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The Economics of Welfare; Pigou, Arthur C.
104 paragraphs found.
Part I, Chapter 1

§4. To say this without saying something more would, however, by very misleading. It is not pretended that, at the present stage of its development, economic science is able to provide an organon even remotely approaching to what it imagines for itself as its ideal. Full guidance for practice requires, to borrow Marshall's phrase, capacity to carry out quantitative, not merely qualitative, analysis. "Qualitative analysis tells the ironmaster that there is some sulphur in his ore, but it does not enable him to decide whether it is worth while to smelt the ore at all, and, if it is, then by what process. For that purpose he needs quantitative analysis, which will tell him how much sulphur there is in the ore." *5 Capacity to provide information of this kind economic science at present almost entirely lacks. Before the application of general laws to particular problems can yield quantitative results, these laws themselves must be susceptible of quantitative statement. The law is the major premises and the particular facts of any problem the minor. When the statement of the law lacks precision, the conclusion must generally suffer from the same defect; and, unfortunately, the task of setting out economic laws in precise form has scarcely been begun. For this there are three reasons. First, the relations which have to be determined are extremely numerous. In physics the fundamental thing, the gravitation constant, expressing the relation between distance and attractive force, is the same for all sorts of matter. But the fundamental thing, in the economic world—the schedules expressing the desires or aversions of groups of people for different sorts of commodities and services—are not thus simple and uniform. We are in the position in which the physicist would be if tin attracted iron in the inverse ratio of the cube of its distance, lead in that of the square of its distance, and copper in some other ratio. We cannot say, as he can of his attractions, that the amount offered or required of every several commodity is one and the same specified function of the price. All that we can say in this general way is that it is some one of a specified large family of functions of the price. Hence, in economics there is not, as in dynamics, one fundamental law of general application, but a great number of laws, all expressible, as it were, in equations of similar form but with different constants. On account of this multiplicity, the determination of those constants, or to put the matter broadly, the measurement of the elasticities of demand and supply of the various commodities in which economics is interested, is a very large task. Secondly, this task is one in attacking which the principal weapon employed by other sciences in their inquiries cannot be fully used. "Theory," said Leonardo da Vinci, "is the general; experiments are the soldiers." Economic science has already well-trained generals, but, because of the nature of the material in which it works, the soldiers are hard to obtain. "The surgeon dissects a dead body before he operates on a living one, and operates upon an animal before he operates upon a human being; the mechanic makes a working model and tests it before he builds the full-sized machine. Every step is, whenever possible, tested by experiments in these matters before risks are run. In this way the unknown is robbed of most of its terrors." *6 In economics, for the simple reason that its subject-matter is living and free men, direct experiment under conditions adequately controlled is hardly ever feasible. But there is a third and even more serious difficulty. Even if the constants which economists wish to determine were less numerous, and the method of experiment more accessible, we should still be faced with the fact that the constants themselves are different at different times. The gravitation constant is the same always. But the economic constants—these elasticities of demand and supply—depending, as they do, upon human consciousness, are liable to vary. The constitution of the atom, as it were, and not merely its position, changes under the influence of environment. Thus the real injury done to Ireland by the earlier English administration of that country was not the destruction of specific industries or even the sweeping of its commerce from the seas. "The real grievance lies in the fact that something had been taken from our industrial character which could not be remedied by the mere removal of the restrictions. Not only had the tree been stripped, but the roots had been destroyed." *7 This malleability in the actual substance with which economic study deals means that the goal sought is itself perpetually shifting, so that, even if it were possible by experiment exactly to determine the values of the economic constants to-day, we could not say with confidence that this determination would hold good also of to-morrow. Hence the inevitable shortcomings of our science. We can, indeed, by a careful study of all relevant facts, learn something about the elasticities of demand and supply for a good number of things, but we cannot ascertain their magnitude with any degree of exactness. In other words, our fundamental laws, and, therefore, inferences from these laws in particular conditions, cannot at present be thrown into any quantitatively precise form. The result is that, when, as often happens, a practical issue turns upon the balancing of opposing considerations, even though these considerations are wholly economic, economic science must almost always speak with an uncertain voice.

Part II, Chapter 1
Cf. Marshall's observation: "Much remains to be done, by a careful collection of the statistics of demand and supply and a scientific interpretation of their results, in order to discover what are the limits of the work that society can with advantage do towards turning the economic actions of individuals into those channels in which they will add the most to the sum total of happiness" ( Principles of Economics, p. 475).

Part II, Chapter II

Part II, Chapter 3

§ 5. These considerations show that, even though the values of marginal social net products were every where equal or differed only in ways "justified" by the costs of movement, there might still be scope for State action designed to increase the magnitude of the national dividend and augment economic welfare. Benefit might be secured by a temporary bounty (or temporary protection) so arranged as to jerk the industrial system out of its present poise at a position of relative maximum, and induce it to settle down again at the position of absolute maximum—the highest hill-top of all. This is the analytical basis of the argument for the temporary protection, or other encouragement, of infant industries; and, if the right infants are selected, the right amount of protection accorded, and this protection removed again at the right time, the argument is perfectly valid. Benefit might also be secured by a permanent bounty at a different rate from that contemplated above, so arranged as to force the industrial system from the summit of the hill-top on which it is found to any position, that overtops its present site, on the slope of a higher hill. The conditions in which bounties are likely to have this effect, rather than that of shifting the economic system to a different position on the hill that it is on already, are somewhat special. But it can be proved that, in certain states of demand and supply, some rates of bounty must have this effect. *17

The shapes of the demand and supply curves and the size of the bounty must be such that, when the demand curve is raised by the bounty, it does not cut the supply curve at any point corresponding to its former point of intersection, but does cut it at a point corresponding to a point of stable equilibrium further to the right than this. This condition can readily be depicted in a diagram.

Part II, Chapter IV

Part II, Chapter 7

§ 3. Let us next consider complexity, or compound character, in the units in terms of which transactions are made. Here, as before, it is capital which calls for the greatest amount of discussion. For capital, as ordinarily conceived in business, is not a pure elementary factor of production. In the concrete, of course, it appears in the form either of plant and equipment or of a system of connections called goodwill. But this concrete capital is always made up of a combination, in varying proportions, of two factors, namely, waiting and uncertainty-bearing. *39 Under primitive conditions, if an enterprise was undertaken by more than one person, it was practically necessary for each of the several contributors to furnish waiting and uncertainty-bearing in the proportious in which these factors were required in the aggregate. They would, in effect, pool their capital, taking upon each £ lent an equal measure of uncertainty-bearing. They would be partners, or, if we wish to suppose them in the enjoyment of limited liability, joint shareholders in a company whose capital consisted entirely of ordinary shares. In modern times, however, this is no longer necessary. An enterprise that requires, say, x units of waiting plus y units of uncertainty-bearing, need no longer obtain from each subscriber of one unit of waiting y/x units of uncertainty-bearing also. By the device of guarantees its demand can be separated into two streams, in such wise that waiting alone is drawn from one set of people and uncertainty-bearing alone from another set. Guarantees may assume a great variety of forms. They are given to industrialists by insurance companies, which undertake, for a consideration, that the industrialists' earnings shall be unaffected by fire or accident. They are given by Exchange Banks, such as those which, in India before 1893, bought importers' and exporters' bills at the time of their bargain, and so, for a price, insured them against loss (or gain) from any fluctuations in the exchange which might occur in the interval between the bargain and the realisation of the bills. Where industrialists have to do with staple goods, for which grading permits the establishment of future markets, they are given, for the more general risks of business, by speculators. For a miller or cotton merchant, undertaking an order to supply flour or cotton goods, can buy the speculator's promise to provide him with his raw material in the future for a stipulated sum, irrespective of the price which may then prevail in the market. Like guarantees are given to a banker preparing to discount a bill for an industrial enterprise, when a second banker, or a bill-broker, or some independent person, consents to accept, or endorse, the bill, or, as is usual with "cash credits" in Scotland, to stand surety for the original borrower. *40 They are given to a Central Bank, when a People's Bank, working, either on unlimited liability or with a subscribed capital of guarantee, in effect borrows money on behalf of its local clients. *41 They are given finally to a banker or other lender when a borrower obtains a loan from him by a deposit of "collateral" security. By far the most effective form of security consists in government scrip and the share certificates of industrial enterprises. For the deposit of these, unlike the deposit of chattel security, involves no present loss to the depositor, while their ultimate assumption, unlike the foreclosure of a mortgage, threatens no difficulty to the person in whose favour the deposit has been made. Furthermore, the "continuous market" provided for securities by the Stock Exchanges of the world safeguards the holders of them against the danger of slumps in value so sudden and large as those to which persons holding, as collateral, the title-deeds of parcels of real estate are liable. *42 In recent times, partly in consequence of the supersession of partnerships by joint stock companies, *43 the proportion of national wealth represented by stocks and shares, and, therefore, available as collateral security, has enormously increased. According to Schmoller's estimate of a few years before the war, whereas 100 years ago only a very small proportion of any country's wealth was in this form, to-day in Germany 17 per cent—Riesser says 33 per cent—and in England 40 per cent, of it is covered by paper counterparts. *44 According to Mr. Watkins's investigations, 77 per cent of the capital value owned by residents in the United Kingdom, on which estate duty was levied in 1902-3, was "personalty," and, out of personalty, 70 per cent was paper property. *45 As a natural consequence the area over which the device of guarantees can be employed, and, therefore, the segregation of waiting from uncertainty-bearing brought about, has been greatly extended.

Part II, Chapter 9

§ 14. So far we have been concerned with forms of divergence between social and private net products that are liable to occur even under conditions of simple competition. Where conditions of monopolistic competition *84—competition, that is to say, between several sellers each producing a considerable proportion of the aggregate output—are present, the way is opened up for a new kind of investment. This consists in competitive advertisement directed to the sole purpose of transferring the demand for a given commodity from one source of supply to another. *85 There is, indeed, little opportunity for this as regards goods of a kind whose quality is uniform and, as with salt, lumber or grain, can be easily tested; but, where quality cannot be easily tested, and especially where goods are sold in small quantities, which can readily be put into distinctive packages for the use of retail customers, there is plenty of opportunity. *86 Not all advertisement is, of course, strictly competitive. Some advertisement, on the contrary, fulfils a social purpose, in informing people of the existence of articles adapted to their tastes. Indeed, it has been said "that advertising is a necessary consequence of sale by description," and represents merely a segregated part of the complex work formerly done by those middlemen who exhibited, as well as sold, their goods. *87 Without it many useful articles, such as new machines, or useful services, such as that of life insurance, might not be brought at all to the notice of potential purchasers who have a real need for them. Furthermore, some advertisement serves to develop an entirely new set of wants on the part of consumers, the satisfaction of which involves a real addition to social well-being; and the development of which on a large scale at the same time enables the commodity that satisfies them to be produced on a large scale and, therefore, cheaply. *88 Under this head it is possible to make out a case in favour of the peculiar system of advertisement arranged on behalf of the general body of its currant growers (without the mention of individual names) by the Greek Government: *89 though, of course, the development of a taste for currants is probably in part at the expense of the taste for something else. It is not, however, necessary to my purpose to attempt an estimate of the proportion which strictly competitive advertisement bears to advertisement in the aggregate—an aggregate the cost of which has been put, for the United Kingdom, at eighty million pounds, and, for the world, at six hundred million pounds per annum. *90 That a considerable part of the advertisement of the modern world is strictly competitive is plain. *91 This is true alike of the more obvious forms, such as pictorial displays, newspaper paragraphs, *92 travellers, salesmen, and so on; and of the more subtle forms, such as a large exhibit of jewellery in the shop window, the according of credit, with the consequential expenditure on book-keeping and on the collection of recalcitrant debts, expenditure in keeping shops open at hours inconvenient and costly to the sellers, and other such forms. It is plain that, up to a point, investment of this type, in so far as it retains, or gains, for the investor "a place in the sun," yields, like expenditure upon national armaments, a considerable private net product. A curve, representing the private net products yielded by successive increments of it, would indicate positive values for a long distance. What relation does this curve bear to the corresponding curve representing the social net products of successive increments?

With solidified units the settlement locus—i.e. the range of possible bargains—lies along the contract curve, and with representative units along portions of the two reciprocal demand (or supply) curves. For a technical discussion of this and connected points cf. my paper "Equilibrium under Bilateral Monopoly" ( Economic Journal, Jan. 1908, pp. 205 et seq.); also my Principles and Methods of Industrial Peace, Appendix A.
Part II, Chapter 11

§ 4. The relations which these laws express between variations in supply price and variations in output are not necessarily the relations which do subsist between these things in history, but the relations which would subsist subject to the condition other things being equal. In real life, with the general advance of knowledge, new methods of production are being continually introduced and new technical appliances invented. Some of these changes are due to factors which would operate even though the scale of output of the industry remained constant. Others are the result of the changes in the scale of output, being called out in response to changes in demand. Of course, in practice, it may often be impossible to say whether a particular invention in, say, the process of steel manufacture is or is not due to changes in the scale of output. Logically, however, the distinction is quite clear. For the present purpose changes not due to changes in the scale of output are definitely ruled out of consideration. Therefore an industry may display continually falling supply price through a long series of years, and yet may not be operating under conditions of decreasing supply price *16 as understood here. In like manner, when, for example, the coal seams of a country are being gradually worked out, an industry may display continually rising supply and yet may not be operating under conditions of increasing supply price. *17 An industry is said to conform to increasing, constant or decreasing supply price, when, apart from changes in technique or other inventions not due to changes in the scale of output, increase of output would be associated, as the case may be, with increasing, constant or decreasing supply prices.


§ 6. Conditions of decreasing supply price from the standpoint of the community are clearly possible in a material as well as in a formal sense. For, when the scale of an industry increases, this change often leads to changes in the internal structure and methods of working of the firms engaged in it, or in the proportions in which the several factors of production are employed, of a kind which would lower the cost of production per unit, even though the prices per unit of all the factors of production employed were unaltered. Thus many writers have called attention to the fact that, when an industry is on a small scale, the firms belonging to it all engage in producing a number of different types or varieties of their commodity. They are, more or less, firms of all work. There is not a sufficiently wide or assured market to allow of close specialisation. As, however, the general demand grows, it becomes more and more worth while for firms to specialise on particular types. Thus Sir Sydney Chapman has observed that the relatively large scale of the cotton industry in England is associated, not only with specialisation between the processes of spinning and weaving, but with further specialisation between firms spinning fine counts and those spinning coarse counts. In contrast to this: "The range of work undertaken by the typical factory in Germany is far greater than that undertaken by the typical factory in England. Hence naturally the skill of the operatives is less in Germany; more time is wasted and factory organisation is less perfect." *19 The increased specialisation of its component firms made possible by an enlargement in an industry as a whole often involves a large reduction in costs. This reduction might, so far as pure theory goes, be accompanied by no change, or even by a decrease, in the size of the typical firm. In practice it is likely to be accompanied by some increase in this size. Thus Marshall writes: "An increase in the aggregate volume of the production of anything will generally increase the size, and, therefore, the internal economies possessed by (such) a representative firm." *20 This, however, is a secondary consideration. The essential point is that an increase in the scale to which an industry is producing frequently alters—in general diminishes—the average (and marginal) costs of the equilibrium firm contained in it, whether or not it also alters its size. There is, then, no difficulty in seeing that the law of decreasing supply price from the standpoint of the community is not merely formally possible, but is likely to be followed in practice by many manufacturing industries.


§ 8. When an industry, besides purchasing ultimate factors of production, purchases also materials, machinery and so on, the matter is less simple. The price variations in these things, if such occur, do not now necessarily represent only transfer expenditure. They do not do so, for example, when an increase in the size of the cotton industry enables textile machinery to be produced with more help from specialisation and standardisation, and, therefore, more cheaply. The fall in price of textile machinery brought about in this way when the cotton industry expands is relevant to the law of supply price in that industry, not merely from the standpoint of the industry, but also from that of the community. Since, however, what is sold to one industry, other than factors of production, must be the product of another industry, it follows from the discussion of the preceding section that an increase in the output (and, therefore, in the demand for materials and machinery) in a given industry cannot involve an increase in the price of the things it buys, except by causing an increase in the price of the factors of production that make them. Therefore, in this complex case, no less than in the simpler one, conditions of increasing supply price from the standpoint of the community are excluded. From the cosmopolitan point of view they are excluded absolutely. From the point of view of a particular country purchasing materials from abroad they may, however, be present. For, though, if the price of imported materials rises as a consequence of an increase in the scale of the given industry, this can only be because a transfer is made to the owners of the factors that help to make them, these owners belong to other countries, and, therefore, so far as the one country is concerned, the transfer does not cancel itself.

Part II, Chapter 12

§ 2. Broadly put, the position was as follows. The war caused in two ways a great shortage in certain things. On the one hand, for munition articles, army clothes and so forth, there was an enormous new Government demand much in excess of normal supplies. On the other hand, for various articles of ordinary civilian use, the contraction of available tonnage and the withdrawal of labour for the army and munition work caused supplies to fall much below the normal. The shortage brought about in one or other of these ways put it in the power of persons who happened to hold stocks of short commodities, or to be able to produce them quickly, to charge for them prices very much higher than usual. When the shortage was due to increased Government demand, the scale of business done by these persons being as large as, or larger than, before, the high prices that they were enabled to charge necessarily yielded them abnormally large profits. When it was due to contraction of supply ( e.g. through the withdrawal of labour or other obstacles to output), the gain from high prices might be cancelled by loss due to lessened sales; so that abnormally large profits were not obtained. For a great number of things, however, the conditions of demand are such that a shortage of, say, 10 per cent in the supply causes the price offered by purchasers to rise by much more than 10 per cent. For the sellers of articles of this class the shortage, even when it was due to a supply contraction, often meant abnormal profits. Of course, some of these abnormal profits were more apparent than real, for, if prices all round are doubled, a doubling of money profits will only enable a man to get the same amount of things as before. Very often, however, the money profits were enhanced very much more than in proportion to the rise in general prices. Wherever this happened, certain specially favoured persons were benefiting greatly as a direct consequence of the war. This state of things naturally caused resentment, and suggested State interference.


§ 5. The foregoing account of the difficulties encountered and the expedients employed in the exercise of price control suggests a question of some theoretical interest. It is plain enough that, in the earlier stages of control, practical considerations make it necessary to begin at the producer's, rather than the retailer's, end; for the local differentiations needed in a retail schedule are generally much more serious and require much more knowledge to allow of their being fairly made. As has been shown, however, as the controlling authority became more expert and got a better grip on its industries, it tended to make price schedules all along the line from the producer to the final seller. Thus, in the end, retail maximum prices often were fixed. The point in doubt is whether, when this has all been arranged, there is any real need to continue the earlier stages of control. Will not maximum retail prices be reflected back all along the line, and so automatically stop "profiteering" at earlier stages? The view that this will be so seems to have guided the work of some of the Ministry of Food's controls. For example, the prices of turnips and swedes were regulated by a rule that nobody might sell them for more than 1½d. per lb., and the price of chocolates and sweets by a rule that nobody might sell them for more than 3d. per oz. and 2d. per oz. respectively. In general, however, it was thought better to maintain price schedules at the earlier stages, separate from, and adjusted to, the retail maxima. In a world of pure competition it does not appear that this would really have been necessary. If the retail maxima were rightly arranged, everybody in line would automatically be forced to charge prices that yielded them about the ordinary rate of profits. The artificial restriction upon retail price would act in exactly the same way as a fall in the public demand for the commodity sufficient to counteract the shortage of supply. It is probable, however, that this adjustment would not, in real life, be made without a certain amount of friction, and that some of the traders affected might be in a position to exercise quasi-monopolistic pressure against particular shopkeepers or others who happened to be mainly dependent on them. Consequently, when schedules of maximum prices for the earlier stages had already been worked out, to drop them, in the hope that the retailers' schedules subsequently superimposed would by themselves achieve the whole of the ends desired, would probably have been unwise.


§ 6. We have now to consider the broad analytical problem which these expedients of war time suggest. What exactly is to be said of the relation between the kind of price regulation that was then attempted and the size of the national dividend? The great upheaval of the war had caused the existing distribution of resources to be uneconomic, in the sense that the value of the marginal net product (social and private alike) of those employed in making certain specially scarce articles was abnormally high. Apart from outside interference abnormal values of marginal net products mean abnormal returns to the investor; and these abnormal returns tend to draw resources from occupations of relatively low productivity to those occupations of greater productivity in which they rule. When prices are cut down by law, the value of the marginal net product of any given quantity of resources in any occupation is, indeed, necessarily cut down also, because we have defined this value as the marginal physical net product multiplied by the realised price. Plainly, however, this definition tacitly assumes the realised price to be identical with the demand price. When these two are artificially divorced, our definition must be changed. The values of the marginal net products of resources, which it is to the interest of the national dividend to make equal everywhere, consist in the marginal physical net products multiplied by the demand prices. When this is understood, it is evident that an artificial reduction of price, while lowering returns in the industry affected by it, leaves the true value of the marginal net product of any quantity of resources invested there unchanged. The desirability, from the standpoint of the national dividend, of a transference of resources is thus unaltered, while the principal influence tending to bring it about is weakened. To put the same point in more general terms, any external limitation imposed on the price of an article produced under competitive conditions ( i.e. otherwise than by a monopolist) must lessen the inducement that people have to make that article. Normally it is just through high prices and high profits that a shortage of anything corrects itself. The prospect of exceptional gain directs free resources into the industry which makes the thing that is short. Cut off this prospect, and that increase of supply, which the interest of the national dividend demands, will be checked, and checked more severely the greater is the cut made from the "natural" price.


§ 8. It would, however, be a great error to infer from this that a general permanent policy of control, designed to prevent groups of producers from reaping abnormal profit on occasions when the conditions of the market give them power to do so, would be equally innocuous. People, in choosing their investments, take account of these ups and downs, and, so far as their judgment is correct, place their resources in such a way that, on the average and on the whole, the marginal yield works out about equally in different occupations. In these circumstances it is obvious that any general State policy of cutting down prices in any industry below the competitive level, on occasions when the conditions of demand and supply would enable that industry to obtain exceptional profits, must, in effect, penalise it as compared with stable industries. For, if, in a hilly district where the average level of peaks and valleys is the same as it is on a plateau, the tops of the peaks are removed, the average level there will, of course, be reduced below that of the plateau. The discouraging effect of this differential action cannot be made good by any direct manipulation of production by the State. For here we have to do, not merely with a tendency for free resources to go elsewhere at the time when the régime of price control is at work, but with a tendency that operates continually and checks the general flow of resources that would otherwise seek investment in building up the permanent equipment of the threatened industry. If, for example, this country adopted a general policy of forbidding farmers to charge high prices when they have power to do so on account of a bad world harvest, this would check investment in British agriculture; because people expect bad world harvests from time to time and look to high prices then to set against low prices in bumper years. While, therefore, on the one hand, our analysis does not imply that the policy of price limitation adopted in the abnormal circumstances of the war worked injury to the national dividend, on the other hand, the experience of the war gives no ground for doubting that a general permanent policy of price limitation, in non-monopolised industries, would produce this effect. This conclusion is, of course, subject to the considerations set out in the preceding chapter. It is subject, too, to the qualification that, if maximum prices are fixed so high as to leave all ordinary sales unaffected and merely to protect an occasional weak purchaser from exploitation by unscrupulous dealers, they will not interfere with the way in which resources are distributed between different uses, and will not, therefore, injure the national dividend. Moreover, if State interference to prevent any group of producers from making excessive earnings in good times were balanced by interference to prevent them from making abnormally low earnings in bad times, the net result, though it would necessarily involve a redistribution of their production between good times and bad, would not necessarily involve a contraction in the aggregate amount of their production.

Part II, Chapter 14

§ 5. Let us next suppose that the size of the individual firm and the size of the individual unit of control in an industry have been adjusted to the structural and other economies obtainable, and that the units evolved in this way are not large enough to exercise any element of monopolistic power. It is then clear that monopolistic power will not be called into being incidentally, as a by-product of developments that take place without reference to it. But there still remains, as an influence tending to produce it, the direct expectation of the gains to which it may lead. When promoters have reason to believe that amateur speculators will expect a particular monopoly to prove more profitable than it really will do, this fact promises extra gains to those who form amalgamated companies, because it enables them to unload their shares at inflated values. *42 Apart from this special consideration, however, we may lay it down that the magnitude of the gains obtainable from monopolisation depends, the conditions of supply being given, on the elasticity of the demandi.e. the fraction obtained by dividing a (small) percentage change in price into the associated percentage change in quantity purchased—for relevant quantities of the commodity concerned. *43 The less elastic the demand, the greater, ceteris paribus, are the probable gains. Incidentally, it may be observed, this circumstance, coupled with that noted in the next paragraph, makes it profitable for a monopolist to extend his control over products that compete with his own; for example, for the "Big Five" meat-packers of the United States to absorb both (a) non-American meat and (b) non-meat foods. *44 The principal conditions of highly inelastic demand have now to be set out.


The first condition is that the commodity shall be of a kind for which it is not easy to find convenient substitutes. The demand for mutton is made comparatively elastic by the existence of beef, the demand for oil by the existence of gas, and the demand for the service of trams by the existence of omnibuses. In like manner, the demand for the service of transport by rail is probably more elastic in England than in continental America, because "the long broken coast-line in England and the great number of ports" render the competition of water carriage exceedingly powerful; *45 and the demand for the services of any particular line of railway is, in general, fairly elastic, even where no water competition exists, in consequence of the indirect competition of lines running to other markets. *46 From another field a good example of the point I am now considering is furnished by Jevons, in his book on the Coal Question: "When the Government of the Two Sicilies placed an exorbitant tax on sulphur, Italy having, as it was thought, a monopoly of native sulphur, our manufacturers soon had resort to the distillation of iron pyrites or sulphide of iron." *47 As regards the kinds of commodity for which it is likely that substitutes can be employed little of general interest can be said. It should be observed, however, that the products of a district, or a country, whose efforts are directed to leadership in quality as distinguished from quantity, are less exposed to the competition of substitutes than other products. For example, the prime qualities of beef and mutton in Great Britain have not been affected by the development of the American and Australian trade to nearly the same extent as the inferior qualities. *48 It is, therefore, a commercially important fact that English manufacturers enjoy a very marked leadership of quality in wall-papers, fine textiles and cables, whereas in the electrical and chemical industries they are in a decidedly inferior position. *49 Obviously, from the present point of view, we must include among the substitutes for any commodity produced by a seller exercising monopolistic power the same commodity produced by other sellers. The larger, therefore, is the proportion of the total output of product that a seller exercising monopolistic power provides in any market, the less elastic the demand for his services will be. Inelasticity of demand for monopoly goods is, therefore, promoted in industries where importation from rival sources is hindered by high transport charges, high tariffs, or international agreements providing for the division of the field between the combined producers of different countries. Furthermore, in order that the elasticity of demand may be affected by substitutes, it is not necessary that the rival source of supply should be actually existing. In some industries manufacture by people who are normally purchasers is itself a possible rival source of supply. Thus the Committee on Home Work observe: "Unless the price at which these articles (baby linen and ladies' blouses and underclothing) are sold to the wives and daughters of the better-paid working men and small middle-class people is low, those who would otherwise be purchasers will buy the materials and make the articles at home." The same remark seems to apply to laundry-work and charing. The poor housewife has the power, if reason offers, to do these things for herself. Consequently, the demand for the services of specialists at such tasks is exceptionally elastic. *50 For example, it has been remarked of Birmingham: "The washerwomen are among the first to suffer in any period of trade depression, for, as the first economy in bad times is to do your own washing, the tiny laundry with a very local connection is soon emptied." *51

Part II, Chapter 15

§ 2. Let us first ignore all forms of action which aim, by sacrifice in the present, at obtaining an advantage against rivals in the future. We have, then, to do with the pure problem of "multiple monopoly." This problem assumes its simplest form when two monopolists only are supposed to be present; and, in this form, it has been much discussed among mathematical economists. Cournot decided, as is well known, that the resources devoted to production under duopoly are a determinate quantity, lying somewhere between the quantities that would have been so devoted under simple competition and under simple monopoly respectively. Edgeworth, on the other hand, in an elaborate critique, maintained that the quantity is indeterminate. In more recent discussions there is apparent some measure of return towards Cournot. If, it is held, each of two monopolists, in regulating his action, assumes that the other will not alter his output in consequence of what he does, the quantity of resources devoted to production by the two together is determinate at the amount calculated by Cournot. If each monopolist assumes that the other will not alter his price in consequence of what he does, then, in a perfect market, the quantity of resources devoted to production by the two together is determinate at the amount proper to simple competition; in an imperfect market—that is to say, a market in which some of the buyers have a preference for one monopolist over the other—this quantity is determinate at an amount less than that proper to simple competition, and falling short of it more largely the more imperfect the market is. *64 More generally, if each seller makes and holds to any definite assumption about the conduct of the other, it would seem that the quantity of resources devoted to production by both together is determinate at some amount not greater than that proper to simple competition, and not less, in a perfect market than the Cournot amount, in an imperfect market than the amount proper to simple monopoly. In real life, however, it is, I suggest, very unlikely that either seller will hold any consistent view about his rival's state of mind. His judgment will be variable and uncertain. As in a game of chess each player will act on some forecast of the other's reply; but the forecast he acts on may, according to his mood and his reading of that opponent's psychology, be one thing or another thing. Hence, as it seems to me, we may properly say that the aggregate amount of resources to be devoted to production is indeterminate in the sense that from a mere knowledge of the demand conditions and of the cost conditions affecting the two monopolists—whether the cost conditions are independent or inter-linked—we cannot foretell what it will be. The range of indeterminateness extends over a distance which is larger in a perfect than it is in an imperfect market, and in either sort of market is diminished as the number of monopolists is increased above two. In no case can the aggregate investment be greater than the quantity proper to simple competition. We have learned, however, from Chapter XI. that, except in industries in which imported materials subject to increasing supply price are employed, this last quantity cannot be greater than the ideal investment. It follows that, except in these industries, the investment which is forthcoming under multiple monopoly cannot be greater than the ideal investment. It may, however, easily be, and, in view of what has been said, in general seems likely to be, substantially less than this.


§ 3. Hitherto we have specifically excluded the effects of price warfare designed to secure future gains by driving a rival from the field or exacting favourable terms of agreement from him. The indeterminateness just described exists under monopolistic competition, even though neither of the monopolists "hopes to ruin the other by cut-throat prices." *65 In many instances of monopolistic competition, however, price warfare—or cut-throat competition—does, in fact, take place. It consists in the practice of selling at a loss in order to inflict injury on a rival. It must be distinguished carefully from the practice of reducing prices down to, or towards, prime cost, which frequently occurs in periods of depression. This latter practice may involve large reductions of price below the "normal," and it is certain to do this when demand is variable and prime cost is small relatively to supplementary cost; but it does not involve "selling at a loss" in the strict sense. Cut-throat competition proper occurs only when the sale price of any quantity of commodity stands below the short-period supply price of that quantity. When it occurs, the range of possible aggregate investment no longer has, as an upper limit, the quantity proper to simple competition, but is liable to exceed this quantity to an extent determined by the opinion entertained by each of the combatants about the staying power of his opponent and by other strategical considerations. There is, obviously, no tendency for it to approximate to the ideal investment; but we can no longer say, as we could when cut-throat competition was ignored, that it is likely to be less than the ideal investment.

Part II, Chapter 16

§ 4. Some qualification of the above results is necessary in industries where temporary low prices may lead to the development of new demands. For, when a prospect of this kind exists, particularly if conditions of decreasing supply price rule and if the current rate of interest on investments is low, it may pay a monopolist to accept low prices for a time, even though to do so involves production at a loss, for the sake of the future gain; whereas it would not pay any one among a large number of competing sellers to do this, since only a very small proportion of the future gain resulting from his action would accrue to himself. It is important, however, to observe that the creation of a new demand, which may thus sometimes be credited to monopoly, is only a social gain when the demand is really new, and not when it is merely a substitute for some other demand which is at the same time destroyed. It is not, for example, a social gain if a railway company, by temporary low prices, "develops the traffic" from one district at the expense of destroying the traffic from another equally well-situated district; and it is not a social gain if, by a like policy, some ring of traders causes people, who used to obtain a given measure of satisfaction from crinolines and no satisfaction from hobble-skirts, to obtain the like given measure of satisfaction from hobble-skirts and no satisfaction from crinolines. This consideration suggests that the transitional advantage of simple monopoly, that has just been set out, is not generally very important in comparison with the long-period disadvantages previously explained.

Attention may be called here to a peculiar case. Suppose the same process to yield two joint products, one of which is controlled monopolistically but the other is not. Then, as shown above, if entry to the industry can be restricted, simple monopoly will make the outputs of both products less than they would be under simple competition. The whole of the non-monopolised joint product that is produced will be sold, but, provided that the demand for the monopolised product has an elasticity less than unity, and that, in respect of the most profitable scale of output, the demand price for the non-monopolised product exceeds the supply price of the process that produces both products, a part of the monopolised product will be thrown away. If entry to the industry is not restricted, more resources will flow into it than would so flow under simple competition. On the assumption that these are actually set to work and not left standing idle, this will mean that, in the above conditions, the output and sale of the non-monopolised joint product is larger than it would have been under simple competition. It is possible, though improbable, that, as a net result, there may be evolved a larger sum of consumers' surplus than simple competition would allow.

Part II, Chapter XVII

Part II, Chapter 17

§ 9. As already explained, practical interest centres upon monopoly plus discrimination of the third degree. But, before studying this, we may, with advantage, glance at the simpler problem presented by the two higher forms of discrimination. It is easily seen that, in industries in which the rates of change in supply price from the standpoint of the industry are identical with the rates of change from the standpoint of the community, under monopoly plus discrimination of the first degree, it will always pay the monopolist to make the ideal amount of investment and to produce the ideal output. This implies that, under conditions of constant supply price, monopoly plus discrimination of the first degree will make the national dividend the same as simple competition would have made it. Under conditions of decreasing and of increasing supply price it will always improve on the result of simple competition. The extent to which it improves on it will be measured by the extent to which the output proper to simple competition differs from the ideal output. This is evidently greater, the more elastic is the demand for the commodity produced by the industry and the more markedly the conditions of the industry depart in either direction from those of constant supply price. Finally, it should be observed that, when conditions of decreasing supply price prevail, monopoly plus discrimination of the first degree may increase the size of the national dividend in a more special way. It may bring about a considerable amount of socially desirable investment in an industry, in which, under a regime of simple competition, it would not have been to anybody's interest to make any investment at all. It is shown in Appendix III. that this result is most likely to be realised (1) if, other things being equal, supply price decreases sharply, in such wise that a small increase of output involves a large fall in supply price per unit, and (2) if, other things being equal, the demand for the commodity or service is elastic till fairly low price levels have been reached. *78


§ 13. To compare the output proper to discriminating monopoly of the third degree with that proper to simple monopoly, we may conveniently distinguish three principal cases. First, let the conditions be such that, under simple monopoly, some of the commodity, in which we are interested, would be consumed in both A and B. In these conditions there is no adequate ground for expecting either that output under discriminating monopoly of the third degree will exceed, or that it will fall short of, output under simple monopoly; if the curves of demand and supply are straight lines, the two outputs will be equal. *79 Secondly, let the conditions be such that, under simple monopoly, some of the commodity would have been consumed in A, but none in B. In these conditions it is impossible that the introduction of discriminating power should lead to diminished output. On the contrary, if there is any substantial demand in B, it must lead to increased output. The amount of the increase will be specially great if the demand in B is elastic, and if the commodity obeys the law of decreasing supply price ( simpliciter). These conditions are often fulfilled among Kartels selling regularly at specially low rates in markets, foreign and other, where they are exposed to competition. An interesting practical inference is that, if a commodity, whose production obeys the law of decreasing supply price, is monopolised, it is to the interest of the consumers in the producing country that the Government should allow the monopolist to make sales abroad at lower prices than at home, rather than that, while still permitting monopoly, it should forbid this discrimination. This inference cannot be upset by reference to the more advanced industries that use the commodity as a raw material, because the sales abroad, being at market prices there,—prices which the monopolistic exports cannot in ordinary circumstances sensibly affect—do not enable foreign users to get it appreciably more cheaply than they could before. Finally, let the conditions be such that, under simple monopoly, none of the commodity would have been consumed in either A or B. In these conditions it is obviously impossible that the introduction of discriminating power should lead to diminished output. It is possible that it may lead to increased output. The condition for this is the same as the condition, mentioned in the next paragraph, that enables discriminating monopoly of the third degree to yield some output, though simple competition would yield none.


§ 14. We have now to compare the output proper to discriminating monopoly of the third degree with that proper to simple competition. Under conditions of constant and of increasing supply price it is obviously impossible for discriminating monopoly of any degree to make output greater than it would be under simple competition. Discriminating monopoly of the third degree must make it smaller than it would be under that system. When, however, conditions of decreasing supply price prevail, the question is more complex. It has been proved in an earlier section that, in that event, monopoly plus discrimination of the first degree must raise output above the quantity proper to simple competition. Furthermore, it is evident that discrimination of the third degree approximates towards discrimination of the first degree as the number of markets into which demands can be divided approximate towards the number of units for which any demand exists. Hence it follows that, under decreasing supply price, monopoly plus discrimination of the third degree may raise output above the competitive amount, and is more likely to do this the more numerous are the markets between which discrimination can be made. Sometimes, but not, of course, so frequently as with discrimination of the first degree, discriminating monopoly of the third degree will evolve some output where simple competition would have evolved none. In view, however, of the limitation, which practical considerations impose, alike upon the number of markets that can be formed, and upon the monopolist's freedom to make up the several markets in the way most advantageous to him, it appears, on the whole, exceedingly improbable that, in an industry selected at random, monopoly plus discrimination of the third degree will yield an output as large as would be yielded by simple competition.

Part II, Chapter 18

§ 2. It is generally agreed that, except in so far as the transport services sold to one set of purchasers are "supplied jointly" with those sold to another set, simple competition would tend to bring about a system of uniform rates per ton-mile for similar services. *3 For these services the level of the uniform rate would be such that the demand price and the supply price would coincide; and, when the service of railway transport was sold in conjunction with some other service, such as cartage or packing, an appropriate addition would be made to the charge. This general analysis can be briefly developed as follows.


First, the actual level of the uniform mileage rate, to which simple competition would lead on any particular railway, will depend on the circumstances and position of the railway. Ceteris paribus, a specially high rate would be appropriate if the route lay through districts where, as with mountain railways, the engineering costs of making a line are specially great, or where the traffic is very irregular from one time to another; *4 because, in these conditions, the supply prices of all quantities of transportation along the route are specially high. In like manner, ceteris paribus, a specially high rate would be appropriate if the route lay through sparsely populated regions where little traffic can be obtained, or through regions where the configuration of the country renders water transport a readily available substitute for land transport for certain classes of commodities between the terminals; because, in these conditions, the demand schedule is specially low, and the supply conforms to conditions of decreasing supply price; the expenses involved in building and working a railway adapted for a small amount of traffic being proportionately greater than those involved in the production of transport service on a large scale. It is, no doubt, in recognition of these considerations that the maxima, imposed in the British parliamentary freight classification, are made different for different lines, though the classification itself is, of course, the same for all of them.


Thirdly, attention must be called to the fact that services, though physically similar, are not necessarily similar in respect of cost when they are rendered at different times or seasons of the year. This consideration is in practice chiefly important as regards the supply of electricity. In order that it may be possible to provide the current required at "the peak of the load," a large quantity of equipment must be erected additional to what would be required if there were no hours or seasons of exceptional demand. Let up suppose that during one-fifth of the time 2 million units per hour are wanted and during the rest of the time 1½ million units, and that, in consequence, the equipment costs 4/3 times what it would have done had 1½ million units been required always. Then the real cost of the peak-load current, so far as it depends on cost of equipment, can be calculated as follows: the equipment cost of producing the units needed in the aggregate of off-peak times is 4/5 times ¾ths ( i.e. 3/5ths) of the total equipment cost, and the equipment cost of producing the units needed in peak times is 1/5 times ¾ths of the total equipment cost, plus the whole of ¼ of that cost, i.e. 2/5ths of the whole. That is, the cost of providing 2 million units at the peak is equal to 2/3rds that of providing 6 million units off the peak: or, in other words, the equipment cost (apart from prime cost) of peak-load service is twice as much per unit as the equipment cost of normal service. This shows that simple competition, or the cost of service principle, involves different charges for electricity supplied at different times. The same thing obviously holds good of telephone service and cable service—not to speak of hotel and lodging-house service in places that cater specially for seasonal visitors. In industries, the product of which can be stored in slack times, and where, therefore, the equipment can be adjusted to produce continuously the average output demanded, these differences should not exceed the cost and the loss of interest involved in storage. Railways, however, at least in the matter of passenger transport, are directly akin to electricity concerns, in that they provide a service which must be produced at the time that it is supplied. Consequently, the cost of service principle would seem to warrant higher fares for travel at busy seasons and at busy hours of the day than are charged at other times. Differential charges of this character are not, of course, exactly adjusted. Indeed, as a matter of fact, it so happens that, for other reasons, it is just for the most crowded parts of the day and week that the cheapest tickets (workmen's tickets and week-end tickets) are issued. In a concealed form, however, differential charges of this type do exist: for, when a man travelling as a straphanger in the London Tube at 5 o'clock in the evening pays the same absolute price as he does when travelling in comfort at 3 o'clock, he is paying that price for a different and much inferior service. There is just as real a differentiation as there would be if he travelled in equal comfort on both journeys and paid a considerably higher fare at the crowded time.


§ 4. Many writers of authority maintain that joint costs play a dominant part in the industry of railway transportation. They believe that the transport of coal and the transport of copper along a railway from any point A to any point B are essentially and fundamentally joint products; and that the same thing is true of the transport from A to B of commodities to be consumed at B and the transport from A to B of commodities to be carried forward to C. This argument is developed by Professor Taussig as follows. First, he observes: "Whenever a very large fixed plant is used, not for a single purpose, but for varied purposes, the influence of joint cost asserts itself." *10 Further: "The labour which built the railway—or, to put the same thing in other words, the capital which is sunk in it—seems equally to aid in carrying on every item of traffic.... Not only the fixed capital of a railway, but a very large part, in fact much the largest part, of the operating expenses, represents outlay, not separate for each item of traffic, but common to the whole of it or to great groups of it." *11 The existence of a large mass of common supplementary costs is not, in Professor Taussig's view, by itself sufficient to bring joint supply into action. For that it is essential that the plant be used for varied purposes. Thus he writes: "Where a large plant is used for producing one homogeneous commodity—say steel rails or plain cotton cloth—the peculiar effects of joint cost cannot, of course, appear." *12 Further, he is willing to admit that the transport of tons of different things and the transport of the same thing for different purposes from A to B do constitute, in one sense, a single homogeneous commodity, on precisely the same footing as plain cotton cloth. The fact that some "carrying of tons" is sold to copper merchants and some to coal merchants does not imply that two different services are being provided, any more than the fact that some plain cotton cloth is sold to one purchaser and some is sold to another implies that two different commodities are being provided. He holds, however, that these different transports, though homogeneous in one sense, are not homogeneous "in the sense important for the purpose in hand—namely as regards the conditions of demand." *13 Thus his essential contention is that, when a commodity, in the production of which supplementary general costs play a large part, is supplied, not to different people in a single unified market, but in a number of separated markets, the provision to one market is supplied jointly with the provision to the other markets, in such wise that simple competition might be expected to evolve a system of divergent prices.


Now, whether or not the term joint products should be used of services related in the way that Professor Taussig is contemplating is, of course, a verbal question: but whether these services are joint products in such wise that simple competition might be expected to evolve a system of divergent prices is a real question. In my view, the conjuction of large common supplementary costs with separation between the markets to which their yield is supplied does not make railway services joint products in this—the only significant—sense. In order that they may be joint products, it is further necessary, not merely that additional investment in plant and so on may be used alternatively to facilitate the supply to either market, but that such additional investment cannot be used to facilitate the supply to one market without facilitating the supply to the other. The point may be illustrated as follows. When cotton goods are provided for two distinct and isolated markets, the costs of furnishing these different markets are, in great part, common: for they consist, to a large extent, of the supplementary expenses of the cotton industry, which cannot be allocated specifically to the goods destined for the different markets. A given addition to investment does not, however, necessarily add anything to the output available for each of the two markets. If, before it occurred, the first market received x units of cotton and the second y units, after it has occurred the extra cotton may be divided between them, or it may go wholly to the first, or wholly to the second. When, however, cotton fibre and cotton seed are provided for two distinct and isolated markets by one and the same process, a given addition to investment does necessarily add something to the output available for each of the two markets. In the latter case it is easily seen that simple competition will, in general, lead to divergent prices. In the former case, however, it will not do this. For, if there are a number of competing sellers supplying transportation, or anything else, to several markets with separate demand schedules, and if the price in one of these markets is higher than in another, it is necessarily to the interest of each individual seller to transfer his offer of service from the lower-priced market to the higher-priced market; and this process must tend ultimately to bring the prices in the different markets to a uniform level. This result, when conditions of simple competition prevail, obviously holds good independently of the question whether or not the commodity or service under discussion is one in the production of which supplementary costs are large relatively to prime costs. Hence Professor Taussig's argument cannot be accepted. Joint supply, in the sense in which we are here using the term, does not prevail in the industry of railway transport in that fundamental and general way that he supposes it to do. *14


§ 5. At the same time it should be clearly recognised that, in the services rendered by railway companies, joint supply does play some part. This is conspicuously true as between transportation from A to B and transportation in the reverse direction from B to A. The organisation of a railway, like that of a steamship company, requires that vehicles running from A to B shall subsequently return from B to A. The addition of a million pounds to the expenditure on moving vehicles necessarily increases both the number of movements of vehicles from A to B and the number of movements from B to A. This implies true jointness. It follows that a competitive system of railway or shipping rates would not, in general, make the vehicle charges the same for journeys from A to B and from B to A, but the direction, for which the demand was higher, would be charged a higher rate. This is, of course, the reason why outward freights from England are generally low, relatively to inward freights, for commodities of similar value. Our imports being largely food and raw materials, and our exports, apart from coal, mainly finished manufactures, the former naturally make a greater demand for shipping accommodation. If it were not for our coal exports, the disparity would be much greater than it is. There is a similar relation in the transport of goods—though not of passengers—between eastward and westward travel in the United States; because "those who supply the world with food and raw materials dispose of much more tonnage than they purchase." *15 This element of jointness is, however, of comparatively small importance. Contrary to the general opinion of writers on railway economics, the services provided by railway companies are, in the main, not jointly supplied. Hence, the conclusion emerges that, subject to the reservations set out in § 2, simple competition would, in general, evolve a system of equal ton-mileage rates for all commodities, whatever their character, and whether they are to be consumed at B or be sent on from B for some further part of a "long haul."


In passenger traffic railway companies find the value of service principle most nearly satisfied by a classification based, in the main, on the relative wealth of different groups of persons, the presumption being that most of the demands for the transport of richer people yield demand prices higher than most of the demands for the transport of poorer people. Since it is impracticable to make a classification founded directly on differences of wealth, various indices or badges, generally associated with varying degrees of wealth, are employed. Thus, in the United States, certain railways make specially low rates for immigrants—lower than those required from native Americans,—even though the latter are willing to travel in immigrant cars. *18 In certain colonies there is a discriminating rate according to the colour of the traveller; black men, who are supposed, in general, to be less well-to-do, being charged lower fares than white men. *19 Again, in England, and still more markedly in Belgium, *20 railway companies charge specially low rates for workmen's tickets. This procedure is exactly analogous to that of those London shopkeepers who charge to customers with "good addresses" prices different from those charged to others, and of the Cambridge boatmen who used to charge a collective customer of five persons 5s. for the hire of a boat for an afternoon, while to a single person they would let the same boat for one shilling. A classification based on indices of wealth alone is, however, somewhat crude, since people of the same wealth will desire a given journey with very different intensities on different occasions. In recognition of this fact railway companies have constructed a variety of cross-groupings, based on such incidents as the degree of comfort or of speed with which, or the hour at which, journeys are undertaken, or the presumed purpose which these journeys serve. Thus the fares for first-class accommodation, or for conveyance by certain express trains, are made to exceed those for inferior accommodation or lower speed by more than the difference in the cost of providing these different sorts of service; *21 and specially low fares are sometimes charged for journeys made in the early morning. *22 In like manner, attempts are made to separate holiday journeys, of presumed low demand, from necessary business journeys, by the supply, on special terms, of tourist, week-end and excursion tickets.


§ 9. From an analytical point of view, the situation is simple. As explained in the preceding chapter, in order that monopoly plus discrimination of the first degree may create an output where simple competition fails to do so—I take the simplest case, in which the demand in one market is independent of the price in the other—certain relations, which were there described, between the general conditions of demand and of supply must exist. The conditions enabling monopoly plus discrimination of the third degree to lead to this result are less precise. Circumstances, in which discrimination of the first degree would only just succeed, will not, in general, enable discrimination of the third degree to succeed. We may conclude, roughly, however, that discrimination of the third degree will have a good chance of succeeding—a chance that is better, the more numerous are the markets between which discrimination is made, and the more satisfactory, from the monopolist's standpoint, is their constitution—when the conditions are such that discrimination of the first degree would succeed with a wide margin. Our problem is to determine how far this state of things is likely to occur in practice.


Granted, however, both that the law of decreasing supply price acts strongly until considerable density of traffic has been attained, and that the demand for the service of railway transport is elastic, these conditions alone are by no means sufficient to ensure that discriminating monopoly would evolve some output, while simple competition would fail to do this. It is necessary, further, that the actual levels of demand price and supply price for a small quantity of service—more generally, the demand schedule and the supply schedule as a whole—shall be related in a particular way. Clearly, if the demand price for a small quantity is greater than the supply price, some output will be evolved under simple competition, and, therefore, the conditions we have in view do not arise. Clearly, again, if the demand price for a small quantity is very much less than the supply price, it is unlikely that any output will be evolved either under simple competition or under discriminating monopoly, and, therefore, again these conditions do not arise. In order that they may arise, a sort of intermediate position must, it would seem, be established. Thus, on the one hand, the district affected must not be too busy and thickly populated; on the other hand, it must not be too little busy and sparsely populated. There is a certain intermediate range of activity and population that is needed. This range, compared with the total range of possibility, is naturally not extensive. Hence the probability that the conditions necessary to make discriminating monopoly more advantageous to the national dividend than simple competition will be present in any railway selected at random at any time seems a priori to be very small. There are, indeed, many dicta of practical experts which suggest that they have in fact a wide range. But, as Edgeworth, who lays stress upon this point, recognises, "the testimony of high authorities would, no doubt, carry even greater weight if it should be repeated with a full recognition of the a priori improbability" to which it is opposed. *34


§ 10. It must be observed, however, that, as population and aggregate wealth in any country expand, the demand schedule for railway service, along any assigned route, gradually rises. Hence, though, at any moment selected at random, it is improbable that the conditions affecting any route, selected at random, are such that a railway rate system based on the value of service principle would be more advantageous to the dividend than one based on the "cost of service principle," it is not improbable that any route, selected at random, will pass through a period during which the conditions are of this kind. Such conditions tend to emerge when one point in the growth of wealth and population has been reached, and to disappear when another somewhat later point has been reached. If the cost of service principle ruled universally, and if no State bounties were given, certain lines would not be built till the arrival of the latter point—when there is hope of "building up" a demand by experience of supply, this point need not, of course, be such that the railway pays at the moment—despite the fact that they could have been built, with advantage to the community, on the arrival of the earlier point. The inference is that discrimination, or the value of service principle, should be adopted when any route is in the intermediate stage between these two stages, and that this principle should give place to simple competition, or the cost of service principle, as soon as population has grown and demand has risen sufficiently to lift it out of that stage. *35 The period proper to the value of service principle would seem, in most ordinary lines, to be a comparatively brief one. *36

Thus, let φ 1(x 1), (φ 2) x2... represent the demand prices in n separate markets, and f(x) the supply price.

The prices proper to the separate markets under monopoly plus discrimination of the third degree are given by the values of φ 1(x 1), φ 2(x 2)... that satisfy n equations of the form:

These n equations are sufficient to determine the n unknowns.

Where the curves representing the demand schedules are straight lines, this complex determinant dissolves into a simple one, namely, the comparative demand prices of those units which are most keenly demanded in each of the several markets. Under these conditions, if conditions of constant supply price prevail, the monopoly price proper to each market can be shown to be equal to one half of the difference between the supply price and the demand price of the unit that is most keenly demanded there.
Mr. Bickerdike ( Economic Journal, March 1911, p. 148) and Mr. Clark ( Bulletin of American Economic Association, September 1911, p. 479) argue, in effect, that the transition from the one system to the other should occur, not when rising demand lifts the railway in question out of the stage just described, but when, if ever, it rises so high as to impinge on that point of the supply curve at which a negative slope passes into a positive one. There is not, in my opinion, any adequate ground for this view.
Part II, Chapter 19

Thirdly, there is another way, besides the saving of advertisement costs, in which "loyalty" makes for economy. As was pointed out in Chapter XIV. § 3, it enables the work of a co-operative concern to be conducted steadily without those large fluctuations, to which private concerns are often subject and the presence of which inevitably involves cost. Thus the rule insisting upon loyalty as a condition of membership of co-operative bacon factories and creameries enables these establishments to count on a constant supply of raw material with greater confidence than private firms can do; *49 and, in like manner, the practice of the English and Scotch Wholesale Societies and of local Retail Associations, in concentrating the constant part of their demand upon their own productive departments and throwing the variable part upon outside traders, greatly lessens the fluctuations to which these productive departments are exposed. No doubt, the economies which co-operative concerns secure in this way have, from a national point of view, to be balanced against any diseconomies that may be caused to outside concerns by increased fluctuations thrown upon them; and so are not a net gain to the nation. To the co-operative concerns themselves, however, they are a net gain. Moreover, in so far as the aggregate demand or supply of a market is constant, and fluctuations in the parts are due to other causes than fluctuations in the whole, the introduction of steadiness in one part cannot increase, but necessarily diminishes, the fluctuations of other parts. Hence it is probable that a considerable part of the economies which co-operative concerns derive from loyalty represent a net increase in efficiency for the community as a whole as well as for themselves.

In the Danish co-operative bacon factories loyalty is generally enforced by a provision to the effect that members shall deliver all their saleable pigs (with certain specified exceptions) to the factory for a period of seven years, unless in the meantime they remove from the district (Rew, An Agricultural Faggot, pp. 123.4). In like manner many Irish dairying societies provide that "any member who shall supply milk to any creamery other than that owned by the society for the space of three years from the date of his admission to membership, without the consent in writing of the Committee, shall forfeit his shares together with all the money credited thereon" ( Report on Co-operative Societies [Cd. 6045], 1912, p. xxxix). It will be noticed that in these classes of societies—and it is only in them that loyalty is enforced in the rules—the use of a considerable plant makes the maintenance of a steady demand a more important influence in eliminating cost than it would be in, say, an agricultural purchasing society.
Part II, Chapter 21

Even now, however, the case against the policy we are considering is not exhausted. There remains a third objection. Combination is not the parent of monopoly only, but also, very often, of incidental benefits. Thus, as was observed in Chapter XIV., a combination, which is large relatively to the market in which it trades, has more inducement than a small single seller to adopt a policy of developing demand among potential customers, since it may reckon on receiving a larger proportion of the gain resulting from any investments which it may make with this object. In addition to this, a large combination will often enjoy certain economies of production, which, if the Government were to adopt a policy of maintaining active competition, would fail to emerge. No doubt, some of those forms of Kartel agreement, under which a proportion of the market is guaranteed to the several members, since they tend to conserve weak firms, which competition would "naturally" destroy, not only fail to yield economies, but actually yield diseconomies. *5 It should be observed, however, that pooling agreements do not necessarily act in this way. The British Committee on Trusts (1919), for example, reports that in a great many associations there is an arrangement under which firms, on producing less than their quota, receive from the pool 5 per cent in value upon the amount of their deficiency. It was urged by some witnesses that this arrangement had the effect of driving weak firms out of the industry by the economical method of pensioning, instead of the more costly method of fighting them. *6 Against this, indeed, we have to set the fact that the money to provide the pensions has to be obtained by some kind of tax on firms that exceed their quota—a necessary discouragement to them. Moreover, some forms of pool, by making the profits of each member severally depend on the efficiency of all collectively, may lead to relaxed energy and enterprise. But, on the other hand, in all combinations that involve any measure of common management, savings of the kind referred to in Chapter XIV. are bound to accrue in greater or less degree. *7 In a peculiar industry like the telephones, where the actual thing supplied to A is improved if B draws his supply from the same agency, the advantage is especially great. It may also be considerable in more ordinary industries. Inter alia, weak or badly situated plants are apt to be shut down much more quickly than they would be under competition; while, among those that remain, the purposive force of "comparative cost accounting" may be expected to stimulate the energy of managers more strongly than the blind force of market rivalry could ever do. *8


§ 11. We turn, therefore, to interference by the public authority with the terms of sale—a method which may be necessary even in industrial enterprises, when the "remedies" considered so far prove inadequate, and which, apart from public operation, is certainly necessary in public utility concerns. Analytically, the problem may be stated as follows. Assuming that the output proper to simple competition (allowing, of course, for any economies in production which a combination may have introduced) is also the output most advantageous to the national dividend, we need so to regulate things that that output will be forthcoming. In industries operating under conditions of increasing supply price, this type of regulation cannot be accomplished by the machinery of price control alone. For, if the price be fixed by the State at the level proper to competitive conditions, i.e. at such a level that, if competitive conditions prevailed, the output would be adjusted to yield normal profits, it will pay a monopolist to produce less than this output. By reducing output he will, under conditions of increasing supply price, also diminish the supply price, thus obtaining a monopoly gain measured by the difference between the regulated selling price multiplied by the output and the supply price multiplied by the output. It will be to his interest to control his output in such a way as to make this monopoly gain as large as possible. According to the form of the demand and supply schedules, the resultant output may be greater or less than it would have been under unregulated monopoly; but, in any event, it is certain to be less than the output proper to competition, at which the Government is aiming. This difficulty, however, is only present in industries operating under conditions of the increasing supply price. When constant supply price or decreasing supply price prevails, it will not pay a monopolist, when price is fixed at the competitive level, to reduce output below the competitive output; for he would not secure any diminution in his costs by doing this. Consequently, if the Government can succeed in fixing prices at the competitive level, it will also indirectly secure competitive output. *43 As a matter of practice, concerns (whether industrial combinations or public utility corporations), which it is necessary to regulate because they tend towards monopoly, are rarely of a kind which we should expect to be subject to increasing supply price. In the main, therefore, control means control over price.


§ 12. When this has been said, there inevitably comes to mind the sort of control over price which was exercised during the Great War, and some account of which was given in Chapter XII. It is very important, however, to realize that what we are now concerned with is fundamentally different from that. In controlling monopoly, it is required to prevent the monopolist from charging high prices, because, by so doing, he will reduce output below the level at which he could put it with normal profits to himself. As explained above, under conditions of constant supply price or decreasing supply price, the fixing of maximum prices at the rate corresponding to the "competitive" output will in fact cause that output to be forthcoming. There is no question of the maximum price being associated with an output for which the demand price that the public are prepared to pay exceeds that price. *44 But in the war problem, as was clearly brought out in Chapter XII., the whole point of intervention was to fix a maximum price below the demand price that the public would be prepared, at need, to pay for such quantity of the commodity as was forthcoming. This is the reason why, at the maximum price, there was always a greater quantity demanded than could be supplied, and why, therefore, it was necessary to prevent accidental inequities in distribution by rationing all consumers to purchases smaller than many of them would have wished to make. This, too, is the reason why it was not sufficient to fix prices as from the producer only. Because the demand price was bigger than the price which the Government wished to allow, to have limited, e.g., shipping freights, without also limiting the price of the things brought in at the limited freights, would merely have enabled the intermediaries between the ship and the consumer to take the whole benefit for themselves. It was necessary, therefore, not merely to fix maximum prices to the original producer, but also to fix maximum additions that might be put on to these prices by the various persons through whose hands (whether as further manufacturers or as retailers) the controlled commodities would afterwards pass. In the regulation of monopoly charges there is, of course, no need for any of these secondary arrangements.

This proposition is exactly true on the hypothesis that the curves of demand and supply are straight lines.
Part II, Chapter 22

Now, it is evident that the effect of a restriction of the willingness to take risks, and, therewith, of the stimulus to invention, upon the economies of production will vary in importance in different industries, according to the extent of the speculative element involved in them. Hence it follows that the relative inefficiency of public operation, as compared with private operation, is very large in highly speculative undertakings, and dwindles to nothing in respect of those where the speculative element is practically non-existent. This idea is sometimes crystallised in an attempt to group industries into two divisions, the speculative and the non-speculative, after the manner in which trustees distinguish between speculative securities and investment securities. This grouping, it is sometimes suggested, can be adequately worked out by setting on the one side new industries in an experimental stage, and on the other industries that are already tried and known. Thus a recent writer has put in the former category "airship construction, wireless telegraphy, ornamental and luxury trades, the production of single special machines and special transport arrangements, the erection of big and difficult buildings and the like," and in the latter "coal mines, the manufacture of steel, cement, locomotives, telephones, electric cables, motors, and so forth." *100 Again, Sir George Gibb distinguishes, from this point of view, the railway industry at an early, and at a mature, age. "As regards the age of construction, at all events, England has derived incalculable benefit from the fact that the railway system has been made by private enterprise. But the problem of working the railway system after it has been constructed is, I admit, essentially different from the problem of securing its construction." *101 In like manner, Professor Commons, writing in 1904, while he approved of the establishment of city electric-lighting plants at that time, considered that "those cities which entered upon municipal electric lighting eight or ten years ago are open to criticism." "Private parties," he holds, "should be encouraged to push forward in all the untrod fields." *102 The distinction thus insisted on has, no doubt, considerable importance. Two points, however, should be noticed. First, an industry, which is old-established at one place, may need new construction at another, and the conditions of construction there may be such that a large speculative element remains. For example, though the industry of water supply is an old one, different towns have to be supplied from sources situated so differently, and along routes of such varying character, that little guidance for one town can be drawn from the experience of others. Secondly, no industry is likely to be so far established that experimentation—which involves speculation—as to improved methods is undesirable. In some measure all industries, in which possibilities of development remain, demand readiness to take risks if further inventions are to be made, and are, therefore, liable to be hampered by anything that obstructs this readiness. It would, therefore, be an error to suppose that the relatively uneconomic character of public operation, due to the circumstances discussed in this section, is significant only for new industries. It probably has some appreciable significance in regard to nearly all industries, though, of course, its importance is greatest in regard to those in an experimental stage.

Part III, Chapter 1

Part III, Chapter I


WHEN labour and equipment in the whole or any part of an industry are rendered idle by a strike or lock-out, the national dividend must suffer in a way that injures economic welfare. Furthermore, the loss of output for which these disputes are responsible often extends much beyond the industry directly affected. This is well illustrated by the fact that, during the coal strike of March 1912, the general percentage of unemployment over the whole body of trade unionists in the United Kingdom was no less than 11 per cent, as against an average level for March during the ten years 1903-12 of 5½ per cent; while in the strike of 1921, which, it must be remembered, occurred in a period of marked industrial depression, the corresponding percentage was as high as 23 per cent. The reason for this is that a stoppage of work in an important industry checks activity in other industries in two ways. On the one hand, by impoverishing the people actually involved in the stoppage, it lessens the demand for the goods the other industries make; on the other hand, if the industry in which the stoppage has occurred is one that furnishes a commodity or service largely used in the conduct of other industries, it lessens the supply to them of raw material or equipment for their work. Naturally not all strikes and lock-outs produce this secondary effect in equal measure. The larger the range they cover and the more fundamental the commodities or services they supply, the more marked is their influence. Coal and transport service, for example, are basal goods essential to practically all industries, and a miners' or a railway servants' strike will, therefore, produce a much larger indirect effect than a cotton-workers' strike of the same extent and duration. But, in some degree, all stoppages of work inflict an indirect injury upon the national dividend by the reactions they set up in other industries, in addition to the direct injury that they carry in themselves. It is true, no doubt, that the net contraction of output consequent upon industrial disputes is generally smaller than the immediate contraction; for a stoppage of work at one place may lead both to more work at the same time in rival establishments and to more work at a later time (in fulfilling delayed orders) in the establishments where the stoppage has occurred. It must be admitted also that, on some occasions, the direct damage caused by strikes and lock-outs is partly compensated by the stimulus indirectly given to improvements in machinery and in the organisation of work. Mr. Nasmyth, in his evidence before the Trades Union Commission of 1868, laid very great stress upon this. "I believe," he said, "that, if there were a debtor and creditor account made up of strikes and lock-outs with the interests of society, up to a certain point they would be found to have been a benefit. Such has been the stimulus applied to ingenuity by the intolerable annoyance resulting from strikes and lock-outs, that it has developed more than anything those wonderful improvements in automaton machinery that produce you a window-frame or the piston-rod of a steam-engine of such an accuracy as would make Euclid's mouth water to look at. These things are pouring in in quantities as the result of the stimulus given to ingenuity through the annoyance of strikes. It is not being coaxed on by some grand reward in the distance, but I think a kick from behind is sometimes as useful as a gentle leading forward in front." *1 These reflex effects of conflict are, no doubt, important. But it would be paradoxical to maintain that the reaction of the industrial organism against the evils threatening it ordinarily outweigh those evils themselves. By adapting itself to injurious changes of environment it can, indeed, lessen, but it cannot altogether abolish, the damage to which it is exposed. An excellent parallel is afforded by the effects of a blockade instituted by one State against the ports of another. The immediate effect both upon the blockaded State and upon neutrals is an obvious, and sometimes a considerable, injury. By altering the direction and character of their trade they may reduce the extent of their losses. It is even conceivable that the search for new trade openings may lead to the discovery of one, which otherwise would not have been found, and which is possessed of advantages great enough to outweigh all the evils of the blockade period. Any such result is, however, extraordinarily improbable, and nobody, on the strength of it, would dream of suggesting that blockades in general are likely to do the world more good than harm. So with industrial disputes. It is conceivable that one of them may stir to action some otherwise mute, inglorious inventor; but it is immensely unlikely that it will, at best, do more than slightly antedate the discovery that he makes. On a broad view, the hypothetical gain is altogether outweighed by the certain loss of production in the industries directly affected and in related industries, the raw material of which is cut off, or the product of which cannot be worked up into its final stage. Moreover, there may be lasting injury to the workpeople, in industrial careers interrupted, a load of debt contracted to meet a temporary emergency, and permanent damage to their children's health through the enforced period of insufficient nourishment. The extent of these evils varies, of course, partly with the degree to which the commodity whose production is stopped is consumed by the poorer classes, and partly with its importance for life, health, security and order. But, in any event, the aggregate damage with which industrial disputes threaten the national dividend is very grave. It has been pertinently asked: "Would any Board of Managers attempt to run a railway or start an electric-lighting plant, or operate a mill or factory, or send a liner to sea, with a mechanical equipment which was certain to break down periodically and lie in inevitable idleness until repairs could be patched up? And yet that is almost an absolute analogy to the state of labour conditions throughout nearly the whole range of such enterprises." *2 Anything that makes it less likely that these break-downs will occur is bound to prove of substantial benefit to the national dividend. Hence the eagerness of social reformers to build up and fortify the machinery of industrial peace. They recognise, indeed, that in the work of pacification constitutions and agreements cannot accomplish much. In industrial, as in international negotiations, perfection of machinery counts for far less than good faith and good will. Care must, therefore, be taken not to stress unduly matters of mere technique. Nevertheless, the type of machinery employed is certain to have some effect, and may have a considerable effect, both directly and also by its reflex influence on the general attitude which employers and employees take to one another. It is, therefore, important to the present purpose to examine the principal problems which have to be faced in building up machinery, through whose aid it is hoped that industrial peace may be preserved.

Part III, Chapter 4

§ 4. Nevertheless, though it would be a mistake to ignore the possibilities of non-governmental Boards, it is plain that there are certain advantages inaccessible to them, but readily available to Boards attached to the governmental machinery of the country. In the first place, the latter possess exceptional facilities—facilities second only to those enjoyed by voluntary Conciliation Boards in particular industries—for ascertaining the existence of differences at the earliest possible moment. For administrative officials can be required to supply them with immediate information whenever a strike or lock-out occurs or is seriously threatened. In the second place, they have greater intellectual and financial resources, and are likely to be more liberal in the use of them. Thus it is probable that the trained ability which the Ministry of Labour—as once the Board of Trade—can command has a good deal to do with the preference displayed for it, as against local Boards, by the parties to disputes covering a small area. Lastly, when, as on the plan adopted in England, the emissaries employed are sent out directly from a central State department, instead of being, as in France, mere local officials endowed with mediatorial powers, they are likely to wield a modicum of reputation which may help them considerably in their work. Consequently, it is not surprising to find that in recent times the work of mediation in industrial disputes has been taken over in great part by machinery attached to some organ of government. In some countries the offer of mediation may only be made on the request of one or other of the parties to a difference. Thus a Belgian law of 1887 authorised the establishment locally of councils of industry and labour with sections representing different industries, and provided: "Whenever circumstances appear to demand it, at the request of either party, the governor of the province, the mayor of the commune, or the president of the section for the industry in which the dispute occurs must convene that section, which is to endeavour, by conciliation, to arrange a settlement." *31 More frequently, however, mediation is authorised at the discretion of the public authority, whether it is asked for by a party to the difference or not. This is the arrangement under the French law of 1892 and under the English Conciliation Act of 1896. The latter Act provides: "When a difference exists, or is apprehended, between an employer or any class of employers and workmen, the Board of Trade may, if they think fit, exercise all or any of the following powers, namely: (1) inquire into the causes and circumstances of the difference; (2) take such steps as to the Board may seem expedient for the purpose of enabling the parties to the difference to meet together, by themselves or their representatives, under the presidency of a chairman mutually agreed upon or nominated by the Board of Trade or by some other person or body, with a view to the amicable settlement of differences; (3) on the application of employers or workmen interested, and after taking into consideration the existence and adequacy of the means available for conciliation in the district or trade and the circumstances of the case, appoint a person or persons to act as conciliator or as a board of conciliators." The Ministry of Labour, fortified with the Industrial Courts Act of 1919, has inherited these powers from the Board of Trade. Experience shows that mediation, skilfully and sympathetically conducted along these lines, can often bring about the adjustment of differences that might otherwise very probably have led to a stoppage of work.

Part III, Chapter 9

Part III, Chapter IX

§ 1. THE subject-matter of this Chapter is the distribution of labour among different occupations and places. The supply of labour of various grades is taken as given; problems connected with the distribution of capital in the nurture and training of different persons, and so with the distribution of persons into different grades, being postponed to Chapter IX. of Part IV. The analysis of the preceding Part showed that, if the national dividend is to stand absolutely at its maximum, the values of the marginal social net products of every form of resource in all uses must be equal. It showed, further, that in many occupations marginal social net product differs from marginal private net product. Hence the maximisation of the national dividend does not require that the values of marginal private net products shall be equal in all uses. On the contrary, such a condition of universal equality is incompatible with maximisation. In spite of this, however, our argument showed that any departure from equality at any point, brought about otherwise than with the deliberate design of improving the dividend, is likely to indicate a lapse on the part of the dividend below the level at which it might have stood. This general result is applicable to labour. Any failure from equality in the values of the marginal private net products of labour of any grade—values that are always equivalent to the demand prices, and generally equivalent to the wages paid per efficiency unit, at different points— probably indicates a distribution of labour between different points other than the distribution most favourable to the national dividend. In general, therefore, causes of failure from equality in the demand prices and wage-rates of labour of given quality at different points are also causes of injury to the national dividend. These causes may be divided into three broad groups—ignorance or imperfect knowledge, costs of movement, and restrictions imposed upon movement from outside.


§ 7. When the initial distribution of new generations of workpeople among the various occupations open to them has been wrong for some little time, the aggregate distribution of the whole existing body of workpeople must also be wrong. The error may, of course, be corrected without any actual movement among established workpeople by a redirection of the flow of new recruits. This correction acts more rapidly in industries where the proportion of annual recruitment to total numbers is large than in those where it is small. It thus acts especially rapidly in women's industries, because the obligations of marriage make the average length of a woman's stay in industry especially short. Though, however, errors due to failures in the initial distribution of workpeople may be corrected without the need for movement, plainly they may also be corrected with the help of it. Moreover, even where there has been no error in initial distribution, maladjustment may come about because a man, who was fitted for a particular post when he first entered it, becomes either too good for it or too bad; either fitted for promotion to a higher grade or ripe for removal to less responsible work. Yet again, the distribution of labour, not only between occupations but also between places, may be made wrong from time to time by temporary fluctuations in the demand for and supply of different things, even though the initial direction given to new generations of workpeople was guided by perfect wisdom. Over a wide field, therefore, there is always opportunity for making the distribution of labour better by rightly directed movement between different places and different occupations. *7 The point we have now to consider is that ignorance, over and above the injury described already, inflicts a further injury on the national dividend by impeding and deflecting movement.


§ 8. Beyond doubt a great deal of ignorance prevails among workpeople in one place or occupation as to the comparative demand prices—by which the values of their marginal net products are represented—for their services prevailing there and elsewhere. The discussion of this matter is complicated by the fact that, since, from seasonal and other causes, work is less regular in some occupations than in others, wage rates per day or per week do not by themselves afford an adequate measure of comparative demand prices as a whole. Such a measure can only be obtained when both the wage rate for full employment and the prospect of unemployment have been taken into account. Clearly, workpeople can less easily gather information about the comparative liability of different occupations to unemployment than about comparative wage rates. This point, however, need not be enlarged upon here, and attention may be confined to wages. The extent of people's ignorance about the level of wage rates in any place or occupation depends, in great part, upon the form in which wage contracts are made. Some forms make the real prospect of earnings offered to work-people much more difficult to calculate than other forms. In nearly all forms, indeed, there is a good deal of obscurity. For real wages, in the widest sense, embrace the conditions of a man's work in respect to sanitary arrangements, safety appliances, and so forth; and these cannot be fully known to any workman before he is actually working under them. But the obscurity is much enhanced when fines are charged for damaged work and information about these is suppressed, and when wages are paid partly in commodities on which some fictitious value may be set. It is, therefore, an important fact that wage contracts embracing these elements are restricted in most modern States. To meet direct suppression of relevant information, the law has intervened in this country through the Particulars Clause inserted in the Factory and Workshops Act, 1901. "That section provides that, in industries to which it is applied by Order of the Secretary of State, persons, to whom work is given out to be done, shall receive from the employer sufficient particulars of the rate of wages applicable to the work to be done, and of the work to which that rate is to be applied, to enable the worker to compute the total amount of wages payable in respect of the work. This provision, the enforcement of which is placed upon the Inspectors of Factories, is intended to secure to the outworker information beforehand as to the price he is to get for the work, and to protect him against arbitrary alterations or reductions when the work is brought in. The provision has been extended by Orders of the Secretary of State to the outworkers in a number of trades." *8 To meet indirect suppression of information through part-payment in objects of ambiguous value, the law in this country has adopted the broad policy of prohibiting such part-payment, despite the risk that in so doing it might incidentally suppress some useful institutions. *9 The fundamental provision of the Truck Act of 1831 was that "wages are to be made payable in current coin of the realm only," and that no condition should be made as to where or with whom any part of the wages should be expended. *10 This provision was made to apply by the Act of 1887 to any one engaged in manual labour who has entered into, or works under, an expressed or implied contract with an employer; it did not include outworkers who contract in terms of product, not of work. It was decided by the Courts that to make deductions for rent of machines, standing-room, etc., was not incompatible with the Act, because wages meant what was left after such payments had been made. Fines were also held to be no contravention. By the Act of 1896, however, "deductions in respect of fines, in respect of loss to the employer by bad or spoiled work or materials, etc., and in respect of the supply of materials, tools and other conveniences to the worker were made subject to conditions intended to protect the worker against harsh or unfair charges on the part of the employer." *11 Some practical problems under this head still demand solution, and were discussed at length by the Committee of 1908. *12

Part III, Chapter 14

In order to understand the matter rightly, analysis is necessary. The common idea is that women are normally paid less than men because men's wages have, in general, to support a family, while women's wages have only to support the women themselves. This is very superficial. The correct line of approach would seem to be as follows. The productive efficiency of a representative woman relatively to that of a representative man is different in different occupations: in some, such as nursing and the tending of infants, it is much greater; in others, such as coal-mining and navy work, it is much less. If we knew enough of the facts, we could draw up a list of all occupations, giving for each of them the amount of normal man's labour to which a day or week of normal woman's labour is equivalent. The relation between the demand schedules for women's work and for men's work is determined by the facts embodied in this list, in conjunction with the general conditions of demand for the products of the several occupations. The relation between the supplies of women's work and of men's work is determined partly by the physiological fact that male and female children survive in nearly equal numbers, whatever the comparative wages ruling for men's work and women's work may be; and partly by the economic fact that the proportions, respectively, of the men and women in existence who offer their work in industry depend, not only on the wages offered to members of either sex separately, but also, since women are the less likely to work at industry the more money their husbands are earning, on the aggregate amount of the joint family income. These two sets of influences together govern and determine the relation between the general level of the wages per day paid to representative members of the two sexes. *22 In equilibrium there is one general rate of representative men's day wages and one general rate of representative women's day wages, the one or the other being higher according to the circumstances of supply, and according as the commodities demanded by the public are chiefly commodities for the manufacture of which the one or the other sex is specially well fitted. *23

This analysis may be formulated mathematically as follows:
Let w 1 be the rate of women's wages per day,
w 2 the rate of men's wages per day.

Then, since the amount of women's labour offered in industry at any given wage depends in part upon the rate of men's wages—being, in general, smaller the larger these are—the supply of women's labour may be written f1( w1, w2). In like manner, the supply of men's labour may be written f2( w1, w2).

And we know that and are positive, and and are negative.

Again, since the amount of women's labour demanded in industry at any given wage depends upon the rate of men's wages—being, in general, smaller the smaller these are—the demand for women's labour may be written 1φ( w1, w2), and the demand for men's labour φ 2( w1, w2). And we know that are negative, and and are positive.

The two equations, which suffice to determine our two unknowns, are:

(1) f1(w 1, w 2) = φ 1(w 1, w 2)
(2) f2(w 1, w 2) = φ 2(w 1, w 2)

It may be added that, if the proportion of women and men offering work in industry were determined solely by the proportion of women and men in existence, we should have to do with a straightforward problem of joint-supply; for, obviously, the comparative numbers of the two sexes are determined by physiological causes outside the range of economic influences. In these conditions, therefore, both the supply of women workers and the supply of men workers would be functions of one variable, this variable being some symbol of a normal family income, such as (w 1, w 2). For f1(w 1, w 2) and f2(w 1, w 2) we should have to write f(w 1, w 2) and kf1(w 1, w 2) and in countries where males and females survive in equal numbers, k would be equal to unity.

Part III, Chapter 16

§ 2. The key here is given by Marshall in his discussion of the fertility of land. He shows, it will be remembered, that, even when we are considering only fertility in respect of one kind of crop—which corresponds to my one "kind" of ability—the fertilities of two dissimilar pieces of land do not bear to one another a single numerical relation which is the same in all circumstances. On the contrary, this relation will be different in different states of demand, different conditions of capital supply, and so on; and it may even happen that a piece of land, which is more fertile than another in one set of circumstances, will be the less fertile of the two in another set. In like manner we now find that the net product (conceived as marginal) and, therefore, the efficiency of workman A, is liable to bear a numerical relation to the net product (similarly conceived) of workman B, which varies as the supply of tools and so on, with which their labour is assisted, varies. Thus, though in any given set of conditions there is some definite numerical relation between the wages of the two men which is fair, this relation does not depend simply upon their personal qualities, but is liable to change as external circumstances change.


§ 4. Account has next to be taken of the fact that men are born with different kinds of ability as well as with different degrees of it. No doubt, it is possible for two men or two acres of land to differ from one another in such a way that the ratio between their capacities, when the price of capital stands at any given level, is the same for all purposes. This, however, is not likely to happen often. With capital at a given price, one man will generally stand in one relation to another in respect, say, of physical strength and in a different relation in respect, say, of mathematical ability; just as one acre will be 10 per cent better than another for growing barley but 20 per cent better for growing wheat. Indeed, it may easily happen that the order of merit between two men is different for different purposes. Mr. Tunney has the advantage of Herr Einstein in a boxing ring but not in a laboratory. It follows that, when either the public demands for the services which different sorts of ability can render change relatively to one another (whether as a result of changes in taste or of changes in the distribution of income among people with different tastes), or when developments of technique alter the relative importance of different sorts of ability in producing services and things, (1) it will be profitable to alter the relative amounts of capital invested in training different types of men, and (2) the relative efficiencies of different types, both net and gross ( i.e. reckoned as including interest on capital), and so the relative earnings that are "fair" between these types, will change. Thus, when the war raised greatly the demand for the services of common soldiers, the efficiency and earnings of unskilled workers rose while those of musicians fell; and, had the war gone on for ever, children born with a special faculty for soldiering would have had a relatively high, and those born with a special faculty for music, a relatively low, expectation of earnings. On the other hand, technical developments enabling a great many industrial operations to be performed by elaborate machines associated with highly skilled attendants cause the efficiencies and the earnings expectation of intelligent children to rise relatively to those of children born with the temperament and physique of an ox. Again, if an invention causes blindness to be less of a handicap in some occupation than it has been hitherto, blind men will tend to flow into that occupation and other men out of it, until finally, their relative efficiency having risen, the earnings of blind men are everywhere slightly higher than before relatively to those of other men. With a wider sweep but a like aim Bateson wrote: "The fact that families or individuals rose into prominence or dropped into obscurity when the great industrial development of this country began, does not prove that the strains from which they came ought previously and in differing circumstances to have been in different relative positions. In various circumstances various qualities are required for success." *62 The efficiencies of different types of people are thus determined, not merely by their natures alone, nor yet by their natures in conjunction with the supply price of capital, but by these things together with the state of demand for different sorts of service and the state of industrial technique in various occupations. It is not possible, I think, to say what kind of change in relative efficiencies, and so in relative earnings—a scattering or a tendency towards greater equality—future developments in tastes and technique are likely to bring about.

Part III, Chapter 17

§ 4. Secondly, in order that, in any particular place or occupation, a wage that is fair as compared with other places or occupations may also be right from the point of view of the national dividend, a certain definite condition must be fulfilled. This condition is that in places or occupations in general workpeople are receiving as wages the value of the marginal net product of their work. If they are receiving less than this, they are without the normal inducement to give as much work as the general interest demands. The pushing up of their wages to a level that equates demand price and supply price would lead to an increase in the size of the dividend more than sufficient to compensate them for their extra sacrifice of leisure. Now, when things have settled down in more or less stable conditions, the play of economic forces tends to secure that in industries in general wages do correspond to the value of the marginal net product of labour. But conditions are liable to change, on account, for example, of new mechanical discoveries, the accumulation of capital, the opening up of foreign trade, or an expansion in the supply of the substance used as money. Any one of these changes necessarily tends to raise the value (in money) of the marginal net product of labour throughout occupations generally. The old wage, therefore, though still fair, will, nevertheless, be too low. It is to the interest of the national dividend that all wages should be raised. If, however, fairness in every individual wage rate was regarded as a conclusive reason against altering it, this change could never come about. Suppose, for example, that wage rates over the whole of industry were settled by Boards of Conciliation and Arbitration, whether wholly voluntary or partly controlled by State authority; and that the principle which each of these Boards followed was that of making its own wage rate equal to that paid for similar work in other occupations. The result, in the face of changing general conditions, would be a complete impasse. In like manner, it is conceivable that workpeople might, even in stable conditions, have their wages "exploited" everywhere to exactly the same extent, and for this reason might be everywhere receiving less than the value of their marginal net product. Here again a rigid rule against interfering with fair rates would make any correction of the abuse impossible. Hence it follows that fairness in a wage rate must not be taken as a conclusive reason against interference to raise it.

Part III, Chapter 20

Part III, Chapter XX

§ 1. WHEN in practice it is decided to interfere with wages anywhere, either because they are "unfair" or for any other reason, there is at once presented a new problem. Effective interference involves either the authoritative award of a new wage rate or encouragement to employers and employed to agree upon a new wage rate. Equally whether an award or an agreement is made, it would be ridiculous that the terms laid down should be fixed for ever. The industrial situation generally, no less than the circumstances of particular trades, is in a continuous state of flux. Every award and agreement, therefore, must be restricted, either explicitly or implicitly, to a short period of time. How short the period shall be before revision can be called for depends entirely upon the practical difficulties that revision would have to face. Apart from this, it would seem, on the face of things, that, since conditions may change fundamentally at any moment, revision should be permitted whenever either side desires it. In practice, however, considerations of convenience alone would make it imperative that some minimum interval should be provided for. But there are also other considerations. Except where the relations between employers and employed are exceptionally good, it is dangerous to reopen fundamental wage controversies more frequently than can be avoided. In view of this it often happens that the governing decisions are given a currency of not less than, say, two years from the date when they are launched. For the purpose of this discussion we will suppose that that practice is adopted generally. It does not, however, follow from this that, whenever a governing award or agreement about wages is made, the rate must, thereafter, be fixed rigidly for at least two years. For it may be possible to devise methods by which the governing award or agreement shall provide for variations in wages in response to temporary changes in demand—we may provisionally regard the conditions of supply, from the standpoint of this sort of period, as given—during the period that it covers. A choice, therefore, has to be made between a rigid arrangement and a plastic arrangement, and our investigation is not complete until the comparative effects of these have been ascertained.


From a combination of these results it follows that, over good and bad times together, a wage system fluctuating on both sides of the mean level, in accordance with temporary movements of the demand for labour, means more work and, therefore, a larger national dividend than one permanently fixed at that level. This gain arises directly out of superior adjustment between demand and supply. It is the fruit of improved organisation, and is similar to the gain produced by improved machinery. It is not retained for long as an exclusive possession of the industry which first secures it, but is distributed over the community as a whole, with the result that a new general equilibrium is established somewhat more advantageous than the old. The interest of the national dividend thus requires that the wage should not stand at the mean level for periods as long as two years, but should undergo short-period oscillations about this level, in such wise as always to make the demand for labour and the supply of it equal.


§ 5. Having thus satisfied ourselves that the interest of the national dividend requires a wage-system fluctuating within the normal period of agreement or award, and having determined the intervals that should elapse between successive fluctuations, we have next to determine on what plan the fluctuations themselves should be organised. It is evident that, other things being equal, the larger any fluctuation of demand is, the larger the corresponding change of wage should be. This principle has now to be worked out in the concrete; and to that end the chief factors upon which the magnitude of demand fluctuations depends must be described. These fall into two divisions: (1) movements in the employers' demand schedule for the commodity which the labour we are interested in is helping to produce; and (2) movements in the supply schedule of the other factors that co-operate in production with that labour. These two sets of influences will now be reviewed.


§ 9. Let us now turn to the second determinant of fluctuations in the demand for labour in any occupation, which was distinguished in § 5. Among the co-operant agents whose supply schedule is liable to move the most obvious are the raw materials used in the occupation. In extractive industries, such as coal-mining, these do not play any significant part; but in the majority of industries they are very important. In accordance with what was said in § 6, it is evident that, when they are obtained from a large number of independent sources, the oscillations of supply are likely to be less than when reliance has to be placed on a single source. For this reason the imposition of high protective duties upon any material, with a view to ousting foreign sellers, may be expected to bring about increased fluctuations. In addition to raw materials, the co-operant agents include the services of auxiliary labour and the services of machines. Mechanical improvements, for example, involve, in effect, a lowering of the supply schedule of the services rendered by capital invested in the occupation that is affected by them. Moreover, in some industries, Nature herself, as represented by the light and heat received from the sun, is a very important co-operant factor in production. Thus there is a high degree of seasonal variability in the demand for labour in the building trades, because the advent of frost in winter seriously interferes with brick-laying, masonry and plastering, while the shortening of the hours of daylight, by necessitating resort to artificial illumination, adds to the costs and further handicaps such work. No doubt, recent developments, such as the substitution of cement for mortar, are doing something to lessen the influence of climatic changes upon this industry, *101 but their influence is still very important. The same remark applies to the industry of discharging cargoes at the London Docks, which is liable to serious interruptions by frost and fog. On the other hand, indoor trades and trades little dependent on weather conditions, such as engineering and shipbuilding—dress-making is obviously not relevant here—display a relatively small amount of seasonal variability. Thus, according to a study by Sir H. Llewellyn Smith extended over some years, the mean difference in the percentage of unemployment between the best month and the worst month was 3¼ per cent in the building trades and only 1 1/3 per cent in the engineering and shipbuilding trades. *102


§ 10. When the demand for labour in any industry fluctuates in a given measure, the appropriate consequent fluctuation in the rate of wages is not, of course, determined by the size of the demand fluctuation alone. It depends also on how elastic the demand for labour in the industry is and how elastic the supply. The more elastic the demand is, the larger the appropriate wage change will be: the more elastic the supply (from the short-period standpoint here relevant), the smaller it will be. The former of these propositions does not call for special comment. But of the application of the latter to practice something should be said. The supply of labour is elastic in occupations so situated that a small change in the wage rate offered in them suffices to divert a considerable quantity of labour between them and other occupations. In general, therefore, the following results hold good. First, when, as with the Scottish shale and coalminers, *103 a small industry is neighbour to a kindred and very large one, the wage change corresponding to a given oscillation of demand should be less than in an isolated industry. Secondly, a set of circumstances, which would justify a given change in the wages of workmen specialised to a particular industry or locality, would justify a smaller change in those of labourers, whose lack of skill, or of managers, the generalised character of whose skill, renders them more mobile. *104 Thirdly, among workmen trained to a particular job, the wage fluctuations corresponding to given changes in the demand of one industry employing them should be smaller when there are other industries in which their services are required. Thus, in a boom or depression in the coal trade, the wages of mechanics employed in the mines should fluctuate less than those of hewers. Fourthly, when wages are paid by the piece, the percentage fluctuation corresponding to a given fluctuation in demand should be smaller than when they are paid by the time. For, since, under the latter system, a rise of pay has not the same effect in inducing workmen to pack more labour into an hour, the elasticity of the supply of efficiency units is lower. Fifthly, broad changes, such as the spread of information, improvements in communication, or an increased willingness on the part of workpeople to work at a distance from their homes, will tend to increase the elasticity of the labour supply and so to diminish the wage change appropriate to any given fluctuations of demand. Lastly, in industries subject to regular seasonal fluctuations, many of the workpeople will have prepared themselves for the slack periods by acquiring some form of skill for which the demand at these times is apt to increase. Hence, within the normal limits of seasonal fluctuations, the supply of labour will be fairly elastic, and, therefore, seasonal demand changes should not seriously alter wages. Thus, despite the great fluctuations in the demand for gas stokers between summer and winter wages should not, as indeed they do not, fluctuate much, because these workers are often also employed in making bricks, the demand for which expands in the summer.


§ 11. So far our discussion has been confined to the general nature of the relation between demand changes and the wage changes that should be associated with them. We have still to inquire whether the wage fluctuation that corresponds to a given change in the demand for labour in any industry should be related to it in the same way, whatever the amount and direction of this latter change may be. The answer must be in the negative, since the supply of labour will not have the same elasticity for all amounts and both directions. We may, indeed, presume that the elasticity will not vary greatly for changes in demand fairly near to the mean. The entrance and the exit to most trades are about equally open. In the North of England mining districts, for example, "the migratory miners include a large number of skilled mechanics, who divide their time between mining and their other handicraft according as either industry offers a better chance of profit." *105 A moderate upward movement in demand should, therefore, in general be met by about the same percentage of wage change as an equal downward movement. But for large upward and downward movements this symmetry no longer obtains. When the demand for labour falls considerably, there is a limit beyond which the wage cannot be reduced without reducing the available amount of the labour in question to zero. This limit will be determined, for unskilled men, by the conditions of life when they are unemployed altogether and subsisting on unemployment insurance and so on, and, for skilled men, in the last resort, by what they can earn in unskilled occupations. Thus, if the demand for labour has fallen in more than a moderate degree, a further fall should be accompanied by a less than proportionate fall, and eventually by no fall, in wage. *106 On the other hand, when the demand for labour rises considerably, the effect upon unskilled wages should be proportionate to that produced when it rises a little. For skilled labour the percentage of wage increase should be even greater. For, while the power of those already in a trade to work extra hours, and the probable presence of a floating body of unemployed, will enable a moderate addition to the supply of labour to be made fairly easily, these resources will be ineffective when a large addition is required. *107


§ 14. There is, however, a much more serious objection to be urged against sliding scales. Changes in the price of the finished product only constitute a good index of changes in the demand for the labour that makes it, on condition that other things are equal. But in real life other things are often not equal. For these other things include the supply conditions of raw material, of the services of auxiliary workpeople, and of the services of machinery: all of which supply conditions are liable to vary. It is evident that a given oscillations in one direction of the supply schedule of any one of these things causes the employers' demand for the labour, whose wages we are considering, to oscillate in exactly the same manner as an equal oscillation in the opposite direction in his demand schedule for the finished commodity. Hence, in order to infer the oscillations in labour demand from those in the employers' commodity demand, we need to subtract from the latter whatever oscillations occur in the supply schedules of the other factors of production. It is true that no provision has to be made for corrections under this head (1) when the supply schedules of the other factors are certain not to oscillate, or (2) when the part they play in the cost of the commodity is so small that their oscillations can be neglected without serious inaccuracy. It is not easy to imagine an industry in which the former of these conditions could be postulated; but the latter holds good in extractive industries, such as coal-mining, where nearly the whole cost of production is labour cost. Except in these industries the index afforded by price with changes is seriously defective. A fall in price will occur in consequence of a fall in the demand for the commodity, and also in consequence of a cheapening in the supply of the raw material. Thus there are two routes connecting changes in price with changes in labour demand. A price movement caused in one way indicates a fall; caused in another way, a rise. If, for example, the price of iron goes up on account of an increase in the public need for iron, there is a rise in the demand for iron-workers' services; if, however, it goes up because a strike in the coal trade has rendered one of the constituents used in making it more expensive, there is a fall in this demand. It is obvious that, in the latter event, wages ought not to follow prices, but should move in the opposite direction.


§ 15. As a way of escape from this difficulty, it is sometimes proposed that the index should be, not the price of the finished commodity, but the margin between its price and that of the raw materials used in making it. "Margins" are utilised with apparent success by the officials of the Cotton Workers' Union, who obtain them by "subtracting the price of raw cotton (calculated from the five leading sorts) from the price of yarn (of eleven kinds) or of calico (of twenty-three kinds)," *111 and order their wage negotiations accordingly. This index has the advantage of moving in the same way in response to a fall in the demand for the commodity and to an increase in the expense of obtaining raw material. The solution it affords is not, however, perfect. Among the contributory factors to the production of the finished article raw material is only one. The conditions of supply of auxiliary labour and of the services of machines are also liable to vary, but their variations are not reflected in any change in the "margin." Mechanical improvements, for example, mean, in effect, a cheapening of the help rendered by machines. When such improvements are occurring, margins are liable to mislead in the same manner as, though in a less degree than, crude price statistics. Furthermore, margins, equally with prices, and because prices enter into their construction, are subject to a serious practical inconvenience. They are not likely to afford a good index in industries where the general level of elaborateness and so forth in the goods produced is liable to vary. In these industries an apparent change in price may really indicate nothing more than a change in the kind of article manufactured. This difficulty is specially likely to occur when prices are deduced from the quantities and values of exports, since there is reason to expect that the cheaper varieties of goods will gradually yield place in foreign trade to the finer and more valuable varieties.


§ 18. There is yet another disability, even less open to remedy, from which any form of sliding scale necessarily suffers. These scales, being designed to relate changes in wage rates to changes in the demand for labour in the particular industries they cover, cannot from their nature recognise or in any way allow for changes in the supply of labour to these industries, such as might be brought about, for example, by the development or decay of some other industry employing the same type of labour. Plainly, however, wage rates ought to be adjusted to meet changes of this type equally with changes in the demand for labour. The failure of scales to do this has sometimes led to results so plainly unreasonable that it has been necessary for one party to a scale agreement voluntarily to concede to the other terms more favourable than those which the scale decreed.

Part IV, Chapter 3

§ 8. We turn to the second main group of causes distinguished in § 2, those, namely, which operate through the supply of labour. It is evident that, if this supply is increased, whether the increase comes about through an addition to the number of workpeople or through an addition to their average capacity, the national dividend must be increased. Our problem, therefore, is to ascertain the effect that will be produced upon the aggregate real income of labour. The analysis set out in the preceding section shows that the marginal net product of labour, in terms of things in general, and, therefore, its real earnings per unit, must be diminished. Whether its aggregate earnings will be increased depends, therefore, on whether the elasticity of the demand for labour in general is greater or less than unity. If this elasticity is greater than unity, labour in the aggregate will receive a larger absolute quantity of dividend than before; whereas, if the elasticity is less than unity, it will receive a smaller absolute quantity. *26 It is, therefore, necessary to determine whether in fact the elasticity of demand is greater or less than unity. *27


Let us begin by ignoring the fact that an addition to the supply of labour available in industry is likely to react upon the supply of other factors co-operating with it. It may then be observed that there is a certain field of personal service where labour works practically unaided by other factors, where, therefore, its productivity per unit would not appreciably fall with an increase in its quantity, and where a good deal could be absorbed without greatly reducing the value of its product in terms of other things. This circumstance points, pro tanto, to a fairly low rate of diminution in the (real) demand for labour in general as the quantity of it increases; though exactly how rapid the rate of diminution would be, or, in other words, how elastic is the demand for labour, it is quite impossible to say. In real life, however, it is illegitimate to ignore reactions, indirectly brought about by an increase in the supply of labour, on the supply of other factors. In particular, the supply of capital is known to be very far from rigidly fixed. When the quantity of labour increases, and, hence, indirectly, the return per unit of capital is enhanced—though, no doubt, those people who have decided to leave some definite sum to their descendants will not be willing to save so much as before—people in general will be willing to save more than before, and so to create a greater quantity of capital. *28 Moreover, owing to the greater size of the national dividend, their ability to save will be increased. The resultant increase in the supply of capital will react to increase the marginal productivity of any given quantity of labour. On the whole, therefore, it is probable that the demand for labour, even viewed from the general standpoint of the whole world, is fairly elastic. *29 The probability is far stronger as regards the demand for labour in any single country. For capital is so mobile that a small increase in the return per unit obtainable by it in any one country must inevitably—apart from complications due to double income-tax, about which it may be hoped that international arrangements will soon be made—bring about a large influx from foreign countries, or, what comes to the same thing, a large contraction of the outflow that formerly went to foreign countries. Hence the elasticity of the aggregate demand for British labour is greater than the elasticity of that part of the demand which depends on British capital alone. It is, indeed, so much greater that, with any reasonable assumption as to this latter elasticity, the elasticity of the aggregate demand is practically certain, from the standpoint of a long period, which is alone in question here, to be immensely larger than unity.


§ 9. When the increase in the supply of labour comes about through an increase in the capacity of labouring people, it is obvious that the consequent increase in the absolute share of dividend accruing to them carries with it, in accordance with the argument of previous chapters, an increase in their economic welfare. When, however, the increase of supply comes about through an increase in numbers, the absolute share per man is lessened, despite the fact that the absolute share of the group as a whole is increased. If there were reason to believe that the loss per man were large, we should hesitate to conclude that an increase of this sort in the supply of labour involves an increase in the economic welfare of labour. In fact, however, it can be shown that, under the conditions now existing in this country, the loss per man would be very small. That it would be very small in terms of commodities in general follows from the fact already established, that the elasticity of the demand for labour in England is large. If the conditions were such that an increase in numbers would lead to a material increase in the price of food or other articles predominantly consumed by the working-classes, it might, indeed, be large in terms of the things that are of significance to them. At present, however, the fact that we are able to import food freely from abroad, makes it impossible that an increase in the population of a small country such as ours should, to any important extent, evoke the law of increasing supply price in respect of it. Hence, in all senses, the diminution of real wages per head of the working-classes would be very small. *30 Consequently, it seems reasonable to conclude that an increase in the absolute share of labour, even when it results from an increase in the numbers of the population, will carry with it an increase in the economic welfare of working people. It is not necessary, therefore, to qualify our conclusion, that causes impinging upon the supply of labour affect the aggregate amount of the dividend and the aggregate real earnings of labour in the same sense, by emphasising the caution that the welfare of labour is sometimes diminished by causes that increase its wealth.


§ 10. The results that have been reached in this chapter serve to rebut two popular opinions. The first of these has to do with hours of labour, and is to the effect that a general shortening of the working day, because it will cut down the supply of labour, will enable workpeople as a whole to secure terms so much better than before that their aggregate real income must be increased. The truth is that, in so far as a diminution in the hours of work leads to a more than corresponding increase in capacity, both the national dividend and the absolute share of labour will benefit. But, if the reduction of hours is pushed beyond this point, so that it injures the national dividend, the real income of labour must, in view of the elasticity of the demand for labour, necessarily be injured also. The second popular opinion is that the compulsory withdrawal from work of persons in receipt of State assistance would increase the aggregate real earnings of the poor, and, therefore, from the point of view of labour, ought to be encouraged. Two schemes were submitted to the Royal Commission on the Aged Poor, one of which contained, as a condition for the receipt of a pension, "the abstention from all work of pensioners, male and female," while the other would have awarded pensions to "every one over sixty, and prohibited work beyond that age." *31 The defence proffered for those schemes was that, if pensioners did not abstain from work, independent workpeople would find their earnings diminished. From a long-period point of view, however, the interests of the poor should be identified, not with those of independent workpeople only, but with those of all workpeople; for all workpeople are liable to become dependent at some period of their lives. But it follows directly from what was said in the preceding section that, if the supply of labour is contracted, the aggregate earnings of independent and dependent workpeople together will be diminished. Hence, so far as the present argument goes, it is inadvisable to adopt the policy embodied in these two pension schemes. It should be noted, however, that the cessation of work by pensioners can be defended from a more special point of view. It may be held desirable that the qualification for a pension should be, not age, but declining strength. This cannot be tested directly, but, if abstention from work were made a condition for receiving, say, a 10s. pension, conformity to the condition would ensure that recipients were really incapable of earning much more than 10s. regularly. Hence such an arrangement, though it would abolish work on the part of many persons below the 10s. line, might, nevertheless, be desirable as a means of preventing many other persons from obtaining pensions, and, in consequence of obtaining or expecting them, from relaxing their efforts in industry. The pension policy pursued by certain friendly societies seems to be based on considerations of this order. *32 Clearly, however, this argument is not relevant where the condition for the receipt of a pension is, not declining strength, but the attainment of some definite age.

It is not relevant to the present argument to note, though the point may be added for completeness, that, in response to the improved demand, the co-operant factors tend to increase in quantity, but, since their supply curve is inclined positively, not to a sufficient extent to reduce their receipts to the old level.
The general proposition, of which the statement in the text is a special instance, is that, other things being equal, an increase in the quantity of any one factor of production will be accompanied by an increase in the absolute share of product accruing to that factor, provided that the demand for the said factor has an elasticity greater than unity. The condition on which it will be accompanied by an increase in the proportionate share of product accruing to the factor is different from this, and can be determined as follows. The supply functions of the other factors being given, the aggregate output P depends on the quantity of the variable factor, in such wise that, if x represents this quantity, P= f( x). The absolute share accruing to the variable factor is, therefore, represented by xf', and the proportionate share by xf'/f. The condition that this latter magnitude shall increase when x increases is that
is positive.

Let e represent the elasticity of demand for the factor in question. Then

and the above condition can be expressed, by easy substitution, in the form

Thus e exceeds unity by a larger amount, the larger is the proportionate share of the product accruing, before the variation, to our variable factor. The condition set out above in symbols can be expressed in words, as Dr. Dalton has pointed out, by the statement that "the elasticity of demand is greater than the reciprocal of the relative share of all other factors taken together" ( The Inequality of Incomes, p. 187).

The term elasticity of demand, as employed by Marshall and in the text above, signifies proportionate change in quantity divided by proportionate change in price when the changes are very small (strictly infinitesimal). It is what Dr. Dalton calls "point elasticity" (cf. The Inequality of Incomes, pp. 192-7). Hence, in order that the argument of the text may hold good of substantial increases of supply, we must suppose that the elasticity of demand is greater or less than unity, as the case may be, not merely in respect either of the old or of the new quantity of supply, but also in respect of all the quantities intermediate between these two.
Part IV, Chapter 5

Thirdly, we have the general fact that the demand for anything is likely to be more elastic, the more elastic is the supply of co-operant agents of production. This fact makes it evident that the demand for labour will be specially inelastic in industries which make use of raw materials of highly inelastic supply. Apart from raw materials, the principal co-operant agents working with labour in any industry are capital instruments, managing ability and other labour. From the standpoint of a long period the supply of these to any single industry is, beyond doubt, exceedingly elastic. But, from the standpoint of a short period or a period of moderate length, it is likely to be inelastic; for specialised machinery and managing skill, and even other labour, can neither be created or brought from elsewhere, nor yet destroyed or carried off elsewhere, in the twinkling of an eye. Here again, therefore, the forces making for elasticity of demand are stronger from the standpoint of a long period than of a short period. It should be added that in some industries, notably coal-mining, Nature herself acts as a very important co-operant factor of production. In times of expanded demand new men have to be set to work on seams much more difficult and less productive than those ordinarily worked. *47 This means, from a short-period point of view, a highly inelastic demand for labour.


§ 4. With these results in mind we may proceed to the next stage in our inquiry, and ask in what conditions the establishment at one point of an uneconomically high wage, which raises the real earnings of the workpeople there, will also raise the real earnings of the workpeople as a whole. Let us still suppose that the commodity, to the makers of which an uneconomically high wage has been assigned, is exclusively consumed by persons other than workpeople. It may be noted, in passing, that, when a factor making for inelasticity in the demand for the services of the particular group of workpeople in whom we are interested is inelasticity of supply and, therefore, "squeezability" in some co-operant group, a part of the gain to the first group will be offset by loss to the second. For the purpose of a general analysis, however, we may neglect this rather special point.

The reason why this conflict between the interests of a particular class of wage-earners and those of wage-earners as a whole, when the particular class endeavours to force up its rate of wages above the normal, is not generally recognised may well be, as Mr. H. D. Henderson suggests, that most wage movements are associated with trade cycles. In consequence of this, the wage rates of different groups generally move up and down together, and, therefore, to the casual observer, there appears to be a greater harmony of interest than there really is ( Supply and Demand, p. 157).
Part IV, Chapter 6

§ 2. In the special emergency of the Great War, supplies of certain things were short as a result of causes which could not have been got over, whatever prices sellers had been allowed to charge. Price regulation and rationing did not, therefore, as was argued in Part II. Chapters XII. and XIII., substantially reduce the size of the national dividend. At the same time they jointly saved the poor from a disaster that could not otherwise have been avoided. The grant of large bonuses on wages would not have enabled poor people to obtain essential articles of which the supply was short and the demand of the rich inelastic. The prices of these things would, indeed, have been forced up, but the rich, at the cost of paying more money, would still have obtained as much as before out of the shortened supply, and would have correspondingly cut down the share available for the poor. Thus the poor would have suffered enormously in respect of real income, even though their money income had risen proportionately to the rise in general prices, because particular things of vital importance to them would have been practically unobtainable. Moreover, the fixing of maximum prices without rationing would not have been sufficient; for the presumption is that the rich, by various pulls, would still have skimmed the market. From the joint facts that in the war price control coupled with rationing did not injure production and did benefit distribution it has sometimes been inferred that the same policy continued in normal conditions would produce the same harmoniously beneficial result. That is the issue we have to judge.


§ 5. With decreasing supply price from the standpoint of the industry, the ultimate consequence of extruding from the market a part of the demand of the relatively well-to-do is necessarily to contract the production of the commodity and, therefore, since, as was shown in Part II. Chapter XI., too little of it is being produced anyhow,—for decreasing supply price from the standpoint of the industry usually implies also decreasing supply price from the standpoint of the community—to lessen the national dividend. At the same time the rise in price, which a diminution in the supply of an article produced under conditions of decreasing supply price must involve, forces poor people both to buy less of the commodity than they would have done and also to pay more for what they do buy. Thus they are unequivocally damaged. The aggregate dividend and their share of it alike suffer, and disharmony is impossible.


§ 6. With increasing supply price from the standpoint of the industry the extrusion of part of the demand again, of course, contracts the production of the commodity. If the conditions are such that increasing supply price from the standpoint of the industry implies constant supply price from the standpoint of the community, the amount of production that would take place in the absence of interference will be the right amount to maximise the national dividend, and an enforced contraction in it will lessen the national dividend. If, on the other hand, the conditions are such that increasing supply price from the standpoint of the industry implies also increasing supply price from the standpoint of the community, the amount of production that would take place in the absence of interference will—as was shown in Part II. Chapter XI.—be too large to maximise the national dividend, and an enforced contraction in it will, if it does not go beyond a certain definite limit, benefit, and not injure, the national dividend. In either event the price of the commodity will be reduced, so that the poor probably get more of it, and certainly get it at a lower price. Hence the poor must gain. In the second case distinguished above, therefore, if the slice cut off the demand of the rich is not too large, there is harmony of an opposite sort to that which comes about under decreasing supply price; the national dividend and the slice accruing to the poor are both increased. But, if the check to the purchases of the rich is pressed beyond a certain point, there is disharmony, the poor still getting a benefit but the national dividend as a whole suffering loss. In the first case distinguished above there is disharmony of this sort whatever the size of the check to the purchases of the rich.

Part IV, Chapter 7

Part IV, Chapter VII

§ 1. IN a community in which wage-rates are everywhere adjusted to the conditions of demand and supply, so that no wage-rates are uneconomically high and there is no unemployment beyond what is necessary to allow adjustments to be made to industrial fluctuations, for the State to subsidies wages in particular industries must, in general, *55 worsen the distribution of productive resources and damage the national dividend. A policy of wage subsidies applied to all industries would not necessarily damage the distribution of productive resources, but it could not improve this distribution; and, though in some circumstances it might increase the dividend, it would probably only do so at the cost of causing too much work to be done, and, therefore, in a manner injurious, and not beneficial, to economic welfare. Hence, subject to qualifications which the reader can readily provide, we may conclude that in a community, in which, apart from subsidies, rates of wages would be everywhere adjusted to the conditions of demand and supply, and policy of wage subsidies is likely to prove anti-social.


§ 2. In real life, however, it may happen that either in particular industries or, it may be, throughout industry as a whole, wage-rates are established at an uneconomically high level; that is to say, at a level too high to allow the demand for labour to absorb the supply, in such wise that more people are unemployed than are accounted for by the movements they have to make in consequence of industrial fluctuations. Thus there is some reason to believe that in England during the post-war depression, partly through direct State action and partly through the extra bargaining strength given to workpeople's organisations by the development of unemployment insurance, wage-rates over a wide area were set at a level uneconomically high in the above sense. Where conditions of this kind prevail and where public opinion insists that unemployed persons shall be somehow provided for, a policy of wage subsidies is no longer prima facie anti-social, but needs more particular consideration.


§ 6. The foregoing analysis is in principle favourable to a policy of wage subsidies, at all events in industries other than export industries, provided that the maintenance of uneconomically high wage-rates is taken for granted. When, however, we pass from generalities to more detailed considerations, pitfalls are revealed. The most obvious difficulty has to do with the comparative treatment of workpeople in different occupations. If all occupations were rigidly separated from one another, so that, not only could no one pass directly from one to another, but also the choice among them to be made by each new generation coming to industrial age was rigidly fixed, everything would be quite simple. Each occupation could be treated as a single problem. In real life, however, different occupations are not rigidly separated, and account must, therefore, be taken of possible effects of a policy of subsidies in modifying the proportions of workpeople attached to different occupations. If exactly equal fiscal encouragement were given to all occupations, no effects of this kind would tend to come about. In practice, however, it can hardly be doubted that larger subsidies would be paid in industries with low wage-rates and large unemployment than in others. For example, at the present time the relatively distressed engineering and ship-building industries would certainly demand more favourable treatment than, say, the railway industry. As the demand for the products of any industry fell off and distress became more pronounced, higher subsidies, both absolutely and relatively to those ruling in other industries, would always be called for. Such pleas would often be acceded to. As a consequence, too many people would be set to and kept at work in some industries and too few in others. Extraordinary strength and competence on the part of the Government would be needed to prevent a policy of wage subsidies from acting in this way. If these were not forthcoming the resulting social loss might well be large. There is also a second serious danger. If the Government were in a position to control the wage demands of the workpeople as well as the amount of the subsidies, and if it were absolutely impervious to political pressure, the adoption of the above policy would not lead to any change in the rate of wages demanded. In practice, however, once the policy was adopted and, as a result of it, unemployment reduced to a low level, there would be a strong temptation to workpeople to demand higher wage-rates, while employers, hoping to recoup themselves from an increased subsidy, might not resist these demands very strenuously. In this way both wage-rates and the rates of subsidy would be subjected to a continuous upward pressure. This tendency, which would exist even in a static community, would be accentuated in the actual world; for in times of boom wages would tend, as now, to go up; and, when, subsequently, depression came, there would be a powerful demand, very likely on the part of employers and workpeople acting together, for an addition to the subsidy to prevent them from falling again. The annual revenue required to provide the subsidy would thus tend to grow larger and larger continually. The burden imposed on non-wage-earners would be raised above the benefit accorded them, and the gap would grow always wider. The supply of the services rendered by them in work and saving would be discouraged; and in the end both the national dividend and the real absolute share of it enjoyed by workpeople would be diminished.

Part IV, Chapter 11

Part IV, Chapter XI

§ 1. SO far we have been considering transferences of a direct kind. There remain transferences through bounties or devices substantially equivalent to bounties. These take three principal forms: first, bounties, provided out of taxes, on the whole consumption of particular commodities which are predominantly purchased by poor persons; secondly, bounties, similarly provided, but confined to that part of the whole consumption which is actually enjoyed by defined categories of poor persons; thirdly, authoritative interference with prices, so contrived that the richer purchasers of particular commodities have to bear part of the cost of what is sold to poorer purchasers. The first of these methods is illustrated by the special subsidies which were paid on bread and potatoes during the Great War to enable prices to be kept down to what was considered a reasonable level. The second and third methods are only practicable in connection with commodities and services which are non-transferable in the sense explained in Part II. Chapter XVII. The second is illustrated by the Irish Labourers Acts, under which, not all house-building in the districts affected, but only house-building for labourers was subsidised, and by the more general provisions which were adopted to meet the post-war house shortage. The third method is illustrated by special arrangements often made in connection with the services supplied by monopolistic "public utilities." Whether these services are actually produced by private concerns or by the public authorities themselves, public authorities can, if they choose, compel sales to selected poor persons to be made at a loss, and can arrange for this loss to be made good through charges to other persons higher than would otherwise have been permitted. This plan is adopted under a number of Tramway Acts, where provision is made for a convenient service of workmen's cars at specially low fares. Thus "a recent report of the Highway Committee of the London County Council estimates that the loss involved by running the workmen's car service is £65,932 per annum." *1 The same policy is illustrated in another connection by the (pre-war) practice of the municipality of Wiesbaden, where gas supplied by means of prepayment meters—a more expensive method of supply—was charged for at the same rate as gas supplied by ordinary meters to all persons the annual rent of whose house was less than 400 marks. *2 It should be noted that this method is not necessarily confined to commodities and services produced under conditions of monopoly. Provided that the goods are, or can be made, non-transferable, it is open to public authorities to fix a charge at which anybody undertaking a named business or profession must sell whatever quantity of service is demanded by persons in a given category. The result will be to limit the number of persons entering that business or profession, till the expectation of earnings therefrom—derived jointly from sales to the poor and to other persons, for whose purchases the charges are fixed by the normal play of demand and supply—becomes about equal to that ruling in other businesses or professions of a similar difficulty and disagreeableness and involving an equally expensive training. This, of course, implies that the low charges made to the favoured category of persons are associated with charges to other categories higher than would have prevailed if the low charges had not been enforced.


§ 4. So far it would seem that there is little to choose between help to the poor by bounties and by direct neutral transferences. If the amount of the bounty-fed commodity which each recipient is to consume is fixed authoritatively, as under the British system of free and compulsory elementary education, this is in fact so. It is so, too, if the amount is not fixed authoritatively, but is, for other reasons, not liable to change in consequence of the bounty. Thus poor people are accustomed to buy some things through a common purchase fund, so organised that the payment a member has to make does not vary with the amount of his individual purchases. Sick clubs are arranged on this plan. There will be no inducement to a member of a sick club to increase the amount of the doctor's services that he calls for in a year merely because the fixed amount, that he has been accustomed to pay for membership of the club, is taken over and paid by the State. These conditions, however, are exceptional. In general, when a bounty, or the equivalent of a bounty, is given on any commodity, the purchasers, having regard to the bounty, will buy more of the commodity than they would have done had they received an equivalent subsidy in the form of a direct money grant. In this way resources are diverted out of the natural channels of production, and there is a presumption—which may, of course, as was explained in Part II. Chapter XI., be rebutted by special knowledge—that this diversion will inflict an extra injury on the national dividend, over and above that set out in the preceding paragraph. If the bounty is large enough, it may happen that the output of the bounty-fed commodity will be expanded so far that to the poor themselves the supply price, not merely in terms of money, but in terms of satisfaction, exceeds the demand price, or, in other words, that the economic satisfaction they get from the last increment consumed is less than the economic dissatisfaction involved in producing it. In general the expectation of a transference to the poor through bounties on particular commodities is likely to damage the national dividend rather more than the expectation of a direct neutral transference of equal magnitude. In spite of this, however, the bounty method may still sometimes be better than the other, not only because there may be special economic or non-economic reasons for encouraging the consumption of the particular thing on which the bounty is given, as compared with other things, but also because the element of "charity" is less obvious and, therefore, less damaging to the morale of the beneficiaries, when it is concealed in a bounty than when it is displayed in a direct dole.

Part IV, Chapter 12

§ 4. Fortunately, however, these classes constitute only a small part of the whole body of poor persons. With the poor regarded generally there is no frozen fixity of quality, but investment is capable of real effect. At a first glance we might, perhaps, expect the marginal return obtainable in this field to be equal to what it is in industry proper. This, however, is not so. In a perfectly adjusted community capital would be invested in the nurture, education and training of different persons, no matter in what class they were born, in such wise that, given the existing state of capital supply, the existing relative demand for services requiring different sorts of ability, and the existing state of industrial technique, the values of the marginal net product yielded by it would be equal everywhere. Thus, as between men with different degrees of the same kind of capacity—duke's sons and cook's sons alike—more would be invested in the abler than in the less able; and, as between men of different kinds of capacity, more would (in general) be invested in those whose kind was in keener demand. There is, however, reason to believe that the ordinary play of economic forces tends unduly to contract investment in the persons of the normal poor, with the result that the marginal return to resources invested, not, indeed, in all, but in a great number of the poor and their children is higher than the marginal return to resources invested in machines. The ground for this belief is that poor persons are without sufficient funds to be able themselves to invest adequately in their own and their children's capacities, while they are also so situated that other persons, who have sufficient funds, are, in great measure, debarred from doing this for them. Under a slave economy, or under a social system so organised that those, in whom alien money was invested, could somehow pledge their capacities as security for loans, the case would be different. But in the actual world there is no easy way in which capitalists can ensure that any considerable part of the return on money invested by them in the capacities of the poor shall accrue to themselves. If they make a loan, they cannot exact security for repayment; if they invest directly, by providing instruction for their own employés, they have no guarantee—unless, indeed, they are manufacturers of proprietary goods requiring a more or less specialised kind of labour, which is of less value to others than to them—that these employés will not shortly quit their service; and, even when there is such security, the employers must expect that the workers, having become more competent, will endeavour to exact a wage increased proportionately to their efficiency, and so to annex for themselves the interest on the employer's investment. In fact, investment in the persons of the poor is checked in a way analogous to that in which investment in land tenanted by rich occupiers and owned by poor men may be checked. The owners cannot afford to invest, and the occupiers, living without proper security as regards tenants' improvements, and receiving, therefore, as private net product, only a portion of the social net product of their investment, are unwilling to invest as much as the interest of the national dividend requires. In view of these considerations there is strong reason to believe that, if a moderate amount of resources were transferred from the relatively rich to the relatively poor, and were invested in poor persons with a single-eyed regard to rendering the poor in general as efficient as possible, the rate of return yielded by these resources in extra product, due to increased capacity, would much exceed the normal rate of interest on capital invested in machinery and plant. *6 Of course, however, in real life transferences from the rich to the poor are not all made subject to the condition that they shall be employed in the way most productive of efficiency. It is, therefore, necessary to examine separately the effects of certain principal sorts of transference.

Marshall, Principles of Economics, p. 213. Furthermore, it should be noticed that such a policy will react to the advantage even of those members of the manual working class who are not directly touched by the improved educational opportunities; for it will both increase the demand for their services, by increasing the number of persons capable of acting as business managers, and also diminish the supply of their services by withdrawing these men from among them.
Part IV, Chapter 13
It is sometimes suggested that those very improvements in the capacity of labour, which have been discussed in previous parts of this book, are calculated to push some men below the minimum standard. It is true, as a point of analysis, that increased capacity of labour is, in effect, equivalent to an addition to its supply, and, therefore, involves a slight reduction in the real wage of a labour unit of given quality. In view, however, of the elastic character of the demand for labour in general, the number of the unimproved men whom this change would push over the line of self-support would almost certainly be very small.
Appendix I

§ 7. When the assimilation is accomplished, and all the various sorts of uncertainty, to which, in different industries, people submit resources, are translated into terms of the uncertainty-bearing involved in some representative scheme of prospective returns, there will be a supply schedule and a demand schedule for pounds to be exposed to this scheme, just as there are a supply and a demand schedule for pounds to be exposed to "waiting." The demand price or the supply price for the exposure of any given quantity of pounds is the excess of money offered or asked above the actuarial value of a £ so exposed. For different quantities of uncertainty-bearing the demand price and the supply price will, of course, both be different. For some quantities the supply price will be negative. Up to a point, people will gamble because they like the excitement, even though they know that, on the whole, they are likely to lose money. But, though some amount of uncertainty-bearing, like some amount of labour, would be forthcoming for industry, even if there were no expectation of reward, in present conditions more is wanted than can be obtained on those terms. The main reason is that an uncertain prospect actuarially worth £100 of money is much less satisfactory than a certain prospect also worth £100 of money. This follows from the law of diminishing utility. One income of £90 plus one of £110 carry less satisfaction, other things being equal, than two incomes each of £100. Thus, in respect of such quantities of uncertainty-bearing as are actually made use of in modern industry, the supply price, like the supply price of the other factors of production, is positive; and the general conditions determining the value, or price, of uncertainty-bearing are similar to those determining the price of those factors.

Appendix II


§ 1. WITH the information at present available it is not possible to lay down any propositions about the elasticity of demand for different commodities beyond those general propositions that are set out in Part II. Chapter XIV. As has been pointed out by Marshall, *46 attempts to determine the elasticity of demand for any commodity in any market by a direct comparison of the prices and the quantities consumed at different times are exposed to very great difficulties. If it could be presumed that the reactions exercised by price-changes upon quantity demanded came about immediately, if the association of actual price-changes with people's expectation of connected future price-changes in the same or the opposite direction could be eliminated, and if allowance could be made for those upward and downward shiftings of demand schedules, for which movements of confidence and alterations in the supply of monetary purchasing power are responsible, a comparison of the percentage changes of price between successive years with the percentage changes in consumption between the same years might, for commodities about which adequate statistics exist, yield a rough numerical measure of elasticity for amounts of consumption in the neighbourhood of the average actual consumption. *47 It seems that for certain commodities the above presumption can reasonably be made. On the basis of it Professor Lehfeldt calculated, immediately before the war, that the elasticity of the aggregate demand for wheat in the United Kingdom was about -0.6. *48 But there is little hope that many elasticities will lend themselves to calculation in this direct way. It is, therefore, important to inquire whether any indirect method of calculation is available for overcoming difficulties due to the slowness with which reactions work themselves out. *49

Professor Moore, in his Economic Cycles (chapters iv. and v.), makes calculations of the "elasticity" of demand for certain commodities without resort to the allowances stipulated for in the text. But, as he himself fully recognises, the elasticity, which his method enables him to measure, is not the same thing as, and is not, in general, equal to, the elasticity of demand as defined by Marshall and employed here. Marshall's elasticity, if known, would make it possible to predict how far the introduction of a new cause modifying supply in a given manner would affect prices; Professor Moore's to predict with what price-changes changes in supply coming about naturally, in company with such various other changes as have hitherto been found to accompany them, are likely to be associated. That this distinction is of great practical importance is shown by the fact that, whereas the elasticity of the demand for pig-iron, in Marshall's sense, is, of course, negative—that is to say, an increase in supply involves a fall in price—the elasticity in Professor Moore's sense, as calculated from his statistics, is positive. The reason for this is that the principal changes in the price of pig-iron that have in fact occurred are mainly caused by expansions of demand (general uplifts in the demand schedule), and not by changes in supply taking place while the demand schedule is unaltered. In certain conditions it might be possible to derive Marshall's elasticity from Professor Moore's elasticity, provided that the reactions exercised by supply changes upon prices could be presumed to take place very rapidly. Apart from this presumption derivation would be impossible, however ample the statistical material.
Appendix III

§ 2. Most industries are made up of a number of firms, of which at any moment some are expanding, while others are declining. Marshall, it will be remembered, likens them to trees in a forest. Thus, even when the conditions of demand are constant and the output of an industry as a whole is correspondingly constant, the output of many individual firms will not be constant. The industry as a whole will be in a state of equilibrium; the tendencies to expand and contract on the part of the individual firms will cancel out; but it is certain that many individual firms will not themselves be in equilibrium and possible that none will be. When conditions of demand have changed and the necessary adjustments have been made, the industry as a whole will, we may suppose, once more be in equilibrium, with a different output and, perhaps, a different normal supply price; but, again, many, perhaps all, the firms contained in it, though their tendencies to expand and contract must cancel one another, will, as individuals, be out of equilibrium. This is evidently a state of things the direct study of which would be highly complicated. Fortunately, however, there is a way round. Since, when the output of an industry as a whole is adjusted to any given state of demand, the tendencies to expansion and contraction on the part of individual firms cancel out, they may properly be regarded as irrelevant so far as the supply schedule of the industry as a whole is concerned. When the conditions of demand change, the output and the supply price of the industry as a whole must change in exactly the same way as they would do if, both in the original and in the new state of demand, all the firms contained in it were individually in equilibrium. This fact gives warrant for the conception of what I shall call the equilibrium firm. It implies that there can exist some one firm, which, whenever the industry as a whole is in equilibrium, in the sense that it is producing a regular output y in response to a normal supply price p, will itself also individually be in equilibrium with a regular output x r.*54 The conditions of the industry are compatible with the existence of such a firm; and the implications about these conditions, which, whether it in fact exists or not, would hold good if it did exist, must be valid. For the purpose of studying these conditions, therefore, it is legitimate to speak of it as actually existing. For any given output, then, of the industry as a whole, the supply price of the industry as a whole, must be equal to the price which, with the then output of the industry as a whole, leaves the equilibrium firm in equilibrium. The industry, therefore, conforms to the law of increasing, constant or decreasing supply price according as the price which leaves the equilibrium firm in equilibrium increases, remains constant or decreases with increases in the regular rate of output—we are not here concerned with short-period fluctuations—of the industry as a whole. In industries which consist, not of many firms but of one firm only, the industry as a whole and the equilibrium firm are, of course, identical, and there are no firms other than the equilibrium firm. In what follows we are concerned (1) with industries in which the outputs of the individual firms are small relatively to the output of the whole industry, which implies that x r, the output of our equilibrium firm, is small relatively to y; (2) with industries consisting of one firm only. The difficult intermediate case of an industry in which x r is neither small relatively to y nor yet equal to y—a case involving some measure of indeterminateness—will be left out of account. It is assumed throughout that outsiders are not excluded from the industry under review by legal rules or clubbing devices.


§ 13. In the third and most general case distinguished in § 3 it is obvious that the three governing conditions impose no restrictions on the relations that may subsist between variations in the supply price and in output. It is still true that, for any given output of the industry as a whole, the output of the equilibrium firm must be such as to make its marginal costs and its average costs equal. But, as the output of the industry as a whole varies, both the output of the equilibrium firm which will make these two things equal and also their magnitude when they are equal may vary indefinitely in either direction. Even, therefore, if the prices of the materials and machinery bought from outside do not vary with variations in the scale of our industry, its own supply price may vary. Many-firm industries of the generalised type are thus perfectly free to conform to the law of increasing supply price, constant supply price, or decreasing supply price, or to any combination of these laws in respect of different quantities of output. Fig. 3 on p. 797 still correctly represents the conditions of supply in the equilibrium firm when the aggregate demand is such that OM units are being purchased from that firm at a price PM per unit. But now, when the aggregate demand alters, the curves SS m and SS a alter also. They move upwards or downwards, or they change their shape, or they do both these things. After the change, as before, equilibrium is only attained when the selling price is equal to both the average cost and the marginal cost of the equilibrium firm. The output of that firm is still measured by OM, where M is the base of a perpendicular drawn from the point of intersection of SS m and SS a; but, nevertheless, both the selling price and the output of the equilibrium firm may be different from what they were before the change.


§ 15. I call the output in any industry which maximises the national dividend, and, apart from the differences in the marginal utility of money to different people, also maximises satisfaction, the ideal output. As was shown in Chapter XI. of Part II. this output is attained—the possibility of multiple maximum positions being ignored—when the value of the marginal social net product of each sort of resource invested in the industry under review is equal to the value of the marginal social net product of resources in industries in general, or, more strictly, in the central archetypal industry of Part II. Chapter XI. § 1. In this central archetypal industry each sort of productive resource will have a value in money per unit equal to the value of the net product of a marginal unit of it. Hence the ideal output in our particular industry will be that output which makes the demand price of the output equal to the money value of the resources engaged in producing a marginal unit of output; in other words, it will be the output that makes demand price and marginal supply price to the community equal.


§ 19. The ideal output is attained, as was stated above, when the marginal supply price to the community is equal to the demand price.


The output proper to simple competition is attained when the supply price is equal to the demand price.


The output proper to discriminating monopoly of the first degree is attained when the marginal supply price to the industry is equal to the demand price.


§ 21. In a one-firm industry when and the supply price of an output y is, therefore, the analysis of the preceding discussion is applicable, the formal expression of it needing to be modified only so far as to provide for the identity of xr and y. In a one-firm industry, in which marginal cost exceeds average cost, something different is needed. The marginal supply price to the industry and the supply price are both equal to F'( y). Therefore, if no transfer elements are involved, so that the marginal supply price to the industry is equal to the marginal supply price to the community, and output equating supply price and demand price—which, in this case, is the output proper alike to simple competition and to discriminating monopoly of the first degree—will be equal to the ideal output, in spite of the fact that the industry conforms to the law of increasing supply price. This case in general can only occur when imported ingredients of increasing supply price are being used. If transfer elements are involved, an output which equates supply price and demand price will be less than the ideal output. *60


§ 22. In the preceding discussion it has been tacitly assumed that the demand curve is also what may be called, by analogy with supply, a curve of marginal demand prices. This is not necessarily so. The marginal demand price of a quantity y of any commodity is the difference between the desiredness (as measured in money) to consumers in the aggregate of annual (or weekly) purchases of a quantity y and of a quantity ( y + Δ y) respectively. The demand price of y units is the price that maintains an annual (or weekly) purchase of a quantity y. Hence it is equal to the desiredness (as measured in money) of the least desired increment (Δ y) in a quantity y to the purchaser of that increment. If then the purchase of the marginal unit indirectly increases or diminishes the desiredness of their holdings to the purchasers of other units, the marginal demand price and the demand price will be different. For commodities the desire for which is partly a desire for the uncommon the curve of marginal demand prices, which, for a nil purchase, coincides with the demand curve, will fall further and further below it as purchases increase: for commodities the desire for which is partly a desire for the common the opposite of this is true; while for commodities which are desired solely on account of the direct satisfaction they confer, the two curves are identical. *61 When the curves diverge, maximum satisfaction—the parties concerned being assumed to be similar in wealth and temperament—is attained with an output that equates marginal supply price, not with demand price, but with marginal demand price.


§ 23. If the State, seeking to protect consumers against a monopoly, fixes a maximum price at the level proper to free competition, it is obvious that, under decreasing or constant supply price, the monopolist will gain by increasing his output up to the amount that would have been produced under free competition. If, however, conditions of increasing supply price prevail, the amount which it will pay the monopolist to produce, namely, the amount which will maximise output multiplied by the excess of the regulated price of sale over the supply price, is necessarily less than the competitive output. It may be either greater or less than the output that would result under unregulated monopoly. If the curves of demand and supply are both straight lines, it will be exactly equal to this amount. This is readily seen by inspection of a suitably drawn diagram.


§ 24. If, under conditions of increasing supply price, the State fixes a maximum price, less than the monopoly price but greater than the competitive price, it is probable in general that the output will be intermediate between the competitive output and the output proper to unregulated monopoly. If the curves of demand and supply are both straight lines, this result is certain.Figure. Click to enlarge in new window.Construct a diagram (Fig. 9), such that PM represents the competitive price, and OM the competitive output; while QN represents the monopoly price, and ON the monopoly output. Let the State controlled price, measured by OV, be greater than the competitive price, but less than the monopoly price. Through V draw a horizontal line VBT cutting DD 1 in B and SS 1 in T. It is easily shown that the monopoly output ON is one-half of the competitive output OM, and that the output, which it will pay the monopolist to produce when the price is fixed at OV, will be measured by one-half of the line VT, drawn horizontally through V to cut SS 1 in T, or by the line VB, according as the one or the other of these lengths is smaller. But, since OV is greater than PM, it is obvious that VT is greater than OM. Consequently one-half of VT is greater than one-half of OM. This proves that the output at the controlled price is greater than the monopoly output; and, since VB must be less than RP, it is necessarily less than the competitive output. That is, it lies somewhere between the two.


§ 25. An extension of the foregoing argument shows that, in the conditions contemplated, when the demand and supply curves are straight lines, the level of controlled price, which will make the output larger than any other level would do, will be that which causes the intersection point of VT and DD 1, namely, the point B, to be identical with the middle point of VT, namely, the point H. If the angle SDP be θ and the angle DSP be φ, this output can be shown to be equal to the output proper to simple competition multiplied by the fraction


§ 26. Consider an industry in which conditions of decreasing supply price prevail, but in which the supply curve lies wholly above the demand curve, so that neither under simple competition nor under simple monopoly can any output take place. Figure. Click to enlarge in new window.Draw the demand curve DD 1 and the supply curve SS 1 as in Fig. 10. Through S draw a curve SS 2 such that, if a perpendicular be drawn from any point P on SS 1, to cut SS 2 in Q, and the figure be completed as drawn, the area SQMO is equal, for all positions of P and Q, to the rectangle KPMO. If DD 1 lies throughout below both SS 1 and SS 2, it is obvious that no output can occur under monopoly plus discrimination of the first degree, just as none can occur under simple competition. It may happen, however, in some industries of decreasing supply price, that DD 1, while lying below SS 1 cuts SS 2. If it cuts it once it must obviously cut it a second time. Let it cut it in R and Q. Then, under conditions of simple competition, no output can occur. But under conditions of monopoly plus discrimination of the first degree, provided that the area RQ is greater than the area DRS, an output OM will yield aggregate receipts in excess of aggregate costs, and will, therefore, be forthcoming. This result is more likely to be achieved, the more steeply the curve SS 1 slopes downward (that is to say, the more strongly the law of decreasing supply price works); because, the steeper is SS 1, the larger, when the distance OM is given, is the area PQS, and, therefore, the greater is the range of demand curves that will make the area RQ greater than the area DRS. Given the inclination of SS 1, it is also more likely to be achieved, if the demand curve does not slope downward steeply in its earlier stages (that is to say, if the demand is elastic till fairly low price levels have been reached).


§ 27. Monopoly plus discrimination of the second degree, as defined on p. 279, approximates in its effects towards monopoly plus discrimination of the first degree, as the number of different prices which it is possible for the monopolist to charge increases. This result, which is obvious in general, can be worked out exactly in a particular case. Let the output proper to discrimination of the first degree be a, and let n be the number of different price-groups. On the hypothesis that the demand and supply curves are straight lines, it can be shown that, when the commodity obeys the law of constant supply price, the output will be equal to for all values of n. That is to say, if one price only can be selected, the output will be ½ a: if two prices can be selected, 2/3 a, and so on. When the commodity obeys the law of decreasing supply price, the output, if n is equal to 1, will still be equal to , but, if n is greater than 1, it will be somewhat less than this.


§ 28. Figure. Click to enlarge in new window.Our next problem has to do with the relative outputs under discriminating monopoly of the third degree—as defined on p. 279—and of simple monopoly respectively. Let conditions of constant supply price prevail, and let there be two markets only. Then if the curves of demand in both markets are straight lines, precise results can be obtained. Let D 1D 2 and D' 1D' 2 represent the demand curves of the two markets, and let SS' be drawn at a vertical distance OR above the base line, where OR measures the constant cost of production. Through D' 1 draw D' 1H parallel to SS', and, through H, draw a straight line HT, such that PT is equal to RP'. Then under discriminating monopoly the output for the two markets will be respectively ½RP' and ½RP. Under simple monopoly, if PH is greater than HD1, the output will be ½RT. But, since PT is equal to RP', ½RT = ½RP' + ½RP. Therefore, subject to the condition italicised above, the outputs under simple monopoly and under discriminating monopoly will be the same. If PH is less than HD 1, the output under simple monopoly will, in some conditions, be ½RP, and there will be no consumption in the less favourable market. When these conditions prevail, so that under simple monopoly nothing would be consumed in one of the two markets, the substitution of discriminating for simple monopoly increases the output; but except in these conditions the output is not changed. When the assumption of constant supply price is removed and it is allowed that increasing or decreasing supply price prevails, the results reached above are not modified, since it is only through a change in the quantity of output that increasing or decreasing supply price can be called into play. *62 Decreasing supply price, however, opens up a possibility referred to in Part II. Chapter XVII. § 13, and analogous to that examined in § 26 above, to which the preceding discussion has no relevance. This is that, in some conditions under which neither simple monopoly nor simple competition would have led to any output, discriminating monopoly may lead to some output.


§ 29. The central argument of Part III. Chapter VIII. can be brought into clear light by means of a diagram. Let us suppose the number of workpeople employed in any industry and the length of the working day to be given. It is then possible to construct a demand curve representing the employers' demand prices (in terms of product) for different amounts of exertion per unit time from a typical workman, and a supply curve representing the workman's supply prices (in terms of product) for different amounts of exertion. Units of exertion are marked off along O x, and the demand and supply prices (in terms of product) of different amounts of it along O y.


Since every increase of exertion on the part of workpeople enables employers to finish any given job more quickly, and so to start their machinery upon some other job, the demand curve DD' will slope upwards towards the right. Figure. Click to enlarge in new window.Since, if a man is at work at all, neither public opinion nor his own comfort will allow him to do absolutely nothing, the supply curve SS' will start at a point some distance along O x, and, thereafter, will slope upward somewhat steeply. Let it cut DD' in P. Through P draw PM perpendicular to O x, and PR perpendicular to O y. Then, apart from possible injurious reactions on capacity that are not here considered, the amount of exertion by a typical workman, which is most advantageous to the national dividend and economic welfare, is measured by OM, and the corresponding amount of his output by the rectangle OMPR. If the wage paid to him is wholly independent of his exertions and consequent output, the amount of his exertions will approximate to OS, and his output to OSQK. An amount of exertion OM, and consequent output OMPR, can be obtained either by the offer of a rate (in product) PM for each unit of exertion (which means each PM units of output); or by the offer of an aggregate wage (in product)—per day or whatever the time-unit may be—equal to OMPR, conditional upon the man producing OMPR units of output, any failure to reach this standard involving the payment of a considerably lower wage.


§ 30. Figure. Click to enlarge in new window.Let DD' be the employers' demand curve for labour and SS' the workers' supply curve in any district or occupation. Let PM be the wage that would result from free competition, i.e. that is equal to the general rate of wages for workpeople of the grade concerned; QM" the wage most profitable to the workpeople if they were combined; and RM' the wage most profitable to the employers. Then the range of indeterminateness described in Part III. Chapter VI. is constituted by all rates between QM" and RM'. There is necessarily exploitation if the employers succeed in paying any wage less than PM. Let us suppose that they succeed in paying a wage RM'. It follows that, if they obtain an amount of labour represented by OM', then the measure of unfairness in the wage is the excess of PM over RM', but the measure of exploitation is the excess of KM' over RM'. If the workpeople succeeded in establishing a wage larger than PM, the exchange index would necessarily fall on the demand curve to the left of P, say at the point Q, and we might speak of an exploitation of employers by workpeople, measured by the excess of QM" over FM".

This matter is best elucidated by means of a diagram. Let DD' be the demand curve, SS m the curve of marginal costs, and SS a the curve of average costs of a one-firm industry. Let OM units be produced and sold at a price PM, where P is the point of intersection between DD' and SS a. If the industry were to increase its output beyond OM, say to ON, the extra units would cost less than PM per unit to produce. But, nevertheless, on the assumption that all units are sold at the same price, ON units could not be sold at a less price than QN without involving the industry in a loss. Since, however, the portion of DD' that is to the right of P necessarily lies below SS a, it is impossible for an output ON to be sold at a price as high as QN. Hence, if the industry expands its output beyond OM, it will make a loss; and, therefore, it has no tendency to expand. When the curves SS m and SS a represent the circumstances of one equilibrium firm among many firms, the position is quite different. It is not now proper to draw a demand curve of the form of DD'. The price in the market would be absolutely unaltered by an expansion on the part of the equilibrium firm if its expansion were balanced by the corresponding contraction in other firms, and approximately unaltered—the equilibrium firm being supposed small relatively to the industry as a whole—if the output of other firms remained unchanged. Therefore the equilibrium firm could expand to ON and still sell at approximately the old price PM. Thus it could sell an enlarged output at more than the average cost of that output, and so make a gain. Hence, for one firm among many others, a state of things in which the supply price of the industry is equal to the average cost of the equilibrium firm, but greater than its marginal cost, is not a state of equilibrium