And this last consideration has led us on from the consideration of speculative "holding" to an examination of the whole system of hiring, loaning, and "advancing," whether of specific articles or of general command of things in the circle of exchange. And further, we have seen how we may treat the supply of any market as itself constituting a demand upon some other market, until we ascend at last to the least differentiated material sources of our wealth.
We must now expressly note that not only commodities but services are in the circle of exchange. This fact has entered implicitly into all our investigations into the market of commodities. The supply of tables and bookshelves is a demand not only on the market of timber, but also on the market of services, for the skill and effort of the carpenter is as essential as the supply of wood to the production of these commodities; and to the consideration of the markets of human effort, or service, we will now turn.
The popular instinct of language, then, has not recognised a distinct category of speculative payment for services as distinguished from payment for their embodied results, and has provided us with no convenient word for it, but it is important that we should give some special attention to it. Since the power of rendering services flows to waste as fast as it accrues unless it is directly applied, or embodied in material commodities, it follows that the market in services has its nearest analogues in markets of the most swiftly and irrevocably perishable commodities. But any commodity, to be marketed at all, must have a certain degree of permanence, whereas the power to make effective effort perishes as it rises; and if the power generated as the moments pass is not exerted as the moments pass, it cannot be held in store and utilised at a later moment. We must therefore conceive of the supply of available human effort of any kind as perpetually flowing to waste if not utilised the moment it rises. On the other hand, the supply of many commodities is replenished intermittently, perhaps as the seasons of the year come round, perhaps as chance determines the discovery of ores or deposits; whereas the power to put forth human effort is (with the qualifications presently dwelt on) continuously renascent. Now we saw, in considering personal expenditure, that stocks must be reduced to terms of "rate of supply" in order to be accurately treated, because wants, to which they have to be related, are either continuous or recurrent. The supply we are now considering presents itself at once in the form of a stream, and we can have no difficulty in perceiving that in an open and competitive market the theoretical price of services, like that of commodities,will be determined by the breadth of this stream of supply (that is to say, the rate at which the services become available), and the composition of the collective scale of preferences. But in this case the rate of supply can only be adjusted to irregularities of demand within very narrow limits. It cannot be stored, and so, if there is anything intermittent or irregular in the occurrence of the wants which a particular service would satisfy, it will be impossible to accommodate the stream of supply to the stream of demand; for the stream cannot be narrowed down to a trickle for a time, and then swelled to a broad volume by pouring in the accumulations from the reservoir. Commercially, no doubt, a contractor may broaden or narrow the stream he controls by taking on or dismissing men, but it is not this stream of which we are speaking. We are speaking of the stream of continuously renascent power of work, and in the case of a man who has not been employed that power has run to waste. The contractor might talk of drawing upon the reserve of unemployed labourers, but the power of work which has not been used up to this moment is not in a reservoir. It has perished.
We may now glance at a few illustrations of the way in which the general characteristics of the market in human effort manifest themselves, and the attempts that are made to deal with them and to remove some of their inconveniences. Let us begin with a single individual. He may be a singer, a lecturer, a physician, a university coach, or a novelist. He may, or may not, be bound or hampered by traditional customs which prevent his conforming to the economic conditions of his case. For instance, custom may dictate that he shall not charge less than a certain fee, and this fee may prevent his getting work which he would be willing to take and able to secure at a lower fee; and some portion of his time may flow off unused in consequence. Or custom may prohibit his raising his fee above a certain point; and he may consequently work harder and earn less than he could do if he were able to limit the number of his clients by raising his fee. In these cases his market is partly dominated by other than economic forces, that is to say, by other considerations than the place on the collective scale occupied by the want to which he can minister, and the place occupied on his own scale by things in the circle of exchange. If, on the other hand, his market is dominated by purely economic forces, what are the elements which compose it? What corresponds to the "amount of commodity in the market"? Obviously the daily renascent flow of possible exertion on his part. To some extent the thing he supplies can be supplied by others also; to some extent it is peculiar to himself. Just so any commodity in the market supplies wants for which partial but not complete substitutes may be found in other commodities. The analogue of the amount of the commodity is the daily accruing capacity to put forth the effort in question. And the place which it occupies on the collective scale is determined by the corresponding stream of wants that it can supply. This stream, as we have seen, may be very irregular. The season, or the term, or the session may bring an access of requirements which periodically raise the place of this particular want on the collective scale. Individual wants or accidental estimates of the significance of the special services in question on the part of conspicuous persons may suddenly raise the demand, or a brilliant achievement of any kind on the part of the man himself may have a like effect, of a more or less transient nature. Now, to the limited extent to which the man can store his energy, that is to say, recoup himself by previous or subsequent relaxation for an extra strain during a certain period, he can adapt himself to these irregularities as they rise. But this possibility is closely limited. It may deal with the ripples, but it cannot deal with the ground swell of change. Many an intellectual and artistic workman has died in poverty who could have made ample provision for his whole life during the few years when he was the vogue, had it been possible for him to concentrate the working hours of his life into that short period, reserving only his leisure hours for the long period of the world's indifference.
Apart from these fluctuations, the individual workman, regarding the thing that he can do as the special commodity that he brings to market, would, if untrammelled by tradition, proceed economically on such lines as the following:—He would be, to a certain limited extent, a monopolist; and if he found that he could command as much work as he chose to take on certain terms, he might consider either of two problems. In the first place, he may consider how much work he will take on those terms. And here the principle of the reserve price comes into play. He will not sell at a given price any effort which he could more fruitfully devote to the direct securing of the things he would otherwise have to draw out of the circle of exchange; and even if he can secure none of these things on advantageous terms by the direct exercise of his capacity, yet he may be able to enjoy it for its own sake when he exerts it in directions that have no economic significance; and it is manifest that at a certain point effort will become so painful that it will not be worth while to encounter it for the sake of further command of things in the circle of exchange.
To put it broadly, both the need of rest and aversion to irksome effort, and all that free command of powers and resources, and application of them to the securing of things that do not enter into the circle of exchange, which we embrace in the term "leisure," will put a reserve price on his wares. He will say, for example, "At 7s. 6d. an hour, or at 300 guineas an operation, I will only undertake so much and no more for the public." But, in the second place, he may raise his terms and say to himself, "I consider it worth the risk to take silk, or to raise my fees. That will limit my ministrations to a range of wants higher on the communal scale. It will subject me to the risk of encountering periods during which the stream of demand, at this high level, is narrower than the stream of the supply of energies which I should be willing to devote to its satisfaction. And I may find time upon my hands, not because of my own mental reserve price in time, but because my announced reserve price in money determines a margin nearer the origin than I had contemplated." Custom, convenience, the difficulty of rapidly forming lines of communication, and the fear of future complications will prevent him in such periods from putting a larger amount of his energy upon the market, and taking the lower price that it will fetch.
We will pass on to some considerations as to the supply of effort. In the market of commodities we saw that the supply of one market constitutes a demand upon another. Is there anything analogous to this in the market in efforts? Wherever there are many directions in which the same man can turn his energies and capacities, the different applications in question compete in the market for his energy. His power is the analogue of the timber, which may be made either into tables or into washstands, but which when made into one cannot be transformed into the other. A man may be put on one job when it would have been better husbandry to put him on another; but when he has put forth his effort, it is the result that survives, for what it is worth, and not the effort. We have already seen that urgency of agricultural operations may draw a man from other employments at harvest time. This may be seen everywhere, but in a primitive community it is very conspicuous; for not only the carpenter and the shoemaker, but the schoolmaster and the catechist will devote himself to harvest work during the season. Yet there is a limit to the possibility of these changes of function, and a highly specialised skill cannot be acquired in a day or a week. Some simple forms of harvest work might, indeed, at a pinch, be undertaken by workers in the building trades, unless custom or prejudice forbade; but the building trades could hardly be recruited to any considerable extent from the ranks of the agricultural labourers, and a bricklayer could probably neither thatch nor plough. In artistic and intellectual work the versatility of a Michael Angelo or a Leonardo is rare. This want of fluidity of human capacity confines most men to a very limited market. Prejudices and mistaken customs tend to intensify rather than to mitigate the difficulty, and the solution of the grave economic problem which we shall encounter at the close of this chapter is rendered more difficult thereby; but it must always remain true that, in an age of specialising and of division of labour, manual and intellectual, development of any particular capacity constitutes a demand upon the general store of undifferentiated human power that is perpetually poured into the world in the form of fresh human lives, and limits the amount available in other directions.
And not only are the means of satisfying wants constantly changing by invention and discovery, but wants themselves as constantly shift. At one time vast countries are to be opened up by railway systems, and navvies and makers of steel rails can supply a want felt with a high relative keenness. At another time, a great country like the German Empire determines to adopt the gold in place of the silver standard for her currency, and the marginal significance of gold is shifted and raised on the collective scale of the nations by this new demand upon it. At another time there is a great war, and those whose faculty and opportunity enable them to make cordite and munitions of war, or to use them in the destruction of life and property, can supply a keenly felt and imperfectly gratified set of desires. This relative elevation of some desires involves a relative depression of others; and when the stress falls elsewhere the now elevated desires will in their turn become relatively depressed. And in any of these cases when the place on the collective scale of the thing I can do falls, the significance of my services and the abundance of the supplies they will secure me fall with it.
Another and closely related aspect of the question of declining significances is suggested by charitable appeals. For instance, there is a famine in India, and I subscribe a guinea. That would appear at first sight to mean that I consider the want of food in India more urgent than any other wants of my own or any one else's to which the guinea would have ministered. But if so, why not give a second guinea? Has the want in India been sensibly reduced by my subscription? In bulk, yes. But in intensity? Even if I could suppose that my guinea had met the most urgent case, would there be any perceptible decline of urgency in the next case waiting to be met? It is exactly the question of the increments of tea over again. We saw that there was no perceptible decrease in the significance of tea as we passed from one quarter-ounce to the next at the margin of 4 lbs., though there was a perceptible satisfaction in the consumption of either.
So I must suppose that a perceptible relief of suffering has been effected by my guinea, but I can hardly believe that a second guinea would relieve suffering perceptibly less intense than that relieved by the first. The marginal significance of a guinea, then, in relieving distress in India, appears to remain the same. Why do I not pay a second guinea and a third, and so on? The answer is twofold. In the first place, in the majority of cases it is not really the famine in India but my own conscience that I am appeasing, and my own conscience becomes perceptibly less clamorous after the first guinea has been paid. It may still grumble, and dispute the ground with other applications, but it may no longer dispute it successfully. My conscience may be right or wrong in insisting that I should take a share in the burden, and in being appeased when I tell it I have done so; but that is not the question. The point is that the demand I am meeting is, as a matter of fact, perceptibly reduced by what I have done to meet it. It is otherwise, however, if I really am directly appraising the urgency of the want that my guinea relieves when given to the famine fund, and the wants it can supply in other applications. In this case it is true that the want in India does not perceptibly decline as I give guinea after guinea, but it is also true that the wants that I neglect in order to meet it perceptibly rise as guinea after guinea is subtracted from the supply of them, until at last they rise to the level at which they balance my sense of the urgency of the need in India. This point may not be reached till I have reduced myself and all those dependent upon me to the level of misery of those that I am relieving; and some moralists are courageous enough to hold this up as an ideal. Our theory of marginal significance is elastic enough to adapt itself to their creed; for all that we assert is that, whatever the grounds on which we form estimates of the relative significance of rival applications of resources, we can so administer those resources as to bring their marginal significance in each application to equality. The urgency of the Indian claim is no doubt gradually declining if the administration of the fund is even approximately sound; but within the limits of the influence of my fortune it does not decline perceptibly. The balance is therefore found when all other expenditures are curtailed to the point at which their rising marginal significance equals that of the Indian claim.
Again, a man is not likely to eat oatmeal porridge for the pleasure of the palate when the appetite (as an index of an organic demand of the system) is assuaged; whereas the skilled cook, "by successive intensifications of his diabolical art," may tempt a man from excess to excess by appeals to his palate, even when his appetite has long been sated. Now healthy and vigorous persons who are accustomed to simple and frugal ways are perhaps conscious, or subconscious, on most days that they would enjoy a rather more elaborate diet than they are accustomed to. But every one who has had experience of the two ways of living will tell us that those who live with severe simplicity get more enjoyment out of their meals than those who have an elaborate dinner every day. It is very easy to see why. The man who tries to extract the maximum of sensuous satisfaction out of every meal is securing trifling increments of satisfaction at the margin to-day, and is thereby deadening his capacity for enjoying the more significant increments nearer the origin
to-morrow. He is not indeed substituting a craving for a source of satisfaction, but he is lowering his possibilities of satisfaction. Thus, if a man has a moderate supply of any such luxuries as we have been discussing, his enjoyment may be represented by
Fig. 6. He stops at
x1, and there are still unexhausted possibilities of enjoyment. But if he habitually goes on to
x2, though at first he secures the additional area of enjoyment
x1p1p2x2, yet he gradually lowers the significance of the initial increments, and ultimately only enjoys the smaller area bounded by the dotted line above
Ox2 instead of the larger area
Opp1x1. Again, the man who eats or drinks as soon as he is inclined to do so, often falls into the habit of eating and drinking as soon as he is able to do so; and, as he never recovers a state of healthy hunger, he too always remains at the low level of enjoyment.
There is still another source of confusion. We have been attempting to evaluate the surplus satisfaction, over and above the sacrifice involved in the payment, which a consumer actually derives, under existing circumstances, from his normal consumption of a given commodity, and to evaluate it in terms of the actual significance of pounds, shillings, and pence under the actual conditions of his resources and expenditure. Our questions as to what he would give for such and such an increment at such and such a margin, or how much he would buy altogether at such and such a price, have merely been a device for discovering the actual value in use that things have for him; and he will not give us the answers we require unless he treats the hypothesis of an increased price as purely ideal and applying to himself alone. For as soon as he begins to think of any actual circumstances under which the price would rise, it will involve the supposition that causes are at work which affect not only him, but others also. And if he imagines that the supply of tea, for instance, is contracted, and that is why he has to pay a higher price for it, he may assume that other people are in the same position as himself; and if that is so, then obviously the general demand for substitutes such as coffee and cocoa will rise, and the prices will rise correspondingly, and the condition "other things remaining the same" will be violated, for he will not be able to purchase the substitutes at the prices for which he can now obtain them. If he is a commercial man he may instinctively take this into account, and give us estimates of what he would do under given conditions, modified by an instinctive sense of what others would be doing under pressure of the causes which had brought these circumstances about. And even the noncommercial student, as he imagines himself retreating towards the origin in his consumption of some particular commodity, often frames half unconsciously some hypothesis to account for the fact, which reacts upon his suppositions as to the supply of other commodities.
This chapter deals with the application of the diagrammatic method of curves to the phenomena of the market. Individual curves of price-and-quantity-taken, if properly constructed for the purpose, can be added into a communal curve, on which the price corresponding to any given supply can be read. A disguised method of reaching the same result by means of intersecting curves is frequently employed, but though legitimate in itself it is misleading when used, as it generally is, in conjunction with a distinction between buyers and sellers, which is irrelevant to the issue. The same principle that determines the flow of any given commodity to the various consumers also determines the flow of the factors of production to the different industries. Capacity for productive effort is distributed between economic and non-economic employments, or is reserved and not put forth at all, on the general principles of the distribution of resources or choice between alternatives.
They will represent for each individual the prices which he would give for each successive increment sooner than go without it, under the modified possibilities as to substitutes which would accompany the contracted supply which caused the rise in price; and the sum of them will constitute a collective scale shewing at what price any given quantity of the commodity could be sold, or what quantity could be sold at any given price, all other supplies remaining constant, though the demand upon those other supplies varies.
We can now understand the exact meaning of the confirmed habit of presenting the phenomena of the market under the form of a curve of "supply" and a curve of "demand," the intersection of which determines the price. It is based in the first place on a division (irrelevant as we have seen) between those persons in the market who have, and those who have not, a certain stock of the commodity in question. The curve of the latter is given in its completeness, or, at any rate, the origin is marked and the portion of the curve which is sketched is made to begin at a defined distance from the origin. This is called the curve of demand. The other curve in then inserted as a reversed curve, and a definite ordinate is assumed either for the point at the origin or for a point at a defined distance from the origin; and this is called the supply curve. Now this curve is a curve of reserve prices, which, as we have seen,
is merely another name for the demand curve of those who possess a stock of the commodity; and its reversal is merely a quick way of arriving at the results of addition. But in connection with it information is tacitly given us as to the surplus of the total stock over the amount required in order to gratify the whole market down to some given ordinate. The connection between these two pieces of information is arbitrary; for the vital information as to excess of supply over that required to bring the ordinates to a certain point, might just as well have been given us in connection with the other (so-called "demand") curve, or partly in connection with one and partly in connection with the other, or without any specified connection with either of them. Thus, if we had not had the two curves given us at all, but only the whole collective curve, without distinction between possessor and non-possessor, and had also been told that the stock was enough to satisfy all claims down to the ordinate of 40 with a surplus of 53, we should have obtained exactly the same result. And if we suppose curve (
a) and curve (
b) alike to be miscellaneous groups, both of them made up of some persons who possess and some who do not possess supplies of the commodity, we shall still have precisely the same results.
Our main conclusions are nothing new. They merely restate the results of the analysis of markets entered upon in Book I. Chapter VI. Given the total supply of the commodity, the market price that any single customer finds established is determined in the main by the demands of all the other purchasers, but in some degree by his own. If his demand is, in bulk, a very small portion of the whole, then its effect on the price will be correspondingly small, that is to say, the total curve will decline so slowly that the addition or withdrawal of an amount of the commodity sufficient to carry this one purchaser from his initial to his final increments will not perceptibly raise its ordinate. And therefore in dealing with any one individual separately we may assume the market price as already fixed by all the other individuals, and may then simply measure it off on the axis of
Y of the particular curve we are examining, and may draw a parallel to the axis of
X through that point. The abscissa of the point at which this parallel cuts the curve will measure the amount that this particular purchaser will take. We may put it in this way: the amount of any commodity which will flow, in obedience to the economic forces, to the satisfaction of any one consumer's wants will be determined by his curve of preferences, by the similar curves of all the other claimants, and by the total amount of the commodity. This is the general law of distribution.
If we go on to ask what determines the quantity of the commodity, we find ourselves dealing once more with the identical problem that we have just solved. The flow of the productive forces into this or that industry is determined on exactly the same principles as the flow of the stock of any single commodity to the different consumers. To breed horses you need land, buildings, corn, apparatus of many kinds, and trained human faculty. In supplying horses, therefore, you demand all these things. To raise corn you need land, buildings, ploughs, waggons, gates, ships, machinery, and human faculty. In supplying corn, therefore, you demand these things. And so with all other commodities. Thus the supply of any commodity is itself a demand upon other commodities and services, and if we separate out the demand, say, for woodwork implied in the supply of each of the commodities into which it enters, we shall be doing just the same thing that we did when we separated out the demand for potatoes from all the individual budgets of the persons that composed the market. Here, as there, the share that each one gets is determined by the curve representing the urgency of the want it satisfies, by the similar curves of the other industries, and by the total available resources of the community. Thus the supply of any commodity is regulated by the combination of productive factors needed for its production and the rival claims of other commodities for the factors of this combination. Ultimately, then, we have at one end the undifferentiated and unmanipulated forces and materials of nature, the faculties (trained and untrained) of man, and the various modifications of the former by the latter, which exist at the moment. This constitutes the total available stock. And at the other end are the tastes and resources of each individual. The amount of the supply, at any moment, of this or that commodity (in its final and united form, or in any of its intermediate states or constituent elements) is determined by the attempts of the commercial community to gauge and anticipate individual wants and to regulate the flow and the combinations of the ultimate sources of supply in accordance with them.
We have seen that all the different items of the ultimate sources of supply, and all the existing products, can, at any given moment, be expressed in a common unit. Therefore, in considering any single industry, we have first to determine what unit we will take to measure amounts of the productive agents. We might take, for instance, the amount that would exchange for an ounce of gold, or a ton of pig-iron, or a quarter of wheat of given quality, or any combination of these or other articles we choose to select. This will be our arbitrary unit-of-products-and-factors-of-production, and as we are now applying it exclusively as a measure of factors of production we will call it the unit-factor of production. The unit of the special product we will take as that amount of it which the unit-factor of production can produce. What will the unit on the axis of
Y be? It will represent the general command of articles in the circle of exchange which corresponds to the ounce of gold, ton of pig-iron, or what not, that we have taken to measure our unit-factor of production. We may think of it in terms of money. It may be a pound's worth or a shilling's worth of anything that is in the circle of exchange, including the factors of production themselves. The curve, then, will indicate the place on the communal scale of preferences of each successive unit of the commodity; and the flow of productive forces into that industry will be regulated exactly as the flow of fish or carrots to this or that purchaser's larder is regulated. It will bring it down to the (objective) level determined by its marginal significance elsewhere. If the total amount of the resources of society which will in any case be deflected to this particular industry is an infinitesimal portion of the whole, we may take this margin as independently fixed. The curve (
Fig. 31) gives us the rate at which the unit-factor of production will satisfy human wants (measured objectively) in this industry at any margin.
At what rate (measured by the same standard) will it satisfy human wants in other marginal applications? Whatever that rate may be it can be represented by a line. Measure off that line on the axis of
Y, draw through the point thus determined a parallel to the axis of
X, and the abscissa of its point of intersection with the curve will determine the flow of the productive resources to this industry, and the corresponding amount of the product. The curvilinear space above this line will represent (objectively) the satisfaction which the creation or destruction of this particular industry would add or subtract from the community. Its revenues of enjoyment (or at least of anticipated or estimated satisfaction) will be increased to that extent by the existence of this industry. It follows, of course, that whereas the communal curves of demand for, say, a certain kind of timber in the furnishing, the building, the shipping trades, and so forth, can be added, under the conditions laid down on pages 494
sq., the communal curves for different commodities (houses, ships, race-horses, diamonds, books, fruit, music, etc.) cannot be added, since each such curve assumes that all other conditions remain the same, and to travel along any one of them constitutes a change of the conditions for some or all of the others.
Leaving the island and returning to civilisation, we take the remuneration of each man's effort per hour as a datum, fixed by the general laws of the market, and, still reading the curve psychologically, we find that at the margin of six hours a day the individual whose curve we are examining estimates the advantage of the increased supplies of all commodities and services in the circle of exchange as threefold compensation for the irksomeness of the work that secures them. And the advantage is on the side of doing more work for wages up to nine hours a day, but no further. This, then, is the amount of labour he chooses to supply on the terms which it will command in the market. Well, then, he sells his time with a system of reserved prices, which constitutes his own demand for it; just as the stall-keeper sells her plums.
Each individual can get for his work economically as much as his doing it is worth to others, and he will require for it as much as his not doing it is worth to himself. The total supply of any kind of effort is the whole capacity of the persons capable of making it, and this supply is distributed between economic and other applications in accordance with the general laws we have studied so fully.
I have preserved the convention by which the "demand" curve is made to run down and the "supply" curve to run up, from left to right. Of course it has no significance and might just as well be neglected or reversed.
The most general case alike in manufactures and in extractive industries appears to be that a large and sudden increase of output must be made at an industrial disadvantage, because the supply of one or more important factors cannot be largely increased at a moment's notice. The increase, therefore, must be made at more than proportional sacrifice, since the proportions of the factors will necessarily be disturbed; and unless a sufficiently higher price is offered an increased product will not be forthcoming at all. On the other hand, if an increased demand continues for a long period, an increased flow of all the requisite factors will set in, and ultimately the advantages and economies of large production, with the factors of production duly balanced against each other, will be realised. Hence, whether in agriculture or manufactures, it seems to be a fairly general rule that when an increased demand causes an increased production that presses against the existing limits, at first cost of production will rise, but ultimately it will fall. There may, of course, be numerous and important exceptions; for there may be real and permanent difficulty in increasing the supply of certain materials; but the cereals, and generally the great vegetable staples, are a singularly unfortunate example to allege. Here at any rate there is no theoretical difficulty, and has been no practical difficulty, in increasing all the factors of production
We are now in a position to examine various diagrammatic methods which have been employed to exhibit the relation between value in exchange and cost of production, determining the normal price of an article by the method of intersection. It is usual to speak in this connection, as in that of the market,
of a demand curve and a supply curve, but to distinguish between the cases that illustrate diminishing and those that illustrate increasing returns. Thus, we might take
Fig. 36 to illustrate the case of an industry following the law of increasing returns. This would mean that if the quantity
Ox of the commodity were produced its market value would be
xp per unit, and the cost of production of a unit would be
xc. Under these conditions there would obviously be an inducement to extend the industry. As
xp would, of course, fall. But so, by the action of the law of increasing returns, would
xc; for as the output increased, economies could be introduced which would bring down the cost of production. There is a limit, however, to the decline of
xc, whereas there is no limit to that of
xp, and therefore a point of intersection must ultimately be reached. If the production were carried beyond this point, the cost of production would be greater than the price; that is to say, the effect of applying the necessary combination of factors of production at the margin of this industry would be the sacrifice of (objectively) higher values at the margin of other industries; and there would consequently be a tendency for these factors to flow from this industry to others, and so to contract the supply.
Apart from this, we must carefully note that the two curves cannot be interpreted in the same manner. The demand curve represents a group of facts or possibilities which all of them exist contemporaneously. It is a synopsis. The high values near the origin represent possibilities as to market price, should an isolated change take place in the supply of this particular commodity, and they represent actualities in the shape of the (objective) value of certain units of the commodity to the persons who actually consume them; whereas the supply curve does not represent a series of co-existing facts. It is not true that some units are produced at the high cost represented by the points of the curve near the origin. The economies resultant on the larger output affect the conditions of production generally, and if the amount produced is
Ox, the cost
xc (except for temporary and individual reasons) will apply to one unit as much as to another. Scrupulous writers are also careful to note that the curve is often used with a historical significance, and in that case the high values near the origin no longer represent even potentialities in case of a reduced supply, for many of the economies which have been effected are permanent and might be applied even to a smaller supply. The supply curve, in such a case, represents a historic development on which the industry has travelled forward, but on which it could not travel backward without modification. This being so, it would be an altogether grotesque supposition that during the whole of this historical process the demand curve had remained constant. Thus the two curves could hardly be regarded as co-existing on the same plane, and no satisfactory interpretation can be given to their intersection.
It is undoubtedly true, however, that in some cases economies can at once be effected, if the scale of production is increased, without awaiting the elaboration of new methods. In such cases all the possibilities represented by the declining cost of production curve may be conceived as actually co-existing,
qua possibilities, though not as actualities. In the same way an amount-of-the-supply and market-price curve represents a series of prices that co-exist as
possibilities but not as actualities; whereas a curve of marginal significances represents, if properly constructed, a group of co-existing
actualities. With these limitations a curve (as in Fig. 36) may be accepted as theoretically giving a closer approximation to the truth than the straight line of
Fig. 31, in cases where the whole curve of demand is given from the origin onwards, or in which a large part of the whole curve is under consideration. Within the limits of actual oscillation, while "other things remain the same," a straight line will often best represent the facts.
The case is far worse for the application of the method of intersection of supply and demand curves, as in
Fig. 37, to instances that are supposed to illustrate the "law of diminishing returns," and this unfortunately has been its favourite application. We have seen that it is normal for a sudden increase in the demand which provokes a sudden increase in the supply to meet with the check caused by the difficulty of suddenly increasing certain of the factors of production, whether land, or skilled labour, or elaborate machinery, or premises. Hence an up-sloping curve will represent the immediate effect on cost of production of an expansion of the supply. We have seen, however, that these effects are transitory. It is only a question of time; for if time be given, all the factors of production will probably be made to flow into this particular industry in proportions corresponding to, if not identical with, those that prevailed before; and the increased scale of production will give scope to all the usual economies. Broadly speaking, then, the up-sloping curve of supply, as contrasted with the down-sloping one, represents not a class of industries, but the condition that the increased demand is recent and has been sudden. There is not only a difference but a contrast between the immediate and the ultimate effect of an increased demand accompanied by an increased supply. The obvious application, however, of the up-sloping curve of supply to the
immediate effects of an increased demand has, I think, misled students into the assumption, never sufficiently examined, that there is a large and normal class of industries to which this form of curve
The remark which has been made with reference to Fig. 36 is also applicable here. The lower curve represents a succession of facts and is not a synopsis of co-existing ones. Lower ordinates of the supply curve nearer the origin do not represent any actual facts which exist contemporaneously with those represented by the ordinate of the point which the production has actually reached; whereas the higher (objective) significance of the units nearer the origin, as represented by the demand curve, does represent facts that co-exist with the lower objective significance of the marginal units.
But probably the most deeply seated of all the predisposing causes which keep the up-sloping curve of cost of production in favour is one that has no connection whatever with the theory of decreasing returns. Neither of the intersecting curves of
Fig. 20, on page 499, has any connection with production, or cost of production, at all. Yet one of them slopes up as the other slopes down. If we place all the holders on the up-sloping curve, so that all the "supply" is in the hands of the persons whose desires it represents, it is easy to fall into the habit of calling it the "supply" curve. We have seen that it is no such thing. It is the demand curve of a certain number of the persons in the market arbitrarily grouped together. The supply is not represented by a curve at all, but by a length on the abscissa. But once use crossing curves to illustrate the determination of the market price, and call the up-sloping one the "supply" curve, and you have at once a figure that you can transfer bodily, and without knowing that you are doing it, to the illustration of the regulation of "supply" as determined by cost of production. Thus crossing curves may come to be used indifferently to represent "demand and supply" or "demand and cost of production," the term "curve of supply" may be used indifferently in either case, the up-sloping curve of the one (which is merely a down-sloping curve of exactly the same nature as the other, reversed for convenience, and having no constitutional connection with "supply" whatever) may be transferred to the other; it may then be read as a curve of diminishing returns and increasing cost of production, and may create a habit of mind to which cases of "increasing return" present themselves as graphically inconvenient phenomena which must be recognised from time to time but can generally be comfortably neglected. A more disreputable origin for a respected figure in the economic world it would be difficult to conceive!
The Government has, however, a further resource. It has the means of maintaining a perpetual recurrence of persons thus desiring money at its face value, for the Government itself has more or less defined powers of taking the possessions of its subjects for public purposes, that is to say, enforcing them to contribute thereto by paying taxes. Ultimately it requires food, clothing, shelter, and a certain amount of amusement and indulgence for its soldiers and all its officials; and it requires fire-arms, ammunition, and the like. And in proportion to its advance in civilization it may have other and humaner purposes to fulfil. Now, as long as gold has any application in the arts and sciences it exchanges at a certain rate with other commodities, just as oxen exchange at a certain rate against potatoes, pig-iron, or the privilege of listening, in a certain kind of seat, to a prima donna at a concert. The Government, then, levying taxes upon the community, may say: "I shall take from you, in proportion to your resources, as a tribute to public expenses, the value of so much gold. You may pay it to me in actual metallic gold or you may pay it to me in anything which I choose to accept in lieu of the gold. If you do not give it me I shall take it from you, in gold or any other such articles as I can find, and which would serve my purpose, to the value of the gold. But if you can give me a piece of paper, of my own issue, to the face value of the gold that I am entitled to claim of you, I will accept that in payment." Now, as these demands of the Government are recurrent, there will always be a set of persons to whom the Government paper stamped with a unit weight of gold is actually equivalent to that weight of gold itself, because it will secure immunity from requisitions to the exact extent to which the gold would secure it. This gives to the piece of paper an actual power of doing the work that gold to its face value could do, in the way of effecting exchanges; and therefore the Government will find that the persons of whom it has made purchases, or whom it has to pay for their services, will not only be obliged to accept the paper in lieu of payments already due, and which it chooses to say that these papers discharge, but will also be willing to enter into fresh bargains with it, to supply services or to surrender things for the paper, exactly as if it were gold; as long as it is easy to find persons who, being themselves under obligation to the Government, actually find the Government promise to relinquish their claim for gold as valuable as the gold itself. The persons who pay taxes constitute a very large portion of the community and the taxes they have to pay form a very appreciable fraction of their total expenditure, and consequently a very large number of easily accessible persons actually value the paper as much as the gold up to a certain determined point, the point, to wit, of their obligations to the Government. Thus it is that a limited demand for paper, at its face value in gold, constitutes a permanent market, and furnishes a basis on which a certain amount of other transactions will be entered into. The Government, in fact, is in a position very analogous to that of an issuing bank. An issuing bank promises to pay gold to any one who presents its notes, and to a certain extent that promise performs the functions of the gold itself, and a certain volume of notes can be floated as long as the credit of the bank is good. Because bank promises to pay are found to be convenient, as a means of conducting exchanges. After this number has been floated the notes begin to be presented at the bank, and presently it has to redeem its promises as quickly as it issues them. The limit then has been reached and the operation cannot be repeated. After this people will decline to accept the promises of the bank in lieu of the money, or, which is the same thing, they will instantly present the promise and require its fulfillment. The amount of notes in circulation may be maintained, but it cannot be increased. The issuing Government does not, without qualification, say that it will pay gold to any one who presents the note, but, in accepting its own notes instead of gold, it says, in effect, that it will give gold for its own notes to any
of its own debtors; and as long as there is a sufficient body of these debtors to vivify the circulating fluid the Government can get its promises accepted at par. Any Government which, even for a short time, insists on paying in paper and receiving in gold, that is to say, any Government that does not honour its own issue when presented by its debtors, will find that its subjects decline to enter into voluntary contracts with it except on the gold basis; and if its paper still retains any value whatever, it will only be because of an expectation of a different state of things hereafter that gives a certain speculative value to the promise. In fact a Government which refuses to take its own money at par has no vivifying sources to rely on except the very disreputable and rapidly exhausted one of proclaiming to debtors, and persons under contract to pay periodic sums, that they need not do so if they hold a certificate of immunity from the Government. Such immunity will be purchased at a price determined, like all other market prices, by the stock available (qualified by the anticipations of the stock likely to be available presently) and the nature of the services it can render. The power, then, of Governments to make their issues do exchange work depends on their power to make a note of a certain face value do a definite amount of exchange work; and this they can effect by giving it a definite primary value to certain persons, and then keeping the issue within the corresponding limits. It does not consist in an anomalous, and, in fact, inconceivable, power of enabling an indefinite issue to perform a definite work, and arriving at the value of each individual unit by a division sum.
The question may often have presented itself to reflective minds whether it would be possible, by limiting the area of commercial intercourse, to prevent the inhabitants of a given country from being swept into the storms of the whole industrial world. Just as it is argued that a yeomanry, living largely on the direct products of its own industry, would be less liable to desolating economic disturbances than a manufacturing population, which is helpless to supply its own wants if the world markets cease to demand its product, so it may be argued in the abstract that the fluctuation within a limited area will be less violent and disastrous if it is approximately self-supplying than if a considerable portion of its population are liable to bear the brunt of changes in the currents of the whole commerce of the world. But though the question whether such relative isolation and self-sufficiency are possible, and whether they might be expected to yield a balance of advantage, is perhaps arguable in the abstract, as a matter of fact no scheme of fiscal union is ever based on any such idea of shielding a suitably constituted area from the commercial storms of the world. The fact becomes obvious when we note that actual or proposed areas of fiscal union are always determined by other than commercial or economic considerations. The United States of America are often cited as furnishing a typical case of protection, but we should never lose sight of the fact that there is free trade within the United States themselves, so that it seems safe to assert that there is no other free trade area of so great an extent and embracing so wide a variety of natural and social conditions in the whole world. Moreover, it is generally supposed that the United States would welcome the accession of Canada, and in case of a union would at once throw down the fiscal barriers that now separate the two countries. If this is so, one is led to the conclusion that the tariff is not maintained on economic grounds, and that no economic loss would be anticipated from its removal. In the same way the desire to federate the British Empire fiscally is clearly determined by other considerations than those of an economically convenient and suitable area, containing a due balance of productive resources; and the desire of all advanced industrial communities to find external markets for their "surplus products" shews that they have no idea of cutting themselves off from the great world-streams of commerce and constituting themselves into self-supplying groups of a size and character determined by the prospect of economic stability.