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Summary.— The significance of any given addition to our supply of a commodity or other object of desire declines as the supply increases. Its significance for any given supply is called its marginal significance. This marginal significance therefore rises or falls as the supply itself is contracted or expanded, and the margin drawn back or advanced. If there is a market price for any commodity, we supply ourselves with it till its marginal significance sinks to its market price; and seeing that all the early increments of supply have a higher value than that at the margin, though all are bought at the market price, it follows that the satisfactions we secure are worth more than the price we pay for them. Only at the margin is there a coincidence between the thing gained and the price paid for it. In more general terms, if we can exchange things for each other or choose between them, on certain terms, then we can increase our supply of the more valued thing at the expense of the other, thereby lowering the marginal significance of one and raising that of the other, till their significance coincides with the terms on which they are obtainable as alternatives. When this point is reached there is equilibrium; and successful administration of resources consists in establishing and maintaining such equilibrium. In making these exchanges or selections we are guided by the anticipated or estimated values of the things with which we are dealing, and if we make mistakes and fail to secure the marginal coincidence between what we have got and the terms on which we got it, the price we mistakenly paid does not affect the value of the thing for which we paid it. The scale on which all objects of desire are arranged and graded in a man's mind, spoken of in the last chapter, must be thought of as a scale of marginal values.

Hence the extreme importance of what is known as the doctrine of margins. We shall constantly find ourselves considering marginal services, marginal consumption, marginal significance, marginal expenditure, marginal values, marginal increments, and so on. (Marginal considerations are considerations which concern a slight increase or diminution of the stock of anything which we possess or are considering; the marginal service rendered to us by any commodity is that service which we should have to forgo if the supply of the commodity in question were slightly contracted; our marginal desire for more of anything is measured by the significance of a slight increment added at the margin of our present store. And the importance of this service, or the urgency of this desire, depends, as we have seen, on the quantity we already possess. If we possess, or have just consumed, so much of a thing that our desire for more is languid, then additions at the margin have little value to us; but if we possess or have consumed so little that we are keenly desirous of more, then marginal additions have a high value to us. And when we say of anything that we "would not take any more at a gift," it means that its marginal value to us has been reduced to zero. (Thus by increasing our supply of anything we reduce its marginal significance and lower the place of an extra unit on our scale of preferences; and suitable additions to our supply will bring it down to any value you please.) Thus, whatever the price of any commodity that the housewife finds in the market may be, so long as its marginal significance to her is higher than that price, she will buy; but the very act of putting herself in possession of an increased stock reduces its marginal significance, and the more she buys the lower it becomes. The amount that brings it into coincidence with the market price is the amount she will buy.)

In our example we have supposed that when she finds new potatoes at 2d. per lb., the first and the second pound for the week come higher on her relative scale than 2d., but the third lower. So she buys 2 lbs., but no more, and this brings the marginal value into coincidence with the price. A fortnight afterwards she finds new potatoes at 1½d. If she only bought 2 lbs. now, the marginal value of a pound, though less than 2d., would be more than 1½d., which is now the price she would have to pay for it; and she would therefore be refusing a good bargain in not buying more; and so too with a fourth pound; but a fifth pound would be worth less than 1½d., and she would make a bad bargain in buying it. By getting 4 lbs., then, she brings the lowered marginal significance of her supplies into coincidence with the present price. And when the potatoes come down to 1d., by increasing her purchases to 21 lbs. she again brings down the marginal significance of the commodity into coincidence with the still further lowered price. Of course, her mind does not travel continuously over all the pounds from the fifth to the twenty-first, realising their gradual decline in significance until the margin that coincides with the new price is reached. It is only in the neighbourhood of the critical point that she consciously considers the question, but nevertheless the principle is at work all along the line. Its action brings her without consideration down to the point at which she has to consider.

In hundreds and thousands of suburban homes the question is asked every day, "How much milk shall we take in to-day, ma'am?" or "How much bread?" and the housewife knows without consideration that if she ordered one loaf of bread and one pint of milk, the marginal significance of bread and milk would be higher than their price, and if she said six loaves and five quarts of milk, the marginal loaf and pint would not be worth their price. Such orders, therefore, never enter into her head. But she deliberates, perhaps, whether she will want three loaves of bread or four, or three loaves and a twist, or three white loaves and a half-loaf of brown, and whether she shall take three quarts of milk or a pint more or less. Thus, whatever the terms on which alternatives are offered to us may be, we detect in conscious action at the margin of consideration the principles which are unconsciously at work in the whole distribution of our resources. When potatoes were at 2d. the marketer perfectly realised that a first or second pound were each of them worth more than 2d. When the price was 1½d. (if all other conditions remained the same) the first and second pound would still be worth more than 2d. each, but the marketer is scarcely conscious of this fact, she is conscious only that a fourth pound is worth more to her than 1½d. and a fifth pound less. By the time they have come down to 1d. she has ceased to realise that a first and second pound are still each of them worth more than 2d., and a third and fourth still each of them worth more than 1½d., nor has she ever at any time reflected that all between the fifth and twenty-first are worth more than 1d. each, which is what she gives for them, though she is still conscious that a twenty-first is just worth or just more than worth 1d., and a twenty-second just not worth it.

Note, however, that it is more accurate to speak of the marginal significance of "the service rendered by the commodity" than of that of "the commodity" itself, because when the housewife, after consideration, has determined to get a fourth pound of new potatoes, thinking that it will be just worth 1½d. (the third having been worth more than 1½d.), that fourth pound is not earmarked as worth less than the rest, but is indistinguishable from the other three. But it remains true that 2 lbs. would have accomplished certain purposes or rendered certain services, and that 3 lbs. will render those services and certain additional services also, which additional services are still worth more than 1½d.; and further, that 4 lbs. will render the whole of the services rendered by 3 lbs., and certain additional services as well, and this last set of additional services are just worth 1½d. While we cannot individualise and earmark the fourth pound, therefore, or say that it performs a less valued service than the third, we can distinguish between the services rendered by 3 lbs. and the extra services rendered by 4. These extra services are what we call the marginal services of a pound; and these marginal services will vary as 4, 10, or 50 lbs. is the margin at which we take them.

This result, though it may seem rather startling, is in reality no more than the analytical restatement of the sufficiently obvious and familiar fact that a well-to-do person who has considerable supplies of most of the articles of his current consumption could support a small deduction without feeling it much, whereas if his supplies were reduced by three-quarters all round he would very distinctly feel any further small deductions from the residue. At his present margin small economies and adjustments do not cut into the quick, whereas at a margin further back they would; yet he pays no more for that proportion of his supplies that keeps him from starvation or from the feebleness of inanition than he does for that proportion which ministers to his comfort or perhaps his superfluity.

It is obvious, then, that whereas the successive units of our supply of any commodity occupy different positions on our scale of preferences, it is only the units close to the margin of actual or contemplated possession that engage our close attention. Thus the scale of equivalence to which we give particular consideration is that of the marginal units of our supplies. Henceforth, therefore, whenever we speak without special qualification of the place which a unit of any commodity occupies on our scale of preferences we must always be taken to mean the marginal unit; and we must remember that as the marginal significance of anything declines owing to the supply increasing, the volume of the total satisfaction derived from it grows. *5

If the reader will now turn back to page 47 and recall the problem that led us into the present investigation, he will perceive that the impossibilities involved in our supposition of minute accuracy strengthen our case instead of weakening it. We noted that whereas our general theory requires us to believe that for any given margin the last unit before will have a higher significance than the next unit after, it is nevertheless customary to ignore the difference in value and to speak of the units on each side of the given point as having precisely the same significance. And we now see that for any degree of accuracy and sensitiveness, however impossibly fine, with which we choose to endow our observer, this proceeding is absolutely justified if the units in question are taken small enough. We can always take increments so large that the significance of the addition or subtraction of each one of them can be distinctly felt and estimated, but at the same time so small that the difference between the significance of two of them taken in succession cannot be separately estimated, and therefore not only may be, but must be, ignored.

So the total difference of 4s. in value between the third and the fourth pounds may, if we like, be analysed into a difference of 3s. between the extreme half-pounds and a difference of 1s. between the mean half-pounds; and returning now to the difference between the inner or mean half-pounds that lie on each side of the 3-lb. point we may again analyse each of them into the extreme or most unlike and the mean or most like quarters. Taking the inner quarters we shall find them to be worth 2s. 7d. + one-eighth of a farthing, and 2s. 4d. + one-eighth of a farthing, respectively; the difference being 3d., or less than one-tenth of the higher and less than one-ninth of the lower amount. And the difference between the rates (10s. 4 1/8d. and 9s. 4 1/8d.) is only 1s. The table continues the successive halvings of the quantities considered till they are only a quarter of an ounce each, and at every step it rejects the more unlike outside halves and retains the more like inside halves of the pair last considered, thus narrowing down the increments, so that the difference between them not only goes on growing smaller, because the values themselves are smaller, but also becomes a smaller and smaller proportion of those smaller values themselves, because the latter are being made more and more like each other by the successive rejections of the most unlike portions of each pair. We see that the difference between the successive two-ounce increments, valued respectively at 1s. 3d. 0 33/64 f. and 1s. 2d. 1 33/64 f. is only ¾d., which is less than 1/19 of the lower and less than 1/20 of the higher term of comparison; and at the end of the table we find the difference between the two successive quarter-ounces on either side of the 3-lb. margin to be only 3/64 f., of which is less than 1/156 of the lower and less than 1/157 of the higher. As we compare smaller and smaller increments on each side of the 3-lb. margin we see that the significance of the higher one falls both absolutely as a quantity and relatively as a rate, because it is taken closer and closer up to the less significant end of the third pound, *7 whereas the significance of the lower one falls absolutely as a quantity, but rises relatively as a rate, because it is taken closer and closer up to the more significant end of the fourth pound. Thus the upper and lower rate are constantly approximating to each other, and the difference between them is constantly becoming a smaller and smaller fraction of either. The falling series (read for convenience to the nearest 1/8d. on the top line of the central row of Table II)

runs, as we pass from the pound to the half and quarter pound, etc.—

whereas the corresponding rising series (read on the lowest line) is—

The difference between each successive pair (read on the central line of either Table I. or Table II.) declines in accordance with a regular law, each difference being one half of the last. Thus by continuing the process we could make the difference as small as we pleased, though we could never make it nothing; and so we can bring the upper and the lower rate as near to each other as we please, though we can never make them identical. All this, together with the suggestion of the next step in our advance, will be made clearer by the inspection of the accompanying diagram.

We saw on page 56 that whatever we suppose to be the smallest quantity that the mind can register we can always fix upon two successive increments so large that the mind can appreciate the significance of each of them, but so small that it cannot appreciate the difference of significance between the two. But now let us suppose that there is a series of phenomena, obeying the law we are examining, so regular that there is no unit, however small, which would make it discontinuous—that is to say, which would reduce it to jumps. The passage of time may be taken as such a continuous phenomenon. And let us further suppose that there is a mind of such quality that no fraction, however minute, is small enough to escape being registered by it. This is what would be meant by supposing that our law worked with absolute accuracy. Let us make this supposition therefore. It would follow that our Table I. could be carried out as far as we chose, and the point would never be realised at which the differences between the successive units or the law of the decline in the successive differences would become too small to note. What should we then have? We should have a series of descending values beginning with 12s. and going down the series 10s. 10½d., etc., always approaching nearer to 9s. 10d. as we halved the unit; and a series of ascending values 8s., 8s. 10½d., etc., also always approaching nearer to 9s. 10d. as we halved the unit, but never reaching it. And if we took a sum ever so little higher than 9s. 10d. the falling series would at last get below it, or if we took a sum ever so little lower than 9s. 10d. the rising series would at least get above it. The sum of 9s. 10d., then, is absolutely fixed, and it represents a rate which is the limit alike of the significance of the third pound as you come down to its less significant end, and of the fourth pound as you come up to its more significant end. You may think of it equally well as the end of the third pound or as the beginning of the fourth. If, then, I say that 9s. 10d. a pound is the theoretical marginal value of tea, at the margin of three pounds, I mean that it is theoretically never quite true that either the last increment before or the next increment after the three-pound margin is valued at the rate of 9s. 10d., but that the rate of 9s. 10d. always lies theoretically between the values of these two increments, and the smaller they are the smaller, proportionally, is the theoretical error involved in saying that either or both of them is identical with it.

We may now epitomise our results. When we speak of the value of the marginal unit (at any given margin) we shall often mean the amount at which the last pound, or whatever it may be, is valued as a whole by the possessor, and shall not mean to imply that the next pound would be valued at the same amount. Sometimes we shall be thinking of the next pound to be obtained and shall call that the marginal pound without meaning to imply that the last pound possessed is not valued at a perceptibly greater amount. Which of these two pounds (each of which touches the actual margin with its lower or its upper limit) we mean, will depend upon the matter in hand at the moment, and the context will prevent any ambiguity. But sometimes the term "marginal value of a unit" is to be understood as applying at the same time both to the last and to the next unit; and in this case the implication will be that the units are large enough to be distinctly felt and valued, but so small that the difference of value between the two successive units is not felt. And this will always be a legitimate supposition. And lastly, we shall sometimes speak not of the marginal value of a unit of the commodity, but of the marginal value of the commodity per unit. And that expression would apply either to the actual rate of significance per unit of the increments just described, or to the theoretically limiting rate, the nature of which we have been examining. The implication in this last case would be that even though, however small the units we take, the last before the margin should always be valued at a little more and the next one after the margin at a little less than this rate, yet either can be brought as near to it as we please, and that it will always lie between them. It represents the point at the margin itself which the upper unit always touches at its lower end, stretching up from it, and the lower unit touches at its upper end, stretching down from it.

If we had taken any other margin, such as 5 lbs. or any other original set of estimates, we should have reached different, but always analogous results, and should have arrived at the same conclusions as to the legitimacy of speaking of marginal values, and as to the exact meaning of assigning such and such a marginal value to any commodity at any given margin. On our original data the marginal value of tea to this particular purchaser would be 19s. 10d. at the margin of 1 lb., 14s. 4d. at 2 lbs., 9s. 10d. at 3 lbs., 6s. 4d. at 4 lbs., 3s. 10d. at 5 lbs., and 2s. 4d. at 6 lbs. Marginal values intermediate to these will, of course, be reached at intermediate points. The marginal value of 17s. approximately corresponds to 1.49 lbs.; that of 7s. 6d. to 3.63 lbs.; that of 5s. to 4.48 lbs. The reader is supposed, if not a mathematician, to take it on trust that these special values are implicit in the original data, but he is supposed to understand, as the result of our investigations, that the original data, or any other similar group, necessarily imply the theoretical existence of definite marginal values, continuously declining, though they do not necessarily give us the means of determining them. *8 The estimates may be varied in any way we please, but so long as we suppose, in every case, a declining (though not necessarily a regularly declining) significance in value as successive increments are secured, we shall always be able to attach a precise significance to the conception of marginal value and shall always find it declining as the stream of supply broadens.

Now the same methods which we applied (asking the reader to take them on trust) to ascertaining marginal values of tea, which has now become our commodity A, if applied to the data of commodity B would yield the following marginal values at the end of each unit:—14s. 10d. at a margin of 1, 9s. 10d. at a margin of 2, 5s. 10d. at a margin of 3, 2s. 10d. at a margin of 4. It will be convenient here to tabulate the estimates of the successive units of A and B which were given us, and also of the marginal values they imply.

It will be noted that if the individual who forms these estimates has a supply of 3 units of commodity A and 2 units of commodity B per month (or other unit of time), the marginal significance of each of them will be at the rate of 9s. 10d. per unit. This means, in rigid theory, that any addition to either of them, however small, is valued by him at something less than the rate of 9s. 10d.; and any subtraction, however small, would be felt at the rate of something more than 9s. 10d. So that he would be the loser by curtailing his consumption of either by ever so small a fraction of a unit, in exchange for increasing his supply of the other by the same fraction. But if we are not speaking of an absolute theoretical margin, but of actual estimates, we shall mean that small increments or decrements of either commodity would alike be estimated, in this region, at the rate of 9s. 10d. a unit, so that it would be a matter of indifference to the possessor whether his supplies remained as they are, or a very small fraction of a unit were taken away from his supply of one of the commodities, and a like amount added to his supply of the other. In either of these cases we should say that if the terms on which the choice between the two commodities is offered him are terms of par—that is to say, if he can get any unit or portion of a unit of either of them by sacrificing the same quantity of the other,—he will have no interest in making any change, and his supplies therefore are in a state of equilibrium. Hence we may sometimes say that if a man's supplies are in equilibrium (at current prices) he would lose by making any change, and sometimes that a small change of one commodity for the other, on the terms open to him, would be a matter of indifference. It will depend upon whether we are considering quantities large enough to embrace a sensible rise or fall of significance within their several boundaries. Equilibrium does not exist if the possessor knows that he would gain by exchanging, on the terms open to him, a portion, however small, of either of the commodities for the corresponding portion of the other.

Thus, if the man had five units of A and 2 of B we should have—

And there will be an obvious advantage in giving a unit of A (5s.) for an extra unit of B (7s. 9d.). The man would then have 4 units of A and 3 of B, and we should have—

And it would no longer be to his advantage to exchange either a unit of A (8s.) for a unit of B (4s. 3d.), or a unit of B (7s. 9d.) for a unit of A (5s.). In the first case he would lose a value of 3s. 9d., and in the second a value of 2s. 9d. We see, then, that it might be possible in a loose way to speak of equilibrium if the possessor had no opportunity of exchanging smaller quantities than a pound; but we can also see that the equilibrium is not perfect or symmetrical, for, in the first place, an exchange in the direction of A for B would be more undesirable than one in the direction of B for A; and, in the second place, if we look at our table of marginal values, we shall see that the marginal value of A to the possessor of 4 units is 6s. 4d., whereas that of B to the same possessor, if his supply is 3 units, is only 5s. 10d. This indicates that he would be the gainer by exchanging a little of B, which he values at not perceptibly more than the rate of 5s. 10d., for a little more of A, which he values at not perceptibly less than the rate of 6s. 4d. Let us, therefore, look further into the matter. A double table (facing p. 70), on the principle of Table I.,

sets forth the fractional values of A round about the margin of four of the units, and of B round about the margin of three. The reader may test the consistency of these data, but will otherwise take them on trust, as before. The 8s. at which the fourth unit of A is estimated is made up of 4s. 5¼d. for the first half and 3s. 6¾d. for the second; and the 5s. at which the fifth pound is estimated is made up of 2s. 9¾d. for the first half-pound and 2s. 2¼d. for the second. If the man possesses 4 units of A, therefore the significance of the last half-unit he possesses will be 3s. 6¾d., and the significance of the next half-unit he would acquire 2s. 9¾d. Similarly, the 7s. 9d. at which the third unit of commodity B is estimated will be found to be made up of 4s. 4½d. for the first half-unit and 3s. 4½d. for the second; and the 4s. 3d. at which the fourth unit is estimated, of 2s. 6d. for the first, and 1s. 9d. for the second. Taking the margin, therefore, at 3 units, the last half-unit possessed will be estimated at 3s. 4½d., and the next half-unit to be acquired at 2s. 6d.; and we shall have—

But we have not reached a state of equilibrium. All the positions we have hitherto examined leave one of the marginal significances higher than the other. We saw that at 4 A and 3 B the marginal significances are respectively 6s. 4d. for A and 5s. 10d. for B, shewing that a small quantity of B can be advantageously exchanged for A. If we take the marginal values at 4 1/16 of A and 2 15/16 of B we shall find them to be 6s. 1 99/128d. for A, and 6s. 0 83/128d. for B, shewing that a very minute portion of B might still be advantageously exchanged for A. But if we take 4 1/8 and 2 7/8 we shall find the marginal values to be 5s. 11 19/32d. for A and 6s. 3 11/32d. for B, shewing that at these margins a little A might advantageously be exchanged for B. The actual point of equilibrium then lies somewhere between 4 1/16 A and 2 15/16 B, and 4 1/8 A and 2 7/8 B. In other words, to get the maximum advantage the man who has 4 A and 3 B should exchange something more than 1/16 and less than 1/8 of a unit of B for a corresponding fraction of A. On our data it will be found that 1/13 is the precise fraction. The theoretical or absolute marginal value of A at a margin of 4 1/13 is 6s. 1 45/169d., and the marginal value of B at a margin of 2 12/13 is precisely the same. Thus if the man distributes his seven units in any other proportions whatever than 4 1/13 of A and 2 12/13 of B, he would be able to shift them one way or the other with advantage. If they are distributed in this proportion, any change, however small, would involve sacrificing at a little more and acquiring at a little less than the significance of 6s. 1 45/169d. per unit.

We are still investigating the conception of marginal adjustment and the relation of marginal to total values; and as we have seen *10 that in ordinary life we seldom or never consider total values with any definiteness, or marginal values except in the close neighbourhood of the actual or contemplated margin of our supply, it will still be necessary to make large claims on the reader's imagination. Suppose, then, that in a besieged city, or under some merely imaginary circumstances of captivity, or what not, I had the option given me between a quart of water or a (half-quartern) loaf of bread per diem, for a week. If I were wise I should choose the water, for I should certainly have a better chance of surviving, and in any case should die with less suffering, on the water alone than on the bread alone. But if the ratio of a quart of water and a loaf of bread (each to count as a unit) were established, as terms on which I might choose between bread and water, and I were then allowed seven such units for the week, each to be taken in bread or water at my option, the problem of adjustment would become a nice one. I might ultimately choose a pint of water (half a unit) and half a loaf (another half-unit) a day. That would be 3½ quarts and 3½ loaves for the week. What would this mean? It would not, as we have seen, mean that I attach the same value to a pint of water and to a half-loaf in the abstract, or under all conditions; for if I had no provision of either, I should prefer the pint of water. On the other hand, if I had 7 pints of water and 3 loaves for the week, I should, it appears, prefer another half-loaf to another pint of water. The relative values of a pint of water and a half-loaf of bread therefore depend on the supply of each that I already have; and if, being free to subdivide as much as I choose, I arrive at the balance we have supposed, it means that if I had 7 pints and 7 half-loaves for the week I would not exchange the smallest amount of bread for water, or of water for bread, at the rate of a pint of water to the half-loaf. That is to say, the values of bread and water at the actual margins exactly coincide with the terms on which the alternatives between them are offered me. But though they correspond thus at the margins the significance of water rises more rapidly as we depart from the margin than that of bread does. It would be a matter of practical indifference to me whether I lost a very minute amount of water or a very minute amount of bread in the proportion of a quart to the loaf, or a pint to the half-loaf, but it would not be a matter of indifference to me whether I had lost a large part of my supply of water or a large part of my supply of bread in that same proportion. The marginal value of the unit of bread and of the unit of water, then, are the same; but the total value of the water is higher than that of the bread, and the value of any considerable fraction of the water is higher than that of the corresponding fraction of bread. Thus, if my allowance were diminished I should economise more in bread than in water, and if it were reduced very low I should take it all in water. And note also that if the allowance were much increased I should take out most of the increase in water too, for the significance of water not only rises more rapidly than that of bread as we recede towards the first increments, but also, after a time, declines less rapidly as we advance. A loaf a day would be about as much as I should want to eat; but I should always be glad of more water, until I had enough to wash comfortably or even to bathe in. The significance of a pint of water, then, begins at a higher point than that of a loaf of bread. It declines rapidly at first, but after a time very slowly. Whereas the value of a loaf of bread begins lower than that of a pint of water and falls more slowly at first, but after a time declines rapidly, almost abruptly.

We have now seen that if the terms on which bread and water are offered me are a pint to a half-loaf, then, whatever my allowance may be, I shall so distribute it as to bring the marginal significance of bread and water into correspondence with these terms. But what if the terms themselves are changed? What if a pint is to be the equivalent, not of a half-loaf, but a whole one? That is to say, let us suppose that I have now the covenanted right to draw seven pints and three and a half loaves per week, but I may if I like sacrifice a pint for a loaf, or a loaf for a pint, so that if I took it all out in bread I should now have ten and a half loaves a week, and if I took it all out in water, ten and a half pints (five and a quarter quarts). There will no longer be equilibrium at 7 pints and 3½ loaves, for at this margin, as we have seen, it is only just not worth while to buy bread for water at the rate of a pint for half a loaf. Obviously, therefore, it is well worth while to buy it at the rate of a pint for a whole loaf. Only for a small exchange, however; for as I increase my allowance of bread it becomes (perhaps rapidly) less significant to me, and as I decrease my supply of water it becomes more significant to me. So I shall perhaps go no further than exchanging one pint of water for one loaf, and the balance will be struck at six pints of water and four and a half loaves of bread.

Next let us imagine a peasant who grows his own foodstuffs and also sells some of his produce. He can get 7s. a cwt. for potatoes and 14s. a cwt. for meal (meal, we will suppose, being the form in which he sells or consumes his grain); and these being the prices, he determines to keep 12 cwt. of potatoes and 10 cwt. of grain for his own use. He might have raised the same sum of money by selling less potatoes and more grain, or vice versa, and if he had sold more of one he would have held more of the other. In choosing, therefore, as he does, he shews that 12 cwt. of potatoes and 10 cwt. of meal are more valued by him than either 13 cwt. of potatoes and 9½ cwt. of meal, or 11 cwt. of potatoes and 10½ cwt. of meal; for each of these alternatives is open to him, and he embraces neither. We see, then, that he will not forgo half a cwt. of meal for a cwt. of potatoes, nor a cwt. of potatoes for half a cwt. of meal. Now we will suppose that the price of meal and cereals remains constant, but that after our peasant has struck the balance and laid up his provisions for the year the price of potatoes rises from 7s. to 7s. 3d. We will ignore the difference between the buying and selling prices, and will suppose that he can buy back a cwt. of meal on exactly the same terms on which he could have kept it. Now we saw that at the margins of 10 cwt. and 12 cwt. he would neither give a cwt. of potatoes for half a cwt. of meal, nor half a cwt. of meal for a cwt. of potatoes, but it does not follow that he will not give a cwt. of potatoes for half a cwt. of meal plus 3d. The change in the terms may just induce him to make the exchange. Let us suppose that this is so. An advance of 3d., but nothing less, would just induce him to sell a cwt. of potatoes. We might therefore be inclined to say that in that case, since 3d. represents the difference in value to him between a cwt. of potatoes and half a cwt. of meal, it would follow that if potatoes fell to 6s. 9d. instead of rising to 7s. 3d. he would sell a half-cwt. of meal for 7s., buy 1 cwt. of potatoes for 6s. 9d., and secure 3d., which represents the difference between his estimate of the two. But this is a rash inference; for it may be that starting with 12 cwt. of potatoes and 10 cwt. of grain he would find the exchange of half a cwt. of grain for a cwt. of potatoes either more or less distasteful than a change the other way. He requires the premium of 3d. to make him change the potatoes for the grain, but it is possible that he would change the grain for the potatoes for a premium of 2½d., or that he would not do it for less than 3¼d. As in the case of the bread and the water, one of the commodities may rise in significance more rapidly than the other as we recede from the margin, or fall less rapidly as we advance beyond it. But, however this may be, if 3d. just, and only just, induces him to sell 1 cwt. of potatoes, it would require a higher premium to make him sell 2 cwt., for the change from 12 and 10 to 10 and 11 would constitute more than twice the disturbance of the change from 12 and 10 to 11 and 10½.

The art of successful administration consists in so distributing our resources that the marginal significance of all the things we secure corresponds to the terms on which we can get them. These terms may be considered as registering the price we must pay in the sacrifice of any one commodity or satisfaction for the acquisition of any other. Thus they are all connected by a system of external equivalences according to which they may be had in exchange for each other. This we may call the system of their "prices" (in the large sense), measured in each other. And they are all connected by a system of internal equivalences according to which each of them is worth, at the margin, so much of each of the others. This we may call the system of their "worths," measured in each other. Successful administration of resources brings these two systems into coincidence. It can always do so, for every change of administration modifies the system of worths; it can always be modified in the direction of conformity to the system of prices until it coincides with it; and every such modification increases the volume of desired results, till the coincidence brings it to its maximum.

But we must carry all this further, and must generalise our results. It is not only such things as bread, water, plums, and potatoes that change their marginal value according to the breadth of the supply. I value an extra hour's leisure in the day, or an extra half or quarter day to my week-end, more or less according to the amount of daily leisure or the amplitude of the week-end. I already enjoy. If I am considering whether I will take a piece of work for which I shall be paid at the rate of 10s. an hour, then (if we neglect the consideration of any irksomeness or any pleasure that the work itself may give me, and look upon the hour simply as subtracted from other occupations) it is easy to see that if I have abundant leisure and am severely straitened for cash, I shall be likely to accept the offer, and if repeated offers come to me I shall go on accepting them. But each successive half-sovereign a week becomes less important, as I am better provided with cash, and each successive hour withdrawn from other occupations involves a greater sacrifice as my reserve of leisure contracts. At last I shall reach the point at which the sacrifice of another hour, at the raised margin, will just compensate the acquisition of another half-sovereign at the lowered margin.

Suppose I can command as much work as I like at 10s. an hour, and I choose to make 250 working days in the year, and to work 6 hours a day, so that I have an income of £750 a year, and suppose I do not care to increase it by £125, at the cost of an extra hour's work per diem. Perhaps I should be willing to work an extra hour a day if I could thereby raise my income by £250. Suppose, however, that I can command as much work as I like at £1 an hour. If I still work 6 hours a day for 250 days, my income will be £1500 a year. It is possible that I may care to make it £1750 by working an extra hour. It is more likely that I may prefer shorter hours or longer holidays. I might choose to earn only £1000, working 4 hours a day for 250 days, or 5 hours a day for 200. Or it might chance, by a mere coincidence, that I went on working just at the same rate of 6 hours a day for 250 days. That is to say, 10s. at the margin of an income of £750 may have more significance to me than £1 at the margin of an income of £1500, or it may have less, or it may, by a coincidence, have exactly the same. In the first case I should work shorter hours for the higher fee, in the second case I should work longer hours, and in the third case just the same number. But in any case either 10s. or £1 will have more significance at the margin of an income of £750 than at that of an income of £1500.

Thus the same law holds in intellectual, moral, or spiritual as in material matters. Cæsar tells how when surprised by the Nervii he had barely time to harangue his soldiers, obviously implying that the harangue was shorter than usual. He felt that a few moments, even at such a crisis, were well devoted to words of exhortation to his troops; but their value declined at the margin, and the price in delaying the onslaught rapidly rose; so the moment was soon reached when the time could be better spent than in prolonging a moving discourse. In a story of South America, after the war, we are told of a planter who, when warned by his wife in the middle of his prayers that the enemy was at the gate, concluded his devotions with a few brief and earnest petitions, and then set about defending himself. Had he been a formalist those final petitions would never have been uttered at all; but under the circumstances the impulse to prayer, though sincere and urgent, became rapidly less imperative and exacting relatively to the urgency of taking steps for defence, as the successive moments passed. The most pious biographers of Alfred the Great praise him for "charging like a boar" at the Battle of Ashdown while his brother was still engaged in prayer; and an entirely devout and sincere person may find himself in the dilemma of having either to curtail (or omit) family prayers or to hurry a guest over his breakfast and perhaps run him uncomfortably close for his train. If he shortens, but does not omit, the prayers, it shews that he attaches declining significance to his devotions as minute is added to minute. And in this we shall see nothing ludicrous, as soon as we give up the cant of the absolute in a world in which all things are relative.

This example will explain why I have occasionally used the cumbrous phrase "the quantity we possess or contemplate ourselves as possessing." It is clear that the marginal increments or decrements we consider are very often taken not at the margin of our actual possessions, but at the margin of the quantity which we have provisionally determined to acquire, or which, for any other reason, we contemplate ourselves as possessing, and take as the basis of our calculations.

The great principle of the declining significance of successive increments of valued possessions, acquisitions, or indulgences, has now been sufficiently illustrated; but before we can safely go on to the next main point we must say a few words in answer to objections that are frequently urged against the doctrine we have been expounding, and must also make certain explanations. It will be convenient to use the technical term "origin" as a contrast to "margin," meaning by the "origin" the point at which supplies of anything begin, and by the "margin" the point which they have reached, actually or in contemplation. Thus when we have a small supply of anything the margin will be near the origin, and when we have a large supply it will be remote from it. Now it is not safe to assert that the significance of any commodity declines for successive increments, unless we add the qualification "after a certain point." It may be that near to the origin the significance does not fall, but rises. We are all familiar with the fact that it is often easier to go without a thing altogether than to have a taste of it and then stop; and many people would prefer no supply at all to a very small supply of something they value.

But even with this qualification the principle is assailed by objections, many of which have already been met by anticipation, but some of which it will be well to consider expressly. It is said, for instance, that though the principle holds for gross material things, each one of which soon produces satiety, yet it does not hold for intellectual or æsthetic satisfactions, nor even for the general command of commodities and services, represented by money. The more a man knows, it is said, the more he wants to know; the more he reads, the more he wants to read; the more music he hears, the more he wants to hear; and very often the more money he has, the more he wants to increase his stock. We will begin with the alleged case of money. It may be true of many men, though it is not true of all, that the more money they get, the keener they are on getting more; but we ought surely to have learnt by this time to be on our guard against vague and indefinite forms of statement concerning matters which are essentially quantitative. The man who has an enormous income may be even keener on "making money" than he was when he was struggling upwards on 30s. a week; but he is not keener on making an extra 1s. a week than he was. He has now no gauge in his mind sensitive enough to feel an addition of £2:10s. to his annual income; and if you ask him to work an extra hour a week, or to incur any appreciable sacrifice, or to put his brains about in any way, in order to secure so trifling a result, he will laugh you to scorn. If you want him to do anything in order to get more money, you must change the terms. There is no such thing as the marginal significance of "money" any more than of "wheat" or of "leisure," unless both the margin and the unit are stated; and the marginal significance of any specified unit, whether it be 1d., 1s., £1, or £100, has notably declined to this man as his income has risen from 30s. a week to £100,000 a year.

Let us examine this principle further. We have seen, in comparing the different applications of milk in an ordinary middle-class family, that if the administration is ideally carried out, the significance of the last small increments of milk are equal in all its ordinary applications. The first thimbleful of milk given to the baby is immensely more significant than the first thimbleful given to the children or reserved for afternoon tea; but if the last thimbleful given to the cat does not perform as important a service as the last thimbleful given to the children, there would have been a gain in giving her a little less and them a little more; and there has therefore been a failure in administration. The cost of giving more to one applicant is giving less to another, and good administration consists in avoiding any application which costs more than it is worth. But as well as balancing all the uses of milk, at the margin, one against the other, the housekeeper has to balance them all, collectively, against every other alternative expenditure of the money she paid for milk, and this opens up another source of possible mistake. In taking in the milk for the day or half-day the housewife considers, consciously or unconsciously, what the significance of the last thimblefuls applied to all the varied purposes, when properly balanced, will be. The answer to the question, "How much milk shall we take to-day, ma'am?" depends on a rapid survey of the programme of the day. If milk is 4d. a quart, the aim is to take in such an amount that the last half-pint shall be just worth 1d.; that is to say, the last thimblefuls in every application, brought into equilibrium of marginal significance with each other, should collectively be worth just as much as anything else on which the 1d. might be spent. But unforeseen contingencies may arise. There may be a great ink-spill, and milk may be wanted to take out the stain while fresh. A little sapling, laden with many associations, may arrive, to grow in the garden or yard, and some one may have read that milk comforts and revives the roots of trees that have felt a journey. The dog may have eaten phosphorous poison, and some one may know that the proper remedy is to drench him with milk. And these sudden and unexpected claims have not been anticipated or provided for. It may really be the case (especially if you live in the country) that more milk cannot, without great difficulty, be got for some hours; or if you live in the town, it does not occur to you (owing to mental inertia) that there is any way of getting more milk except the customary one of waiting till the milk-man comes round again. And so a new set of claimants on the day's supply of milk, of which there was no thought when the milk was taken in, has been introduced. In the case of the poisoned dog, it might well be that even the baby would be put on short allowance for a certain period, or driven to some substitute, in the hope of saving the life of an inmate of the house, whose loss would be long and sincerely mourned. Now it may be perfectly understood that there are always such risks, but it is bad economy to provide for a risk as though it were a certainty, and therefore when such a contingency occurs it will set up an urgent demand for which it would not have been reasonable to make provision. It must therefore be met out of the general stock, and all the other uses will be trenched upon. The last thimblefuls will still be kept in equilibrium, but each will meet a more clamorous demand than usual, the lower or less clamorous demands not being met at all; and if the dog has been poisoned, probably the cat will get nothing, even her initial and most urgent claim not being able to compete for a place amongst the higher demands that alone can be satisfied now.

The reader, I repeat, may be surprised at so much insistence on so obvious a fact; but let me warn him once more that this fact, so open and obvious here, will meet him again and again, under deep and subtle disguises, in every region of economic study. He will do well to scrutinise it closely now, in order that he may recognise it whenever he meets it hereafter. If the price that we pay for an article made it marginally worth what we had paid for it—that is to say, if there were any causal connection that made the value at the margin dependent upon the price—then there would be no difficulty whatever in administering our resources; for everything would be worth what we had given for it, just because we had given it, and it would make no difference how our supplies of anything else might stand. Whereas in reality the whole art of wise expenditure consists in deliberately bringing about a coincidence between "price" and marginal significance, which by no means looks after itself, and which will fail if we buy either too little or too much of anything.

The problems on which we have been engaged have led us to consider special cases of balancing present privations against future immunities, and we have seen how it may often be worth while to escape proximate privations at the cost of incurring remote ones. If there is a question between paying £10 a quarter for twenty years on the one hand, or £20 a quarter for ten years and nothing for the other ten, we may consider it in this way:—Taking £10 a quarter for ten years as fixed and not open to question, I have the alternative of adding the other payment of £10 a quarter for ten years either concurrently or successively at my option; that is to say, I can escape a payment in the remote future by making a payment in the proximate future, or vice versa. If I choose, under these conditions, to pay in the remote rather than the proximate future, it is not, so far as the data shew, because the one is near and the other is far, but because the near payment would have to be made under less favourable conditions than the far payment, and is therefore intrinsically more irksome, for it would have to be encountered at a less favourable margin. If the choice were between £10 a quarter for twenty years, and nothing for the first ten years but £20 a quarter for the last ten, it would still be good economy to make payments of £10 at the more favourable margin and secure immunity from payments which would have to be made at a less favourable margin, though now the favourable conditions would be near and the unfavourable ones far. Thus the very same principles of prudence may make one man save money in his early married life in order to have it when he wants it more in the future, for his children's education, and may make another (or even the same) man rent a house instead of buying it, because if he defers the expenditure of the greater part of the sum he will have to pay altogether, he will pay it over a period in the future during which he can better spare it than he could spare it in the lump at present.

Were one or both of the articles capable of small subdivision, the intervention of a third article as a make-weight need not be contemplated. We find, for instance, in a number of Exchange and Mart that a gentleman wants "children's new boots," and offers in exchange for them "fine old cigars." Jones, then, who has fine old cigars, and wants children's new boots, cannot, so far as our evidence goes, be said to prefer boots to cigars in the abstract, but he prefers a pair of boots of given size and quality to a certain number (more or less closely defined in his own mind, but not revealed to the public) of his "fine old cigars," and he thinks it likely that some one else will prefer that number of the cigars to such a pair of children's boots. That is to say, Jones imagines that there may be some Robinson on whose scale of preferences old cigars stand higher with respect to new boots than they do on his own. The conditions of exchange are present, then, if Jones possesses a supply of any commodity x, and Robinson of any commodity y, provided that (relatively to x) y is higher at the margin on Jones's scale than on Robinson's. And here we need say nothing about units; for though it would be nonsense to say that y stands higher on Jones's scale than x does, unless we state the unit (or unless x and y are single concrete objects), yet it is sense to say that any arbitrarily selected small quantity of y stands higher, at the present margins, relatively to any arbitrarily selected small quantity of x, on the scale of Jones than it does on the scale of Robinson; and we need not state what the small quantities are. I cannot tell you whether butter or jam stands higher on my scale unless you tell me whether I am to have an ounce or a pound of butter as an alternative to a pot of jam; but I may be able to tell you that I estimate butter (whether an ounce or a pound) as worth more jam than my neighbour does. And note here, once for all, that if y is higher in relation to x on my scale than on yours, it follows that it is lower on your scale than on mine, and also that x is higher in relation to y on your scale than on mine, and lower on mine than on yours. So that any one of these four statements carries the other three with it.

We may now advance to the general statement, that if the marginal significance of anything (old cigars) of which I have a supply stands lower on my scale than it does on yours with reference to something else (children's boots) of which you have a supply, I shall be able to offer you terms on which an exchange can be made to our mutual satisfaction; provided, of course, that the articles are in their nature exchangeable. And as our previous investigations have made us familiar with the thought that if a man possesses a large stock of any commodity, a unit of it will take a lower place on his relative scale at the margin than if he has a smaller stock, it follows that as I increase my stock of children's new boots and diminish my stock of cigars the marginal value of boots relatively to cigars declines to me; whereas you are reducing your stock of boots and increasing your stock of cigars, and the marginal value of cigars relatively to boots is declining to you. To each of us, therefore, the significance of that which he began by estimating relatively higher has declined, and the significance of that which he began by valuing relatively lower has risen; and thus the relative marginal values approach more nearly to equality. As long, however, as any difference continues to exist the conditions for a mutually advantageous exchange will still be present; unless, indeed, I have parted with all my cigars, or you with all your boots. In that case I may still think less of cigars relatively to boots than you do, but if I have no cigars, or if you have no boots, we cannot make an exchange. A relatively low estimate on my part of something I have not got does not induce business. If I value oats less highly in comparison with barley than you do, but have not any oats to give you for your barley, my relative underestimate of oats does not result in any exchange. A man once boasted that he had been offered the whole site of Chicago for an old pair of boots, and when asked why he did not close with the offer, replied, "I didn't have the boots." The conditions, therefore, for mutually advantageous direct exchange are that two men, who have access to each other, should differ in their estimates of the marginal significances of some two commodities, and that each should possess a supply of that commodity which he relatively underestimates.

Let us try to realise exactly the point we have reached. Some men eat tripe, but not beef, and others eat beef, but not tripe. Both these sets may occasionally eat bacon. It follows from the whole course of our inquiries that, in a state of equilibrium, tripe and bacon take the same relative places at the margin on the scales of all who consume them; for if they did not, then the conditions of exchange would exist and there would not be equilibrium. Their market or equilibrating prices represent the position they occupy relatively to each other on all the scales, and that position is identical for all of them. And, again, if any one does not consume them at all, it is because no portion of them is worth the market price to him. That is to say, they stand higher at the margin on the scales of all who buy them and give the market price for them than on the scales of any who do not buy them because they are not, even at the origin, worth the market price to them. In like manner bacon and beef have their uniform place relatively to each other on the scales of all those who consume them; and these places also are represented by their market prices. Thus the market prices reveal the relative marginal significances of tripe and bacon to all who consume them, and of bacon and beef to all who consume them; and so, even if there is no class of consumers who eat both tripe and beef, the places of tripe and beef on the communal scale relatively to each other are fixed, because each of them is fixed relatively to the place of bacon. In all cases, then, the market or equilibrating price of a thing represents a relative place on individual scales which is identical for all consumers.

But now we must turn to the other qualification. We have seen that on every man's relative scale articles that do not "enter freely into the circle of exchange" are registered. With respect to these there is no uniform communal scale at all. Food and writing materials must theoretically occupy the same relative places on the scales of any two individuals who habitually supply themselves with both and who have access to each other; for if not, they might advantageously exchange with each other. But it does not follow that either of these things will occupy the same place relatively to the desire to escape the weariness of an extra half-hour's work at a certain margin, or the desire to be relieved from a certain intensity of hunger. To secure the same amount of food or of writing materials, one man may be willing to work when his nerves and muscles cry aloud for repose, and another man may not be willing to walk across the street or to turn a shovelful of earth. And to increase his stock of writing-paper by a certain amount, one man may be willing to stop eating when his appetite is still fierce, while the other does not and would not endure any conscious privation for it at all. Because, in dealing with weariness and hunger, we are dealing with things that cannot be shifted from man to man, for which there is no direct market of exchange, and which therefore cannot adjust themselves on individual scales to any common standard. The significance of tripe relatively to bacon is identical on the scales of all who consume both. But the significance of tripe relatively to health, happiness, and domestic affection may vary indefinitely on the scales of two members of the same community; for the man to whom it means more happiness than it does to another cannot give the other so much happiness in exchange for it—he can only give him so much bacon. When William Cobbett was a private soldier, he had once "made shift to have a halfpenny in reserve" out of his pay, with which he meant to buy a red herring in the morning. "But," he tells us, "when I pulled off my clothes at night, so hungry then as to be hardly able to endure life, I found that I had lost my halfpenny! I buried my head under the miserable sheet and rug, and cried like a child!" He was not a soft man, and yet missing an expected red herring was a matter for tears to him. At that very time he was elaborately educating himself, buying books, pens, ink, and paper out of the farthings or halfpence he saved from his pay—halfpence, therefore, which were in competition with red herrings and the like. It follows, then, from the observations we have just made on markets, that red herrings, books, pens, etc., occupied the same place relatively to each other on Cobbett's scale as they did on those of other members of the community who purchased and possessed them, and the loss of a red herring or half a quire of paper would be, relatively to other things in the circle of exchange, no more serious to him than it would be to you or me. But vitally? With reference to things that are not in the circle of exchange?

But the principle of declining marginal significance applies here too, and works in with the distinction between that which is necessary for the accomplishment of our desires and that which is itself intrinsically to be desired. These exchangeable things, which are necessary, are necessary in a diminishing degree as our stock of them increases. We must have some of the commodities and services that enter into the circle of exchange in order to live at all. Hence the extreme urgency of securing a certain supply. But we are very prone to treat this urgency as though it were inherent in the nature of the things themselves, and to regard the acquisition of money, or command of things in the circle of exchange, as characterised by a kind of intrinsic urgency. When we have gained a certain supply of these things their decreasing marginal significance makes the deflection of energy from the cultivation or enjoyment of more direct sources of satisfaction, in order yet further to increase them, extremely bad husbandry. Indeed, just as it is easy to have so many houses that we have no home, so in general there is a point at which the command of exchangeable things may cease to support and may begin to oppress, or feed upon, our store of ultimately desired experiences. And long before this point is reached the relatively feeble value, at an advancing margin, of further increments of exchangeable things, may make them worth much less than the fruition we sacrifice to get them. It is therefore well to note that the same line of investigation which has shewn us the extreme urgency of a certain supply of exchangeable things has also shewn us the futility of an indefinite increase of them. Aristotle said, long ago, that it is only the man who has no defined ends who desires the strictly indefinite accumulation of means. A tool, he says, must always be of limited dimensions.

It is incredible how easily all this is forgotten, nay, how superlatively difficult it is to bear it in mind. We shall see presently how the economic organisation of industry draws all free resources and unpledged efforts towards those channels which promise the best remuneration—that is to say, which will put us into the largest measure of undefined command of things in the circle of exchange; and seeing that remuneration is obtained by supplying some one else's wants, the wants we can get the highest remuneration for supplying are, by a gross (though natural and apparently inevitable) confusion, conceived and spoken of as the most urgent wants. What a chasm is thus concealed we can now perceive. It is, of course, true that if we are dealing with one and the same man, the thing for a marginal increment of which he will pay or sacrifice most is that which he wants most at the margin, but it is a desperate leap indeed to pass from this self-evident truth to the self-evident falsehood that if A will give more for a marginal increment of one commodity than B will give for a marginal increment of another, A is more "urgently in want" of one than B is of the other. Does the extra ruby which the agent of a millionaire thinks on the whole will improve the design of a binding for a manuscript, and for which he therefore gives £50, perform as urgent and socially important a service as 24,000 red herrings or 24,000 hap'orths of stationery applied to the wants of 24,000 Cobbetts, could you find them? One father will spend £10,000 to save the life of his child. Does it follow that his love is ten thousand times as great as that of another father who watches his son dying when he knows that £1 spent on better food and a little change of air might save him?

A great part of the work of many literary men and artists of every kind is, or may be, of this kind; and so may any intelligent handicraft, up to a certain point. The observation of this fact has given rise to a Utopian idea that all irksomeness might ideally be expelled from life; and some favoured individuals seem so nearly to reach this ideal as to furnish some kind of pledge of its actual possibility. But a little reflection will shew that this is inherently impossible; for if we really care for the purpose of our work, that is to say, if independently of the pleasure of doing it (which would have been secured if the effect were instantly destroyed), we also care for the effect itself, it must follow that so long as that effect is imperfectly accomplished we shall be willing to make sacrifices or to endure weariness for the sake of its further accomplishment. That is to say, no man will be content always to stop doing whatever he is engaged upon as soon as he ceases to enjoy it, except the man who has no real care that the thing should be actually done at all. And this will explain why even that man, the general tenor of whose life seems to have secured an almost perfect coincidence between his tastes and his purposes, and who enjoys every portion of his normal day to the full, will yet (unless he can hermetically seal his heart against all appeals) find that he has perpetually to break in upon the life he loves in order to meet personal or public claims which impose comparatively distasteful tasks upon him; and this because they tend to the accomplishment of more urgently needed results than those to which the daily labour of his life is ministering. He may long believe that all this is due to a series of vexatious accidents, and that presently he will be left undisturbed; but reflection will shew him that it is inherent in the conditions of human life that the man who cares for anything will often have to relinquish something else that he cares for in order to secure it, and that while he is himself highly fortunate in finding the main supports and adornments of his life spontaneously conferred upon him simply for doing that which it is his delight to do, there yet remains a margin of unsupplied wants, or unfulfilled purposes, or neglected claims, or undeveloped opportunities, the provision for which must trench on his loved occupations, or must be met from the proceeds of excess of work that converts it into exhausting and wearying toil. No man can escape doing things he does not enjoy for their own sake, or doing more of them than he enjoys, unless he is indifferent to all the unsatisfied purposes or potential reliefs or delights, whether of himself or others, to which they might minister.

Summary.— The market is the characteristic phenomenon of the economic life and it presents the central problem of Economics. It is the machinery by which objective equilibrium in the marginal significance of exchangeable things is secured and maintained in a catallactic society. Equilibrium exists when the commodity occupies the same place at the margin on the scales of all who possess it, and is higher at the margin on all their scales than on the scales of any one who does not possess it. The equilibrium price of any commodity is the price which if at once established would produce equilibrium without oscillations; and it is determined by the quantity of the commodity at command and the composition of the collective scale. It is the interest of each dealer to know this price, and any erroneous estimate of it he may form, while placing him under penalties, will tend to correct itself, but will have a secondary reaction on the equilibrium price itself. The law of the market is implied in the definition of equilibrium; for the market price will be determined by the place on the communal scale of the lowest of the desires for a unit that are gratified, and these will all of them be higher than any that are not gratified. Hence if there are x units of the commodity the place of the xth unit on the collective scale will determine the equilibrium price. The collective scale registers the estimates not only of the buyers but also of the sellers at reserve prices, who are equivalent to buyers at those prices. Vicarious or speculative estimates are to be reckoned in with the rest, and as long as they tend to regulate the consumption of the commodity they perform a valuable social service; but they often transcend this limit and become socially pernicious. There are many types of market and forms of sale, but they all conform to the same law, so far as the essential condition of free communication, and knowledge of each other's doings, is realised amongst the persons concerned; and where this is not the case men's actions are still controlled by the same fundamental laws and forces which create more or less perfect markets where the conditions are favourable. Markets in raw materials follow the same law as markets in finished articles.

Returning from our digression on the character and importance of economic forces and relations, we approach the long-deferred examination of the constitution of markets and market prices, which presents our central problem. What we mean by the market price of an article is what a man is able to get, or is obliged to give, independently of any interest in him or his purposes on the part of his correspondent. It is a purely economic conception, and that is why we have so carefully examined the relation of economic to other considerations before proceeding to examine it. A market is the machinery by which equilibrium in the marginal significances of exchangeable things is produced, maintained, or restored. We have seen that equilibrium only exists when the relative scales of every two members of the community coincide, so far as concerns all the exchangeable commodities of which they both possess a stock. When such an equilibrium has been reached, and all the individual scales of marginal preference coincide, we may speak, in an objective sense, of the "communal scale of preferences." Each commodity occupies a definite place on that scale with reference to all other commodities, and this place may be conveniently indicated by stating the gold value of a small unit. The gold value, or equivalent in gold, we may call the equilibrium value of the commodity at the margin; that is to say, it is the gold index of the relative significance, in a state of equilibrium, of a small marginal increment of the commodity, on the scale of every one who possesses a supply of it.

Equilibrium is established when the marginal position of the commodity in question is identical upon the relative scales of all who have secured a supply, and higher on them all than it is on the scales of any of those who have secured no supply. What that position will be depends on the amount of the commodity that there is for distribution. For, as we have seen, the more I possess of any commodity the lower on my relative scale does it stand at the margin; so that if equilibrium amongst the consumers were established at any point on their scales and the growers still had stores in relative excess, and therefore found it to their interest to effect further exchanges, this continued distribution, yet further increasing the supplies of the consumers, would lower the marginal significance of the commodity on all their scales. The more of the commodity there is to be distributed, then, the lower will be the position on the several personal scales, and therefore on the collective scale, at which equilibrium is finally reached. Thus the amount of the crop and the scale of preferences of the community are the two ultimate considerations which determine the point on the collective scale at which equilibrium will be reached, or what we call the equilibrium price or value of the commodity. Armed with this conception of the state of equilibrium as the goal of all the operations of exchange, let us return to the simple type of market with which we began our investigations, and let us once more accompany our housewife to it.

The amount of the stock is by hypothesis fixed for the time being. At this moment, in the spring of 1909, British Consols, for instance, amount to £577,342,017, the 5 per cent Preference Stock of the Great Western Railway to £11,925,808, and Fiji Debentures to £70,900. These amounts will satisfy the demands of holders down to a certain point, and if that point of equilibrium were once reached, and if conditions of exchange supervened, it could only be because the relative position of the stock at the margin on some of the scales (whether of holders or non-holders) had changed. But this may happen for many reasons. The credit of the Government or the prospects of the concern may have changed, and the change may be differently estimated by different persons, thus producing a disturbance of equilibrium. Or the position and circumstances of the holders themselves may change. "There is a time to buy and a time to sell," says the Preacher. The man who is making a handsome income, and who wishes presently to retire from business (or fears that business may "retire from him"), wishes to save. The man who has been saving in his early married life with a view to heavy expenditure on the education or establishment of his children wishes to spend his savings. And men are continuously passing from one of these states to the other. Or men die, and their investments are not in the most convenient form for carrying out the provisions of their wills, or their heirs have their own view as to the significance of various stocks. Or for a thousand other reasons, good, bad, or indifferent, but all of them connected with actual circumstances, wants, and estimates, the stock shifts its place on the scales of certain individuals. Its marginal significance rises on some scales and falls on others, or rises or falls unequally on different scales. And so it will come about that though the great majority of the stocks are still in the hands of persons who value them at the margin as highly as any one else does, so that on the great majority of scales they are still in equilibrium, there will nevertheless be a few shares which are marginally lower on the scale of their possessors than they are on the scale of certain others, who either possess none or who possess some, but are ready to purchase more. If this is so, the conditions for exchange exist; and since it is difficult for the persons concerned to find each other out individually, there is room for the services of agents and dealers, who will buy from those who are prepared to sell (either with a reserve price or unconditionally), and sell to those who are prepared to buy at suitable prices. Any one, therefore, who has reason to believe or to know that there are or may be persons on whose scales the marginal significance of any of his stock is higher or lower, as the case may be, than it is on his own, may instruct a broker to sell or buy for him either unconditionally or at any moment at which he can get such and such terms. And the broker, at a moment determined by the nature of his order, goes to a jobber whose business it is to deal in such stocks. He does not tell the jobber whether he is instructed to buy or to sell, but simply tells him how much stock he wishes to deal in, and asks him to "make a price" for (technically "in") that quantity. Suppose the price the jobber makes is 98 3/8 - 5/8. That means that he offers either to sell the specified amount of stock at £98:12:6, or to buy it at £98:7:6 per nominal £100, and undertakes to produce the money or the stock on the settling day, which (in London and in the general market) occurs twice in the month. If the price made by the jobber complies with the terms of the broker's instructions, and the latter does not think he is likely to get better terms elsewhere, the bargain is struck, and the broker sells or buys for his client at the jobber's price, and charges a commission.

But this change in the market price of stock, which is a modifying influence affecting a genuine buyer's or seller's estimate of the most eligible alternative, may be considered in itself, and may become the subject of a purely speculative transaction. That is to say, a man may buy stock not because he wants to hold it and draw the dividends, but because he expects it to rise, and means to sell it again before the settling day, when he would have to pay for it; and in like manner a man may sell stock not because he wants the money instead of the dividends, but because he expects the price to go down, and means to buy the stock back before the settling day, when he would be required to deliver it. And in such cases, manifestly, the buyer need not possess the ready money, and the seller need not own the stock. They will only have to receive or pay on the settling day the difference between the prices at which they have bought and sold, minus or plus the two commissions. And this transaction, if deliberately engaged in, is of the nature of a speculation or bet on the rise or fall of the stock. An immense majority of the commissions given to brokers are thus "cleared" before the settling day, and are presumably of a consciously speculative character. It is to be noted that neither brokers nor jobbers, as such, are speculators in the proper sense. The broker works for a commission, and the jobber, though obliged to form speculative estimates, relies for his profits upon the difference between his buying and selling prices, and would make his profit if there were not any change in the level of prices; whereas persons who buy to sell, or sell to buy in, are actuated solely by anticipations of a rise or fall sufficient to cover the commissions and leave a margin of profit. As a class they must lose, for what the gainers gain is not all that the losers lose, but that sum with the commissions subtracted. When we hear that a private individual is ruined because he has "made unfortunate speculations on the Stock Exchange," it is probable that it is the extent and not the nature of his transactions that has ruined him. It is the commission that has broken him. His luck has not been prevailingly bad or good, but he has tried his luck so often, always paying for the privilege, that he has nothing left with which to try it again.

The reader will perceive that the element of speculation enters by imperceptible degrees into such transactions in wheat or cotton "futures," or in stocks, as we have been examining. At the one end are the genuine buyers and sellers, whose requirements are different, so that the article dealt in signifies at the margin more to the one than to the other; at the other end are the pure speculators, who have no notion of either buying or selling, but bet on the points at which those who do buy and sell will find their equilibrium from day to day. And between these are the dealers who are forced to form estimates, and to that extent to speculate, and the buyers and sellers, who are keenly alive to the changes of the market, and who are influenced more or less, but not wholly, by their anticipations of its movements. But so long as there is any real market at all, that is to say, so long as there is any commodity or privilege which is actually being bought and sold, the quantity of that commodity that exists, and the communal scale of preferences, determine its marginal significance, and therefore its price, at any moment. Speculative purchasers and holders count just as much as others do if they actually purchase and hold, but, as their ultimate purpose is to sell, they are speculating on the prices at which they will be able to unload. That is to say, they speculate on the conditions of the market as they withdraw from it; and these conditions depend of course, ultimately, on the values attached to the stock by the genuine purchasers who mean to hold. The speculators who do not buy at all, but merely bet, can only affect the market in an indirect and transitory manner.

An equally close analogy and the same fundamental difference may be traced between domestic and commercial administration when we consider the mistakes and miscalculations that may occur in them. If the housewife assigns her store of damsons unwisely, and makes jam of what would have been better eaten as fruit, or if she buys a disproportionate amount of the fruit altogether, there is so much waste. And in exactly the same way if a man has made wood into washing-stands which would have met wants standing higher on the collective scale if it had been made into tables, he will try to avoid a repetition of the mistake, but he cannot undo it. To him, as a business man, there has been so much waste. The wood has actually been applied at less business advantage than might have been. A stock of washstands when made can no more be transformed into the tables that might have been made instead, than the milk that was bought this morning can be transformed at four o'clock this afternoon into the tea-cakes or muffins that might have been bought with the same money, or than the milk that has been sipped by the cat can on reconsideration be put into the tea. And just as, since closed alternatives are no longer open, the milk may be consumed at a relative significance too low to have justified its purchase, had the state of things been accurately anticipated, or may have been given to the cat at a lower significance than would have justified the application had we known how much we should want it at afternoon tea, so the washstands may have to be sold at a lower price than would have induced us to make them, had we realised that the tables we might have made instead would be more valuable; or the timber may have been bought under the impression that both tables and chairs would satisfy wants standing higher on the collective scale than is found to be the fact. And just as the total order for milk may have been in excess or defect, so that even if internal equilibrium is preserved, the milk is all consumed at a higher or lower marginal significance than good husbandry would justify, so the whole stock of timber from the business point of view may turn out to supply wants at the margin that would have made it good business to buy more, or bad business to buy as much, had their exact place on the collective scale been truly anticipated.

Summary.— The market in advances follows the law of other markets. One man could administer his resources for a given period more economically if he could quicken their flow for the first part of the period at the expense of slackening it in the last; and the case is reversed to another. Or both may be in the same case, but to one the advantage of anticipation may be relatively greater than to the other. Between these two the conditions of exchange exist; and if, when equilibrium is reached, there is a premium on anticipation, that constitutes one source of the phenomenon of interest. Current savings of perishable things may be paid by one man to another who is accumulating wealth in more permanent forms, that may afterwards be paid back in compensation. Hence each individual may transform perishable present into more permanent future possessions, or permanent present into more perishable future possessions; or may transmute more into less perishable commodities, or vice versa. Effort may also be diverted from the immediate production of desired things into the production of tools, or the acquiring of skill that, when obtained, will make effort more fertile; and out of that increased fertility a premium may be paid to one who advances tools or apparatus. Land may be regarded as yielding either a revenue of commodities or a revenue of directly enjoyable services, and in either case it may be regarded as partly given by nature and partly manufactured. A man may desire to hire it (i.e. to have it without buying it) for the same reasons for which he may desire to hire a house or a tool, viz. either in order to distribute his resources more to his advantage or in order to increase them. Both these advantages of anticipation obey the general law of declining significance as the margin advances; and they both, together with the mere prodigal's desire to anticipate future resources, constitute a claim on the total resources at present available, and find their place of equilibrium amongst other claims. The resultant premium on advances constitutes interest. Some cannot help saving; but it is not always wise to save for a distant future. Saving beyond a certain point is never wise. The existence of interest as a normal phenomenon reacts upon the distribution of personal resources, and also has its analogues in things not in the circle of exchange. The rate at which a society accumulates exchangeable things depends upon its wealth, upon the distribution of its wealth, upon the providence of its members, and upon the wisdom and honesty of those that direct its industries. Hire and rent contain elements in common with interest, and hire deals with a problem of fractional purchase analogous to that with which insurance is concerned.

We can now give a certain extension to our conception of the market between wealth in the present and wealth in the future; for we have seen that exchange may be effected not only between a large sum in the present and a series of small sums in the future, or a single present sum and a single future sum, but also between a series of small payments over a period of time and a lump sum to be received at the end of it, or a series of small sums in the proximate future for another series of small sums in the remoter future. And if in any one of these transactions there is a premium in the market on the present, or the proximate future, as against the relatively remote future, there will be a like premium in all of them. And in this market, as in others, the man who carries either saving or anticipation to the point that brings its marginal significance to him personally into correspondence with the market price, gets what is worth as much as he gives for it at the margin, and more than he gives for it at all points short of the margin. That is to say, a man who postpones his expenditure may be supposed in many cases to receive a far greater return for his initial savings than would have been enough to induce him to make them. It is only at the margin that what he gives and what he gets will balance. And so also with the man who anticipates expenditure.

The case is exactly the same with the manufacturer. A man may see his way to making £10,000, spent in improved machinery and appliances, yield him £1000 in the increased efficiency of his staff and materials. Perhaps by spending yet another £10,000 he could still further increase their efficiency, but possibly the further addition would amount not to £1000 but only to £500 a year. So if he went into the open market to raise the money, and found that under all the conditions of the case he would have to pay 6 per cent premium or interest, he would think it worth while to raise the first £10,000 and not the second. The declining significance, however, would be gradual, and he would not be confined to increments of £10,000. The first portions of the second £10,000 might have the power of increasing the output at less than the rate of 10 but more than the rate of 6 per cent, and therefore some portion of the further sum would be borrowed. In short, whatever the rate of interest at which the manufacturer can command an advance (that is to say, the immediate use of concentrated or accumulated resources), a balance must be struck between the industrial efficiency of increased apparatus and the price that has to be paid for it in the market. The point will come at which the man would lay down a certain machine, if interest were only 5 per cent, because he expects it to fertilise the concern to the amount of 5 per cent on the money expended, with a sufficient margin to cover risks, replacement, etc.; but if interest is 6 per cent he will not lay the machine down.

Lastly, we will introduce, if only for form's sake, our friend the "prodigal," to whom a few words are frequently devoted in books of Political Economy. He is a person who thinks, possibly not altogether without reason, that he is capable of enjoying £100 now more than he will be capable of enjoying £200, or, for the matter of that, £2000, at some remote period when he is likely to come into possession of it. He may think so, partly because he will then have larger annual resources and can therefore cut back from an objectively more advanced margin, and partly because he thinks he is himself capable of higher enjoyment now than he will be then, so that even if his revenues were evenly distributed throughout his life he would get a larger subjective value out of them by spending freely in his youth and economising in his age. Or he may not even have so good a reason as the worst of these for valuing future command of resources relatively low. He may be simply careless as to the future. But in any case his estimate of the present in terms of the future is presumably subject to the law of declining marginal significance. As his future resources dwindle, and the prospect of retrenchment or want comes nearer, he will probably cease to pawn the future still further in obedience to every whim, and will only do so to escape serious difficulties or secure objects of keen desire. If not, then the time will soon come when his promises of future payment are no longer current, and then he falls out of the market and we "see him no more." Meanwhile, as long as he draws the line anywhere, and has anything still in hand for the future, he too competes with the rest and has his claims satisfied down to the same relative point, for he is in the same market.

In fine, every man who is not living absolutely from hand to mouth will make some attempt so to distribute his resources over time as to apply them where they will give the best psychic return. Even if he is so constituted that he values the future more than the present, still, as long as he attaches any value to the present at all, there will come a point at which the receding margin of present satisfaction balances the advancing margin of contemplated satisfaction in the future. The balance between the present and future will be determined partly by a man's comparative poverty or wealth, partly by his individual disposition and circumstances, partly by the premium on savings which the markets to which he has access offer him; but that balance will always be struck somewhere, and it will be struck on precisely the same principles that determine us in striking the balance between potatoes and carrots, between dress and charity, between abundance of possessions and leisure in which to enjoy them, or between any of the other alternatives which are open to us whether they are or are not concerned with things that enter the circle of exchange.

Summary.— The market of services or efforts follows the general law of the market. The flow of services of every kind determines the point down to which the desire for them is satisfied, higher or lower on the collective scale according as the stream is narrower or broader. The market in human effort is characterised by the fact that effort cannot be stored (except in a secondary sense and to a limited degree) unless embodied in some material thing, animate or inanimate; and therefore it runs to waste if not used as the capacity for it rises. Further, in many cases it is impossible for the holders to maintain an effective reserve price. And again it is impossible to detach it (unless embodied) from its source. Under these restrictions the law of the market dominates the exchange of human efforts with each other and with commodities. But the markets are often imperfect. The supply of each separate market of human effort constitutes a demand on the general market, and whereas its flow into the several markets is to a large extent dominated by economic forces, the original supply or production of human raw material is to be regarded almost entirely as incidental to expenditure of resources and expression of impulses, and scarcely at all as produced in response to a demand. Economic forces tend to secure to every one in the market as much as his effort is worth to any one else at the margin. It does not follow either that he has no claims beyond this, or that his marginal worth might not be increased; but seeing that the better society is supplied with the thing he makes the lower will be its place on the collective scale, it follows that each group of workers has an interest in society being rich in all things else but poor in what it itself supplies. Hence the lump-of-labour economics and much misdirected sympathy with anti-social action. A full recognition of the hardships involved in the uneven advance and the fluctuations of industry is a necessary condition of successfully combating anti-social ways of attempting to remove them.

The characteristic of perishability further prevents the possibility of speculatively holding back effort in order to apply it at some more favourable moment in the future. In so far as a man can apply his own efforts to his own purposes, he has a reserve price in bargaining with others; for unless they will do better for him in return for his effort than he can do with it for himself, he has no economic reason for dealing with them. If he has both a stock of wood and the skill of a craftsman, he may choose between selling his wood and making a bargain with some one else for the application of his skill, or applying his skill to his own material, and putting the resultant articles into the market. Or more generally, whatever opportunities, possessions, and faculties any one commands, he may choose between all the possible distributions of his own faculties amongst his own opportunities (whether for the direct serving of his own purposes or the satisfying of those of others), and the linking of his faculties to the opportunities commanded by others, and the opportunities he commands to the faculties possessed by others. As long as these varied courses remain open to him, the advantages of one determine a reserve price below which he will not consent to devote his resources to the other. But if his own faculties and opportunities can make no fertile combinations, then they are thrown into the market with no reserve price, and will sell for what they are worth at the margin to others. The man, for example, who has a small piece of land, the tools for cultivating it, and enough in hand to buy seeds and await the maturing of crops for his own consumption, has a reserve price for the exercise of his skill. If it is of no use to any one else it is of some use to himself, and he need not sell it except for something more than it is worth to himself. Again, the man who has the faculties and the materials necessary for producing things which he could not directly live upon himself (the case, perhaps, of our man who has a stock of wood and craftsman's skill as well), will also have a reserve price for the application of his services to the materials supplied by others, though it is based not on his ability directly to supply his own wants, but on his ability to enter another market than that of mere services. The case would be the same with the cultivator of the plot of land if he were producing choice fruit for the market instead of wheat and potatoes for his own use. But in all cases alike we shall find that in an open competitive market the price of services, like the price of commodities, will be determined by the rate at which the supply becomes available and the collective scale of preferences.

Apart from these fluctuations, the individual workman, regarding the thing that he can do as the special commodity that he brings to market, would, if untrammelled by tradition, proceed economically on such lines as the following:—He would be, to a certain limited extent, a monopolist; and if he found that he could command as much work as he chose to take on certain terms, he might consider either of two problems. In the first place, he may consider how much work he will take on those terms. And here the principle of the reserve price comes into play. He will not sell at a given price any effort which he could more fruitfully devote to the direct securing of the things he would otherwise have to draw out of the circle of exchange; and even if he can secure none of these things on advantageous terms by the direct exercise of his capacity, yet he may be able to enjoy it for its own sake when he exerts it in directions that have no economic significance; and it is manifest that at a certain point effort will become so painful that it will not be worth while to encounter it for the sake of further command of things in the circle of exchange. *31 To put it broadly, both the need of rest and aversion to irksome effort, and all that free command of powers and resources, and application of them to the securing of things that do not enter into the circle of exchange, which we embrace in the term "leisure," will put a reserve price on his wares. He will say, for example, "At 7s. 6d. an hour, or at 300 guineas an operation, I will only undertake so much and no more for the public." But, in the second place, he may raise his terms and say to himself, "I consider it worth the risk to take silk, or to raise my fees. That will limit my ministrations to a range of wants higher on the communal scale. It will subject me to the risk of encountering periods during which the stream of demand, at this high level, is narrower than the stream of the supply of energies which I should be willing to devote to its satisfaction. And I may find time upon my hands, not because of my own mental reserve price in time, but because my announced reserve price in money determines a margin nearer the origin than I had contemplated." Custom, convenience, the difficulty of rapidly forming lines of communication, and the fear of future complications will prevent him in such periods from putting a larger amount of his energy upon the market, and taking the lower price that it will fetch.

We have now gained a very precise idea of the economic position of every worker, whether he belongs to the privileged or the unprivileged classes. However high his remuneration is, it cannot be fixed by the economic forces any higher than the estimated worth of his services at the margin; and, however low it may be, it cannot be held down by those economic forces any lower than that marginal worth. Hence, if we say that any kind of service is over- or underpaid in the open market, we must be speaking in accordance with some ideal conception; for instance, the idea of what is due to a man, as such, rather than what he commands in virtue of the significance to others of what he can do. If we say that men and women working at a starvation wage are getting "all they are worth," it sounds harsh and inhuman and wakes an instant resentment. But that is because "worth" is a word of many applications, and carries with it many associations besides those of the market. We speak, for example, of the "infinite worth of a human soul," and we sometimes say in contempt that such and such a man, or his fate, "is not worth a thought." Whereas if we say that the economic forces tend to fix every man's remuneration at the precise level of his marginal worth, we do not mean by "worth" any inherent qualities of the man himself, whether technical or broadly human; and still less do we mean the claim he has to the sympathetic care of his prosperous fellow-beings. The question is—What is the man's output of energy economically worth at the margin? And that means—What is it worth while for some one else to give him, in return for his efforts, as an indirect means of furthering his own purposes? Ultimately we may have to evolve some special word, free from misleading associations, to express this idea concisely and clearly; but meanwhile we must do the best we can with our existing vocabulary. When we say that a man's potatoes are "worth 2d. a pound," we mean exactly that they are "worth to some one else, at the margin, the sacrifice of all the alternatives represented by 2d." When we speak of what a man's efforts are "worth" in the market, we use the word in the same sense.

In considering industrial questions it is of extreme importance that we should grasp the fact that if any person, or class of persons, is habitually "underpaid," that is to say, habitually get less for what they do than it is worth to some one else at the margin, this must be due not to the economic forces but to some obstacle that stands in their way. It may no doubt be due to the working of economic forces that a man is worth as little as he is. For instance, he may have been underfed, and put early to exhausting and unskilled work by his parents, under pressure of want or greed; and so he may have feeble powers and poor training. And the economic conditions of a given society may be such as tend to produce these results. But the economic forces can not cause a man, such as he is, to receive a lower remuneration than represents the worth to others of his work; for the economic forces are always urging those others to purchase anything that they can get for less than it is worth to them, so that if there are any persons to whom the work of an individual (or a class of individuals) would be worth more than he is now receiving for it, the economic forces urge them to offer higher terms and so secure his services. In speaking of "underpayment," therefore, we must be careful to distinguish between payment which is less than the payee is economically worth, to remedy which underpayment we may rely on the support of the economic forces; and payment which, though all that the payee is economically worth, is not as much as he "deserves," because it is not his fault that he is worth so little; or is not as much as he "needs," or not as much as he "ought to have," because he can not live a decent life on it. For "underpayment" in this latter sense it is not fair to throw the blame on the employer; and any general movement that aims at improving the condition of the "underpaid" in this sense must aim either at giving them more than they earn, i.e. more than their work is worth, or at making their work worth more.

There is nothing mysterious in this excess of revenue over aggregate earnings. We shall perhaps see deeper into the matter later on in this work, but an illustration may serve meantime to remove any cloudiness that may have risen in the reader's mind. Suppose two men discovered a mineral spring or inherited the possession of a factory. They might find that each of them, working it alone, could make £1000 a year out of it, and that if they both worked they could make £1500 a year. If they are both working, then, the withdrawal of either of them would reduce the total earnings by £500 a year. £1000, then, represents the sum of the worth to the concern of the efforts of the two men (taken severally) when backed by the joint control of the accumulated apparatus of the factory, or the natural resources of the spring. But their total revenue is £1500, which is £500 in excess of the sum of what each of them is worth to the other. If the spring or factory were in possession of a third party who did not work at all, and if the two workers did not combine, the owner might pay each what he was worth at the margin (£500) and would have a balance of £500 which he received but which no one had "earned." Can the earners, or any groups of them, by combining, get control of this unearned revenue, or any of it, in addition to the earnings which they are marginally worth to its possessors? *33

Again, if in the open market a man is not likely to receive in return for his effort more than it is worth to some one else at the margin, we must reflect that where there is any kind of patronage, or any system of fixed salaries for elective posts, it is extremely possible that a man may be receiving in payment for his work more than it is worth to any one. And if, as in all public and official posts, those who determine how much a man is to be paid are not those who ultimately pay him, we escape, to an undefined extent, the controlling action of the economic forces. If I am to decide how much a man is worth to me for my purposes, and am then to pay him, I have a more direct interest in determining his worth than if I am to decide how much he is worth to some one else, and how much he is therefore to receive from him. Theoretically as long as there are any open markets no man need accept less than he is worth in them; but under any system of patronage or election he may easily receive more.

The other is to shift them to places and conditions in which they will be worth more than where they are. If you gave some of the workers in an "underpaid" industry the opportunity to migrate into one better paid, you would have put them where they were worth more; and further, since the margin would recede in the industry they had left, you would also raise the marginal significance and therefore the pay of their late companions. But you would also lower the marginal significance of a worker in the ranks which they had joined; and this observation brings us to the very root of the troubles with which industrial society is afflicted, and may almost be regarded (in the fashionable language of the day) as enabling us to identify the bacillus of the disease of civilisation. Objectively (and we can have no other test) society is enriched by the change. The comparatively low worth of the work dropped, is replaced by the comparatively high worth of the work taken up. The total revenue of the community, then, is raised. And, moreover, the persons in the most deplorable condition have been relieved; and therefore whoever has suffered the redistribution of wealth has been socially justifiable. But the persons whose marginal significance has been reduced will not see the thing in this light.

In general, if the want that I satisfy becomes less acute at the margin, because it is more abundantly supplied, and at the same time all other wants are more abundantly supplied in a suitable ratio also, then although the thing that I can do is less urgently needed, yet the things I want in return are less urgently needed also, and society may give me as much of these less-valued things for the same amount of my less-valued services as they gave me of the things that they valued more, for the services that they valued more also. The real trouble is not that my product is too abundant, but that other things are not abundant enough, and the remedy is to make them abundant too. That would give us all a larger volume of satisfaction. But if the thing that I supply becomes relatively more abundant, and ministers to a relatively less urgent need, my command of what I want declines just because your command of what I give increases. Hence the paradoxical situation that the advance in well-being which we all desire and are all pursuing becomes an object of dread to each one of us in that particular department in which it is his business to promote it. That is to say, because it is my social function to supply the world as well as I can with a certain thing, therefore I dread the world's being so well supplied with it that I shall be able to get little or nothing for supplying more.

The open and unscrupulous selfishness of any threatened "interest" is formidable enough, and its concentrated energy may give it vast social and political power. But it is with something more subtle and pervasive that we are now dealing. The "lump-of-labour" theory and its analogues guide the action and tinge the aspirations of countless disinterested workers, who veritably believe that it points the way to social salvation. And a mere demonstration of the blindness and mutual destructiveness of their methods will not suffice to convert them, if it be accompanied by no manifest zeal for their ends and sympathy with their feelings. "On ne détruit que ce qu'on remplace." We have seen that diffused progress is almost normally accompanied by local depression, and often by local wreckage; and it is right and natural that this local wreckage should catch the eye and excite the sympathy. For, in point of fact, the gain, under such circumstances, must be ampler in volume than the loss in order to make it socially equivalent to it. When a diffused benefit is accompanied by a concentrated loss, the benefit extends the satisfaction of a great number of people, at a declining significance, to a slightly lower margin, but it cuts back deep, at a rising significance, into the supplies of the few whom the concentrated suffering strikes. A loss of 5s. a week to a hundred families, to whom it meant a reduction of 25 per cent in their resources, would be a loss of just 500s. and no more, but it would not be compensated by the gain of 1s. a week to 500 families, to whom it meant an increase of 5 per cent in their resources, though that also would be a gain of just 500s. A loss of 25 per cent is more than five times as significant as a gain of 5 per cent. So if any industry is threatened by a new discovery or invention by which the world will be enriched and a particular class of persons impoverished, not only do the persons whose industrial position is attacked dread it, and desire to disarm and thwart the step of industrial progress that brings it about, but they also find that they have the keen sympathy of the spectator, who is more struck by the concentrated loss, though he does not share it, than by the diffused gain in which he shares.

Summary.— The problem of distribution is analogous to the problem of personal expenditure of resources, inasmuch as it involves the balancing and mutual substitution at the margin of factors in the production of a desired result which cannot be substituted for each other at the origin. The same material product may result from different combinations of productive agents, such as tools, land, output of muscular or intellectual effort, and so forth; and since a marginal subtraction of one may be compensated by a due marginal addition of another, they can all be reduced to a common measure, expressed in terms of each other, and therefore summed up in terms of a common unit. The product divided by that sum yields the unit share in the distributed product. The last problem we shall discuss is that of the relation of cost of production to exchange value. What a thing has cost cannot determine its value, but what a thing will cost may determine whether or not it will be made. If it has cost more to make than it is worth at the margin, it will not be made again in such large quantities, and if it is worth more at the margin than it has cost to make, it will be made in larger quantities. Thus there is a constant tendency to equality between price and cost of production, but not because the latter determines the former. But the cost of production sometimes exerts a sentimental reaction on the conduct of the producer which is an effective though not an economic force; and low prices may sometimes produce a genuine effect in lowering the cost of production by stimulating invention and economy, since a man will fight harder to escape ruin than to increase his fortune.

And just so a firm of manufacturers (or the "entrepreneur" or "undertaker" who deals on their behalf with all the persons and for all the things necessary for the enterprise) will require certain things that cannot be substituted for each other in their totality. The firm must command a place where the industry may be conducted, some output of human energy, physical and intellectual, material on which to work, tools and apparatus with which to work it, and subsidiary substances, such as coal, gas, or water, which will be consumed or transformed in the process. Now probably no one of these things can be entirely dispensed with or its place taken by any one of the others. And within the limit of any one such group there will be several classes of requisites that can hardly be substituted for each other. Intelligence cannot entirely take the place of physical strength, nor one kind of trained skill for another. Nor can a building be a substitute for machinery, or machinery for a building, or one kind of machinery or one kind of tool for another. And yet, within limits, the most apparently unlike of these factors of production can be substituted for each other at the margins, and so brought to a common measure of marginal serviceableness-in-production. Thus, though no amount of intelligence or industry can make bricks without straw, yet intelligence may economise straw, and one man with more intelligence and less straw may produce as good bricks as another with more straw and less intelligence. There is a limit to this. To withdraw straw beyond a certain point would be to render it impossible for a given degree of intelligence to produce a satisfactory brick, so if that limit is passed we have come to a point at which a less intelligent man with a better supply of straw might produce a better article. In general terms, therefore, intelligence, care, and fidelity can be substituted at the margin for raw material; and raw material can be substituted at the margin for intelligence, care, and conscientiousness. A little more of one may be an exact compensation for a little less of the other; in the sense that the result will be the same whichever alternative is taken. But as the margins change, as, for instance, the intelligence of the man is increased and the raw material diminished, the marginal significance of the increasing factor falls and that of the diminishing factor rises, so that it would take more of the former to compensate in the result for a given sacrifice of the latter. The terms on which any two factors may be accepted as equivalent to each other change as their margins advance or recede. Whatever their price in the market, the individual undertaker will advance his margin of one at the expense of the other till their significance to him coincides with their prices.

The undertaker, then, will provide himself with all the factors of production in proportions determined by the state of the market and their marginal effectiveness in this industry. It may well be that, though additional intelligence would save him something in waste, that same intelligence would have higher relative significance in some other application. In that case some one else will outbid him for it, for he will not spend any more on intelligence, to save material, than the worth of the material which it will save; and if it will, at the margin, render more valuable services to somebody else, the market price of it will rise above his figure. We are exceedingly familiar with this in practice. People often complain of the carelessness of those they employ, when they are quite aware that they could get a higher class of men by paying a higher wage. But they are also aware that it would not be worth their while to do so. A sense of bitterness in such cases may be natural enough, for we do not see why any one should be careless; but a general grievance against the level of character and intelligence in any rank or class of humanity, however easy to understand, in no way affects the matter we are considering. There is a market for intelligence, and even for character. It may be very deplorable that the market is not better supplied, but well or ill supplied it obeys, as a market, the market laws; and every manufacturer has to balance character against other things that he can get in the market and has to bring their marginal significance into coincidence with the terms on which the market offers them to him as alternatives. The fact that it is not always easy to know whether you have really got what you have paid for in this particular market does not affect the theory. There is always a speculative element in all purchases. In sum, then, just as we saw that in private expenditure fresh eggs and the pleasures of friendship may come to be balanced at their margins,—so much of the one being just equivalent to so much of the other,—so we now see that material things and mental and moral qualities may, at their margins, have exact quantitative relations as productive agents, so much of the one being worth so much, but not more, of the other.

Again, the unintelligent or unconscientious exercise of physical power not only wastes the material on which it works, and the tools it works with, but wastes itself also. The same physical power obviously produces widely different results according to the greater or less intelligence by which it is directed. Some intelligence is required for the efficient performance of even the simplest task, and a very high degree of trained skill will be required for others. In some cases, and to some extent, the physical energies of one man may be directed by the intelligence of another. In other cases, and always to some extent, the directing intelligence must be the man's own. Here again, though neither intelligence and muscular strength, nor my own intelligence and the intelligence of some one else who directs me, can be substituted for each other in totality, yet each can be substituted for the other at the margin. "I can get any kind of work out of any kind of man" is obviously a vaunt that cannot be made good; but one manager can get better work from the same man than another can, or as good work from a worse man; so that managing ability may, at the margin, be a substitute for skill and intelligence in the hands, and vice versa. And the question of the proper adjustments may be of great importance.

We need not work out any more details. It is already obvious that the main groups of factors of production, and within each main group every distinguishable sub-variety of effort, tools, skill, material, and so forth, may find a substitute, at the margin, in some other. All must be balanced against each other at their margins, and the market price of each factor will determine to what point it will be well for any individual to supply himself with that factor in preference to relying on some other as a substitute.

What, then, is the problem of the undertaker? By hypothesis he is dealing with limited resources, and in applying these resources he must draw commodities, services, and privileges out of the circle of exchange, and so combine and direct them as to produce a result, that can itself be returned into the circle of exchange with a value higher than that of the factors or ingredients that were drawn out. He desires to maximise this result, just as the housewife or any other administrator desires to maximise the result of her expenditure. And as the housewife's attention is fixed upon marginal considerations, while she takes the initial increments for granted, *39 so the undertaker takes for granted the early increments, near the origin, of all the factors of production, land, labour, tools, and so forth; for some supply of all of them is necessary for any production at all; but at the margins, where each performs a service no longer distinctive and irreplaceable, but capable of being rendered equally well by some substitute, he carefully balances them, and the smallest change in their market prices may induce him to substitute a little of one for a little of another. Here, therefore, a common measure can be found; and just as the price the housewife is willing to pay for any article of consumption is determined, not by the fact that some of it is very important, perhaps essential to life, but by the relative importance of a little more or a little less of it, as against a little more or a little less of something else, so here the prices that the undertaker will pay for the different factors are determined not by the peculiar service that each renders near the origin, but by the extent to which the units of each can respectively perform at the margin the common service they can all render alike. In a former example we determined the equivalence of so much bread to so much water not by considering the nature of the specific functions of bread and of water in supporting the human frame, but by comparing them on the common ground of their satisfying a human craving. *40 On this ground the value of each can be expressed in terms of the value of the other. It is not because they are unlike, but because they are like, that they come into comparison with each other. So if land and labour are to be compared and equated, and are to settle their respective claims on the common product, it must be because they are reduced to a common measure so that the significance of each can be expressed in terms of the significance of the other. And this must be accomplished by finding the aspect under which their significance is identical, not that in which it is specific to each. Lastly, here as in all markets, what each man is willing to pay for a thing is determined by its relative place on his own scale, what he actually has to pay (or go without it) by its relative place on the scales of others. There is equilibrium when these places coincide.

It is obvious that if we dispense with the undertaker altogether and think of different groups of persons, controlling different agents or factors of production, as freely combining and bargaining with each other, exactly the same principles will hold. We may suppose that some possess land, some tools or buildings, some material, some manual skill, some knowledge of the markets on which the product must be placed; and that all are willing to wait for their share till the product is made or sold, and so to take their share in the speculative risk of the undertaking. Some may contribute several factors, but all wait and all speculate. This supposition is necessary for our hypothesis, for if any one demands instant payment the value of his contribution is discounted and bought on speculation by the rest, and they are collectively taking the place of the undertaker with respect to him. Where there is no undertaker the co-operators must themselves determine how they are to share the proceeds, and it is at the margins, where the things that they respectively control can be substituted for each other, that they must find their common measure and come to terms. A marginal addition or subtraction of any one of the factors, the others remaining constant, may be expected to have such and such an effect on the product, and it is thus, and thus only, that they can make comparisons. The withdrawal of the whole supply of labour or the whole supply of land would annihilate the industry. The withdrawal of any one class of tools, or any one kind of intelligence or experience, would severely cripple it; but the withdrawal of a defined small amount of one factor, at the margin, would produce a definite result. How much of any other factor must be withdrawn to produce the same result? When we have answered that question we have determined the relative marginal efficiency of a unit of each of the two factors, and have arrived at the principle on which they must share in the proceeds; for we can now express the contributions made to the result by all the different factors in one and the same unit, and if we divide the proceeds by the sum of these units we shall determine the share to be claimed on account of each.

Returning to the more familiar case of the undertaker, and stretching the term to include all the functions of promoter, director, and manager, we find him making bargains with those who control the several factors of production. Some of them will receive fixed payments or promises, and will have no further claims on the concern. On this method he may secure raw material, labour, machinery, and land, and may pay some part of the necessary premium on waiting (debentures). Others will take or share the risk, and will give their co-operation on an expectation as to the result, their respective claims on which are suitably defined. These others may be a distinct and separate class of persons with possessions for the direct enjoyment of which they are willing to wait (shareholders). Or the undertaker may himself take some, or all, of this risk, for he may be his own capitalist. Or he may be employed, at a fixed salary, by those who take the risk. In any case, on his own account, or on the account of his employers, he will make whatever initial bargains have to be made; and will then direct and combine the several factors, and determine their respective amounts. These functions may be separated or subdivided. A syndicate may be formed in the first instance to raise the capital, that is to say, to make speculative bargains with possessors who will wait, and then all other bargaining and directing may be handed over to a manager. Or the original syndicate may retain some control of the business, that is to say, may themselves exercise a part of the functions of the manager. But, in any case, whatever resources the undertaker commands, he must so balance their application that the marginal significance of a pound is identical whether expended in wages, rent, interest, or however else. He will, therefore, fix the proportions in which the different factors are to be combined on the principles we have already examined. He will have to make definite payments or promises in some cases, and he will raise more or less elastic expectations in others; and in every case he will have to pay, or to promise, or cause to be expected, as much as the open market offers, in order to command the factors of production he requires. To succeed, then, he must be able so to arrange the proportions of his factors, and so to combine them, as to make them all worth as much at the margin in his own concern as other people expect them to be in theirs. For he will have to give as much as other people offer for them, and he will get as much as they turn out to be worth to him. If he succeeds, the product will recoup him for all his payments, will enable him to meet all his promises, and adequately satisfy all the expectations he has raised, and will leave a balance which he considers a satisfactory remuneration for the exercise of his own sagacity; that is to say, not less than he supposes he could have obtained by some other application of it. This is on the supposition that he has no fixed salary, but has made his own bargains with all the others concerned and is the residuary claimant. If he has a salary that will be included amongst the payments and the syndicate, or whoever takes the ultimate risk, must include that salary amongst their speculative payments or promises.

It is highly instructive to turn from the objection to the doctrine of declining significance which we have just examined to another which is quite as frequently urged. It is said that the whole theory of distributing our resources so as to gratify our wants pari passu and keep the marginal wants balanced, is false to fact and experience. The truth is, it is said, that there are certain things that we "must have," and we get "as much as we want" of them before we begin to consider less urgent requirements at all. For instance, we all eat as much as we want several times a day, and do not stop short of satisfaction because our desire for literature or travel is unsatisfied. Now to begin with, this is obviously an argument of the well-to-do. It is flagrantly untrue of the very poor that they get as much food as they want before they begin to trouble about keeping up their supply of clothes. *2 We have already spoken of the thousands of young people, well above the line of actual want, who in managing their own slender resources consciously and constantly bring their meal to a conclusion at a penn'orth or two penn'orth short of satisfaction in order to advance some other margin. In its crude form the whole contention that we are examining is palpably false. Where do we or can we find in civilized society the man who gets as much food as he wants "before" he gets any clothes or any shelter? All that can be seriously maintained is that if a man's resources are sufficient to provide him with a certain amount of the things he needs most urgently, including food, he will soon come to points in every other branch of his expenditure at which he will be content to rest until he has completely satisfied his desire for food as far as mere quantity, apart from quality, goes.

Another and closely related aspect of the question of declining significances is suggested by charitable appeals. For instance, there is a famine in India, and I subscribe a guinea. That would appear at first sight to mean that I consider the want of food in India more urgent than any other wants of my own or any one else's to which the guinea would have ministered. But if so, why not give a second guinea? Has the want in India been sensibly reduced by my subscription? In bulk, yes. But in intensity? Even if I could suppose that my guinea had met the most urgent case, would there be any perceptible decline of urgency in the next case waiting to be met? It is exactly the question of the increments of tea over again. We saw that there was no perceptible decrease in the significance of tea as we passed from one quarter-ounce to the next at the margin of 4 lbs., though there was a perceptible satisfaction in the consumption of either. *5 So I must suppose that a perceptible relief of suffering has been effected by my guinea, but I can hardly believe that a second guinea would relieve suffering perceptibly less intense than that relieved by the first. The marginal significance of a guinea, then, in relieving distress in India, appears to remain the same. Why do I not pay a second guinea and a third, and so on? The answer is twofold. In the first place, in the majority of cases it is not really the famine in India but my own conscience that I am appeasing, and my own conscience becomes perceptibly less clamorous after the first guinea has been paid. It may still grumble, and dispute the ground with other applications, but it may no longer dispute it successfully. My conscience may be right or wrong in insisting that I should take a share in the burden, and in being appeased when I tell it I have done so; but that is not the question. The point is that the demand I am meeting is, as a matter of fact, perceptibly reduced by what I have done to meet it. It is otherwise, however, if I really am directly appraising the urgency of the want that my guinea relieves when given to the famine fund, and the wants it can supply in other applications. In this case it is true that the want in India does not perceptibly decline as I give guinea after guinea, but it is also true that the wants that I neglect in order to meet it perceptibly rise as guinea after guinea is subtracted from the supply of them, until at last they rise to the level at which they balance my sense of the urgency of the need in India. This point may not be reached till I have reduced myself and all those dependent upon me to the level of misery of those that I am relieving; and some moralists are courageous enough to hold this up as an ideal. Our theory of marginal significance is elastic enough to adapt itself to their creed; for all that we assert is that, whatever the grounds on which we form estimates of the relative significance of rival applications of resources, we can so administer those resources as to bring their marginal significance in each application to equality. The urgency of the Indian claim is no doubt gradually declining if the administration of the fund is even approximately sound; but within the limits of the influence of my fortune it does not decline perceptibly. The balance is therefore found when all other expenditures are curtailed to the point at which their rising marginal significance equals that of the Indian claim.

Again, a man is not likely to eat oatmeal porridge for the pleasure of the palate when the appetite (as an index of an organic demand of the system) is assuaged; whereas the skilled cook, "by successive intensifications of his diabolical art," may tempt a man from excess to excess by appeals to his palate, even when his appetite has long been sated. Now healthy and vigorous persons who are accustomed to simple and frugal ways are perhaps conscious, or subconscious, on most days that they would enjoy a rather more elaborate diet than they are accustomed to. But every one who has had experience of the two ways of living will tell us that those who live with severe simplicity get more enjoyment out of their meals than those who have an elaborate dinner every day. It is very easy to see why. The man who tries to extract the maximum of sensuous satisfaction out of every meal is securing trifling increments of satisfaction at the margin to-day, and is thereby deadening his capacity for enjoying the more significant increments nearer the origin *10 to-morrow. He is not indeed substituting a craving for a source of satisfaction, but he is lowering his possibilities of satisfaction. Thus, if a man has a moderate supply of any such luxuries as we have been discussing, his enjoyment may be represented by Fig. 6. He stops at x₁, and there are still unexhausted possibilities of enjoyment. But if he habitually goes on to x₂, though at first he secures the additional area of enjoyment x₁p₁p₂x₂, yet he gradually lowers the significance of the initial increments, and ultimately only enjoys the smaller area bounded by the dotted line above Ox₂ instead of the larger area Opp₁x₁. Again, the man who eats or drinks as soon as he is inclined to do so, often falls into the habit of eating and drinking as soon as he is able to do so; and, as he never recovers a state of healthy hunger, he too always remains at the low level of enjoyment.

We can now fully understand the recognised failure of all elaborate attempts to make life enjoyable by luxuries. A rich man trying really to enjoy himself in the midst of his wealth often suggests a man attempting to bathe in his Sunday clothes. He cannot feel the sweep of wind and water over his limbs. Hence the genuine but futile wail of persons surrounded by luxury, hence their craving for the "simple life," and their restless longing to break away from their surroundings and to put themselves into circumstances where money positively will not command any but the simplest supports of life. Only so can they get into contact with the initial satisfactions which are reserved for those whose nerves have not been deadened and blunted by being called upon to respond to fresh supplies before they have recovered from the last, or to seize a little more excitement at the margin to the detriment of their tone at the origin. There can be little doubt that those who constantly go without things, not because they do not want them, but because they cannot get them, and who have an unfailingly abundant supply of nothing but a few simple things, selected by experience for their staying qualities, get more physical enjoyment out of life, and a larger amount of physical delight out of their contact with things, than all the devices of luxury can secure. And, very happily, this mode of ordering life, with all its invaluable reactions, may be maintained, when once deliberately embraced, not by thinking but by not thinking about it. The man who cares most for other things will act with the greatest wisdom in these matters; and he will instinctively form habits, or, if you like, contract prejudices, which without self-consciousness will secure the best fruits of reflection.

Note that our housekeeper will probably never deliberately incur or inflict the specific privation we are considering, merely in order to economise the tea needed to avert it. It will occur through some inadvertency or miscalculation, and it will be the delay, or trouble, or want of courtesy to a guest, or incidental (as distinct from primary) waste, that would be involved in correcting the error that will determine her to accept the result. But when the housekeeper is asked to make a number of hypothetical estimates as to what successive increments of the supply would be worth to her, and comes to think of a contraction of supply great enough to make this specific privation normal and permanent instead of occasional and accidental, she finds she has a very clear conception of that particular "lot" of satisfaction, that she has been accustomed to translate it into a great variety of equivalents, and that she has from time to time defined it pretty closely as worth just so much of certain other things, but not even a little more. She can now translate it, by a deliberate calculation, into so much tea per month, and can estimate it with some precision at its money value. This may form a kind of standard unit of reference, and may be the magnitude she is capable of estimating with the highest degree of proportional accuracy and precision. The area thus determined will be that of the elements out of which our curve can be constructed with greatest accuracy. For in considering the value of other increments nearer to the margin or further from it, our housewife (we are supposing) will find it easiest to make accurate estimates of areas of satisfaction of this particular magnitude; and she will find, of course, that if she has to think of herself as compelled by the further contractions of her supply to cut deeper back into the satisfactions of her household than she has ever actually done, she will realise that a smaller amount of tea, at the higher significance so reached, would yield the standard unit of satisfaction, and that in like manner at a more advanced point it would require a correspondingly larger amount to secure it. Geometrically the standard area will stand on a narrower basis as we approach the origin, and on a broader one as we recede from it.

Now seeing that every day the housekeeper deals with the whole supply for the day, and has the opportunity of experiencing or observing the actual service rendered by every increment from the initial to the final one, we might be tempted to think that she could base her whole conjectural construction of the curve from the origin to the margin upon direct experience. But this is not so. We have seen that recurrently satisfied wants never take us back to the real initial significance of the things that satisfy them. *17 If our supplies were very much contracted (even apart from any reaction upon the organism that might ultimately take place) we should gain experience of significances that had evaded us before; for the want which to-day's first increment supplies is a different want according to the point up to which our want was satisfied yesterday. And as soon as we begin to contract or increase our supply at all this process sets in, though its effect at first may be hardly perceptible, and it may only become pronounced as we recede considerably from our present margin. Thus an additional element of uncertainty enters into all estimates far behind or far in advance of the present margin, and our ideal equal areas will become correspondingly more speculative. This speculative element may reveal itself consciously in a refusal to make equally precise estimates, or unconsciously in an inability to make equally consistent ones, as we recede from the actual margin. Past experiences, vividly remembered, may establish at irregular intervals other bases of comparatively direct and immediate estimates; or critical points may so appeal to the imagination as to give a firm but illusory precision to speculative estimates; or some changed unit of maximum accuracy may assert itself in certain regions of the curve; and throughout we must distinguish between precision and consistency in the sense explained above, and approximation to the estimates which would be formed under the pressure of immediate experience should it ever be realised.

In constructing our curve, we have used denominations of shillings and pence simply as measures of certain definite satisfactions, and we have tried to shew how, ideally, the area of total satisfaction corresponding to any given supply Ox of the commodity could be actually evaluated in these denominations. But on closer inspection we become aware of a disturbing instability and ambiguity in our unit when regarded as a psychological magnitude. We have often noted that 1s. has a different psychological significance to two different men, and also to the same man if his income rises or falls. Theoretically, then, the marginal significance of a shilling will be affected by the sum the man has already paid to secure a certain satisfaction. We supposed, in our example of the tea, that the housekeeper gave us the outside value of the first pound of tea to her, and then supposing herself to have paid that sum for it went on to give us the outside value of a second pound, and so forth. If our Fig. 15 has been constructed on this system, then x₁p₁ will represent the marginal value of a commodity to a man, on the supposition that he has actually paid the money represented by the area Oy₀p₁x₁ for the quantity Ox₁. But will Ox₁ represent the amount he would actually buy if the market price were Oy₁? Not unless the sum of money represented by the whole area Oy₀p₁x₁ is so insignificant a part of the man's total expenditure that it makes no perceptible difference to the marginal significance of a penny whether the area Oy₀p₁x₁ or only the area Op₁ has been spent upon tea. If this is not so, then the fact that he can actually get Ox₁ for the expenditure of Op₁ will leave him better off than on our first supposition by the area y₁y₀p₁; and this being an appreciable sum it will enable him to get a little more of everything or anything (including the commodity under direct consideration) than he would have been able to do had he spent y₁y₀p₁ (as well as Op₁) on the supply Ox₁. A little more than Ox₁ may therefore be purchased. And again, since all the man's wants will be satisfied down to a lower point of urgency, the significance of what a penny will buy at this advanced margin is lowered. Thus the psychological significance of our unit will be smaller if the whole supply is purchased at the lower price than if the full sum represented by the mixtilinear area had been given for it. As we imagine Ox to advance or recede, the changing values of the total or the rectangular areas will react upon the psychological significance of the unit, and the difference between them will prevent the abscissa from accurately representing the amount that would be consumed at the price represented by the ordinate.

We will begin with the latter difficulty. How can we maintain the stability of our psychological unit throughout a series of estimates? What we really want is to fix in our own minds or the mind of our informant the actual psychological magnitude represented by the objective unit at the margin of our current expenditure; and then to estimate in that unit the significance of small increments of the commodity at various margins. We should then have, for any given quantity consumed, what we set out to obtain, viz. an evaluation in a stable unit of the total estimated satisfaction enjoyed, as distinct from the sum paid. These estimates, however, are such as we could only imagine experts trained in a psychological laboratory attempting to make. The naïve, however careful and acute, answers we could expect from practical administrators would never be based on so subtle a conception as that of the psychological unit. We should have to assist our informant by putting our questions in some such form as this: "If when you had bought your tea for the month and paid for it at market prices, you lost half, three-quarters, nine-tenths, or all of your stock, what in each case would you pay for a first small increment, sooner than go without it?" The smallness of the increment estimated would reduce to a vanishing point the reaction of the sum to be paid upon the psychologic value of the money unit, and the fact that in every case the full amount that is actually paid for the commodity, and no more, is already written off, would keep that psychological value uniform. The ingenious reader may still think of disturbing influences, the shock of the loss, the changed significance of other enjoyments caused by the reduction in the supply of tea and so forth; and he may imagine any system of discounts that pleases him. It is clear that in any case absolute fixity of the psychological unit is only an ideal conception, and that actual estimates in money will never be more than approximately consistent in their psychological significance. The essential point is that the total psychic value of the satisfaction derived from the consumption of a given amount of a commodity is a finite quantity, capable of ideal evaluation in a fixed unit, and that over a vast field of our current expenditure it exceeds, in our own estimate, the value of the alternatives we relinquish for it. *22 This total area of satisfaction may, in theory, be represented accurately by a figure which sets forth the marginal significance of every successive increment of the commodity; but if we have taken as our psychic unit the satisfaction which the money unit commands at the actual margin of our expenditure under existing conditions, then any hypothesis which sensibly changes those conditions (as by increasing or diminishing the amount actually spent on our commodity) will change the significance of the unit; and therefore, if we measure penny or shilling rates on the axis of Y, it follows that the same figure cannot represent, with theoretical accuracy, the meaning of a number of different hypotheses, regarded as co-existing. Given any price and the actual administration of resources that corresponds to it, we can ideally construct a curve of total satisfaction, the unit of which corresponds to the marginal satisfaction now secured by a penny or a shilling; but if the price changes we cannot preserve the same figure and get an accurate result by simply changing the point on OX at which we erect a perpendicular to cut the curve; for under the changed conditions the satisfaction secured by a penny or a shilling will have changed.

I have been careful to speak of the Figure as giving, ideally, a representation of the total satisfaction derived from the consumption of Ox, in the mixtilinear area above it. I have not said that the surplus of satisfaction over payment would be accurately represented by the area yy₀p. For this again would only be an approximation. In evaluating the price actually paid at Op our Figure implies that if the market for the commodity in question were closed, or if the commodity ceased to exist, the purchaser, while losing the total area above Ox, would gain the released area of the rectangle Op. This means that the whole of the money now spent on this commodity could be expended on other commodities at a marginal significance represented by xp or Oy. But theoretically this is not true, for if the supplies of other commodities were increased, it would of course be at a declining significance, and consequently, when the whole sum Op had been distributed amongst them, their marginal values would have declined to some extent, however small, from the height xp. Some portion of them, therefore, would have less value than if their marginal significance had remained at xp; and in the sum they will not equal Op. And here again, as we recede from the actual point of departure towards the origin, there will be another source of disturbance in the psychic significance of the money unit, independent of the advancing margin, viz. the change in the whole significance of remaining sources of satisfaction as the one to which the Figure refers dries up. Here again, therefore, all attempts to guard against and discount sources of disturbance in the psychic value of our objective unit must be at once subtle and clumsy. The only ideal method is to conceive of a mind trained to hold a psychic magnitude firmly and apply it consistently as a unit. That magnitude would be the satisfaction represented by the money unit under existing conditions, but it would be applied to hypothetically changed conditions directly, and not through the convenient but treacherous intervention of a money unit which might be perpetually changing its significance.

But now let us suppose that a man's income increases or diminishes. This will obviously affect the whole system of his scales of preference. Possibly "pop and cockles" may completely fall out of his list of purchases, and "champagne and oysters" may appear on it; but in an ordinary case (especially where the change is not so great as to declass the man), while some modes of expenditure will probably be dropped and some almost certainly introduced, a large number will be extended. He will perhaps increase the scale of his hospitalities, will pay more for houseroom, and so forth. That is to say, on a great number of individual commodities the amount of his purchases will increase, but he will pay for land, railway tickets, concerts, and provisions at the same rate as before, and, as before, will gratify his tastes to the point at which the relative marginal significance of the things he buys is the same to him as it is to his competitors in the market. But the price of things, though the same, will not represent the same sacrifice, for he is better supplied with all the things in the circle of exchange that the price represents. But as for those things that do not enter into the circle of exchange—irksome effort, for example, or the sacrifice of personal tastes or the thwarting of personal affection—he would not now incur the same sacrifice in these things to avoid a slight decrement or to secure a slight increment of any of the things in the circle of exchange that he would have done when his smaller income gave each of these latter a higher psychic significance to him at the margin.

For instance, if one of his children shews signs of ill-health, and by the expenditure of £100 a year he can place him under more favourable conditions, he may not hesitate to sacrifice the alternatives of things in the circle of exchange at the margins of his other expenditures which will be necessary; whereas when his income was narrower he could not have faced the acuter hardships and sacrifices which would have been involved in drawing back these margins. Thus his marginal estimates of the significance of things on which he still expends his money, relatively to other things in the circle of exchange, are the same as they were; but relatively to things not in the circle of exchange they have taken a lower place. Whatever his income he will always bring his expenditure into equilibrium with the market prices; that is to say, the marginal units of the things he buys will always occupy at the margin the same fixed place on the objective scale of things in the circle of exchange, but on the subjective scale they have advanced to a point of lower significance.

There is still another source of confusion. We have been attempting to evaluate the surplus satisfaction, over and above the sacrifice involved in the payment, which a consumer actually derives, under existing circumstances, from his normal consumption of a given commodity, and to evaluate it in terms of the actual significance of pounds, shillings, and pence under the actual conditions of his resources and expenditure. Our questions as to what he would give for such and such an increment at such and such a margin, or how much he would buy altogether at such and such a price, have merely been a device for discovering the actual value in use that things have for him; and he will not give us the answers we require unless he treats the hypothesis of an increased price as purely ideal and applying to himself alone. For as soon as he begins to think of any actual circumstances under which the price would rise, it will involve the supposition that causes are at work which affect not only him, but others also. And if he imagines that the supply of tea, for instance, is contracted, and that is why he has to pay a higher price for it, he may assume that other people are in the same position as himself; and if that is so, then obviously the general demand for substitutes such as coffee and cocoa will rise, and the prices will rise correspondingly, and the condition "other things remaining the same" will be violated, for he will not be able to purchase the substitutes at the prices for which he can now obtain them. If he is a commercial man he may instinctively take this into account, and give us estimates of what he would do under given conditions, modified by an instinctive sense of what others would be doing under pressure of the causes which had brought these circumstances about. And even the noncommercial student, as he imagines himself retreating towards the origin in his consumption of some particular commodity, often frames half unconsciously some hypothesis to account for the fact, which reacts upon his suppositions as to the supply of other commodities.

But here a difficulty presents itself. If the price rises because the supply is reduced, the amount that A will take at this higher price is affected by the terms on which he can get all the available substitutes; but if B is having his stock reduced at the same time as A he will probably run to the same substitutes, and since this will raise their market value A will find that the conditions under which he made his estimates have been violated. We asked him how much he would take at such a price, "all other things remaining equal," and we constructed his curve from his replies; but now we find that (in the normal case) as the price rises all other things do not remain equal, for the price of substitutes rises also; and the modifications which this will introduce into A's estimate of the relative significance (expressed in the objective unit) of the commodity at any given margin cannot be determined simply by analysing his present sense of values, for the terms on which the alternatives will be offered to him will be changed to an extent which he cannot determine and which does not depend on his own estimates of different satisfactions.

We have seen that all the different items of the ultimate sources of supply, and all the existing products, can, at any given moment, be expressed in a common unit. Therefore, in considering any single industry, we have first to determine what unit we will take to measure amounts of the productive agents. We might take, for instance, the amount that would exchange for an ounce of gold, or a ton of pig-iron, or a quarter of wheat of given quality, or any combination of these or other articles we choose to select. This will be our arbitrary unit-of-products-and-factors-of-production, and as we are now applying it exclusively as a measure of factors of production we will call it the unit-factor of production. The unit of the special product we will take as that amount of it which the unit-factor of production can produce. What will the unit on the axis of Y be? It will represent the general command of articles in the circle of exchange which corresponds to the ounce of gold, ton of pig-iron, or what not, that we have taken to measure our unit-factor of production. We may think of it in terms of money. It may be a pound's worth or a shilling's worth of anything that is in the circle of exchange, including the factors of production themselves. The curve, then, will indicate the place on the communal scale of preferences of each successive unit of the commodity; and the flow of productive forces into that industry will be regulated exactly as the flow of fish or carrots to this or that purchaser's larder is regulated. It will bring it down to the (objective) level determined by its marginal significance elsewhere. If the total amount of the resources of society which will in any case be deflected to this particular industry is an infinitesimal portion of the whole, we may take this margin as independently fixed. The curve ( Fig. 31) gives us the rate at which the unit-factor of production will satisfy human wants (measured objectively) in this industry at any margin.

At what rate (measured by the same standard) will it satisfy human wants in other marginal applications? Whatever that rate may be it can be represented by a line. Measure off that line on the axis of Y, draw through the point thus determined a parallel to the axis of X, and the abscissa of its point of intersection with the curve will determine the flow of the productive resources to this industry, and the corresponding amount of the product. The curvilinear space above this line will represent (objectively) the satisfaction which the creation or destruction of this particular industry would add or subtract from the community. Its revenues of enjoyment (or at least of anticipated or estimated satisfaction) will be increased to that extent by the existence of this industry. It follows, of course, that whereas the communal curves of demand for, say, a certain kind of timber in the furnishing, the building, the shipping trades, and so forth, can be added, under the conditions laid down on pages 494 sq., the communal curves for different commodities (houses, ships, race-horses, diamonds, books, fruit, music, etc.) cannot be added, since each such curve assumes that all other conditions remain the same, and to travel along any one of them constitutes a change of the conditions for some or all of the others.

We will begin with Robinson Crusoe. Along the axis of X ( Fig. 33) we measure units of effort. The proper basis for such a unit would be foot-pounds if we were considering mere muscular effort, but it will be convenient to take an hour's work as our unit, including all physical and mental effort, and ignoring the fact that during different portions of the day, and so forth, the actual output of effort made per hour, measured by any objective standard, will vary. The p curve will now represent the marginal significance to Crusoe of the result of successive unit-outputs of effort, and the l curve will represent the marginal irksomeness of the output of effort itself. The unit on the axis of Y is essentially psychic, and we may for the present read the figure as meaning simply that at the margin of six hours' work per day the value of the product compensates threefold the irksomeness of the effort; that is to say, Crusoe would make the effort even if its results accrued at only a trifle above one-third the rate at which they actually accrue. Thus the balance is favourable up to 9 on the axis of X; after that it would be unfavourable, and therefore the output of effort is carried to that point and no further.

Leaving the island and returning to civilisation, we take the remuneration of each man's effort per hour as a datum, fixed by the general laws of the market, and, still reading the curve psychologically, we find that at the margin of six hours a day the individual whose curve we are examining estimates the advantage of the increased supplies of all commodities and services in the circle of exchange as threefold compensation for the irksomeness of the work that secures them. And the advantage is on the side of doing more work for wages up to nine hours a day, but no further. This, then, is the amount of labour he chooses to supply on the terms which it will command in the market. Well, then, he sells his time with a system of reserved prices, which constitutes his own demand for it; just as the stall-keeper sells her plums. *37 Each individual can get for his work economically as much as his doing it is worth to others, and he will require for it as much as his not doing it is worth to himself. The total supply of any kind of effort is the whole capacity of the persons capable of making it, and this supply is distributed between economic and other applications in accordance with the general laws we have studied so fully.

We are now in a position to examine various diagrammatic methods which have been employed to exhibit the relation between value in exchange and cost of production, determining the normal price of an article by the method of intersection. It is usual to speak in this connection, as in that of the market, *43 of a demand curve and a supply curve, but to distinguish between the cases that illustrate diminishing and those that illustrate increasing returns. Thus, we might take Fig. 36 to illustrate the case of an industry following the law of increasing returns. This would mean that if the quantity Ox of the commodity were produced its market value would be xp per unit, and the cost of production of a unit would be xc. Under these conditions there would obviously be an inducement to extend the industry. As Ox increased xp would, of course, fall. But so, by the action of the law of increasing returns, would xc; for as the output increased, economies could be introduced which would bring down the cost of production. There is a limit, however, to the decline of xc, whereas there is no limit to that of xp, and therefore a point of intersection must ultimately be reached. If the production were carried beyond this point, the cost of production would be greater than the price; that is to say, the effect of applying the necessary combination of factors of production at the margin of this industry would be the sacrifice of (objectively) higher values at the margin of other industries; and there would consequently be a tendency for these factors to flow from this industry to others, and so to contract the supply.

The habit of treating land as something wholly exceptional that does not enter into production on the same footing as other factors has led to a frequent use of this form of diagram as though it represented cost of production. It will be worth while to dwell on this point for a moment. It is usual to speak of wheat which has been grown on specially fertile ground as having been raised "under favourable conditions." This is quite natural and intelligible in itself, but if we translate it into a statement that the cost of production of this wheat has been less than that of other wheat grown on less fertile ground, we at once land ourselves in a tangle of confusion. There is no presumption that the cost has been less to the man who raised it, for he has had to pay higher rent for the more fertile land. Nor is there any reason to suppose, from the communal point of view, that a smaller sacrifice of open alternatives has been made for this unit of wheat than for any other. Just as in a broad generalisation we assume that labour might be withdrawn from the margin of any one industry and applied at the margin of other industries, not indeed without loss, but without great and conspicuous loss if the transfer were only small, and with a loss that diminishes without limit as we suppose the transfer to be smaller, so we must also assume that if land were withdrawn in small quantities from any given use, agricultural or other, it could be applied to some other use where it would be only a little less valued. The cost of production of any commodity, as we have seen, is determined by the significance of the alternatives sacrificed in its production, and there seems to be no kind of justification for excluding land, and the other purposes that it might have served, from the cost of production either of wheat or of anything else. If we ask the origin of so strange a practice as that of excluding land (which, moreover, we cannot separate from capital) from consideration when estimating the cost of production, the answer seems to be as follows: It was taken as an axiom that cost of production determined the value of the product. It was then seen that wheat raised upon land for which a high rent had been paid sold for no more than wheat of the same quality that had been raised on inferior land. Hence the syllogism: "Cost of production determines exchange value; rent does not affect the exchange value of wheat; therefore rent is not part of its cost of production." The major premise was false and the conclusion absurd, but so firmly was the premise established as an axiom that even a reductio ad absurdum did not lead to its revision. The argument, such as it is, would of course apply just as much to labour, raw material, or capital, as to land. For some wheat less has been paid in wages than for other wheat of the same quality; it would follow that if cost of production determines exchange value, wages are not part of the cost of production. The general truth is, as we have seen, that the value of the factors of production is derivative from the value of the product. The price or hire of some land is higher than that of other land because its products or services are more valued, but the same is true of all raw material and of all kinds and grades of skill. Their value is derivative from the value of the commodity, or ultimately the experience, they produce. This derivative nature of the value of factors of production was perceived in the case of land earlier than in other cases; and thinkers who were still under the impression that in general the product derived its value from the value of the factors of production, and who perceived that this was not true in the case of land, at once set land on a footing of its own, with the resultant confusions which we have been examining.

The roots of the error concerning the exceptional treatment of land, which we examined in the last chapter, go down far deeper than the point to which we have as yet traced them, and the process of extirpation cannot be completed without an elaborate examination of the current exposition of the theory of rent. We will therefore go on to the examination of the ordinary diagram given to illustrate both the supposed "law of decreasing returns" and the "law of rent" derived from it. In Fig. 39 increments of "labour" applied to a constant of land are reckoned along the axis of X, and rates of increment to the crop per unit increment of labour along the axis of Y. The total yield for Ox₁ "labour" is Orw₁x₁, and labour being rewarded at the rate of x₁w₁ per unit receives the area Ow₁ altogether, the balance y₁rw₁ being rent. If Ox₂ only had been applied to the same amount of land the total yield would have been the smaller area of Orw₂x₂, but the reward of "labour" per unit would have been higher, namely, x₂w₂. Rent would only be y₂rw₂, a smaller proportion of a smaller total. Thus decreasing returns to land per unit and increasing returns to "labour" per unit are read as we recede from the margin, and decreasing returns to "labour" per unit and increasing returns to land per unit as we advance from the origin. More labour bestowed on the same land means less land under the same labour. So we have these results: More labour on the same land or less land under the same labour means a larger rent per unit of land and a less "wage" per unit of "labour"; whereas less labour on the same land or more land under the same labour means a lower rent per unit of land and a higher "wage" per unit of "labour." Those of the results just formulated which are directly illustrated in the figure are very familiar to all students of Political Economy, and familiarity has made them appear axiomatically true. But those of them which are just as explicitly contained in the data, but are only indirectly illustrated by the figure, and which have been italicised in the statement just made, are unfamiliar to most students of Political Economy, and may appear startling and perplexing, though they are absolutely identical with those expressed in the more familiar form and at once accepted as axiomatic.

We have seen that the figure constructed on the hypothesis of land being constant, and labour and capital variable, may equally well be regarded as an illustration of the Ricardian theory of rent when associated, as it usually is, with the hypothesis of "no-rent" land being under cultivation. The general attitude of mind with regard to rent that results from all this may be thus described:—Rent is a residuum which is determined by the subtraction of the shares of the other factors of production, and what those shares are is determined by the remuneration they can secure on "no-rent" land—that is to say at the margin of cultivation.

Nor is this the last or the worst of it. The reader will have noticed that the use of " margin" or "marginal" which we are now examining is quite different from that in which we have defined it on page 40 sq. and used it throughout this work. "Marginal land," for instance, or "marginal ability," in this connection, is not land or ability considered with reference to the volume of the supply, at the margin of which it is added or subtracted, but land or ability of the lowest intrinsic quality which is devoted to the industry in question. And the marginal conditions are not the conditions determined throughout the industry by the "margin" in our sense, that is to say, by the marginal significance of adding or subtracting a small increment, but are certain specified conditions applying to the production of specified units of the product. On this conception of margins many writers have conceived of one distributive category after another as consisting of an actually existing "surplus," mounting backwards towards the origin from the "margin," and constituting a great reservoir untapped by marginal distribution; and bewildered and bewildering attempts have been made to get at the marginal (least efficient) man working with the marginal (least efficient or least abundant) capital on the marginal (least efficient) land, and to calculate everything backwards from this point. But it must now be clear to the reader that all such attempts are based either on the mere arrangement of units on the abscissa in the order of their efficiency, which neither illustrates, nor proves anything except that the better article commands the better price, or else are based on a misunderstanding of the geometrical form necessarily assumed by the area that represents the constant, whatever it may happen to be, in a diagram constructed on the principles of Fig. 39 (page 551). The ambiguous use of the term "margin" has obviously added to the confusion. We now see once for all that the marginal distribution in our sense (that is to say, the distribution of the product amongst the claimants in proportion to the significance of the addition or withdrawal of a small increment, at the margin determined by the present supply), exhausts the whole product. The curvilinear area represents a margin just as much as the linear ordinate does, and may just as well be represented in the same geometrical form.

In our phraseology a unit "at the margin of x" is not contrasted with the other units in the group, which are in some way superior to it. All the units in the group are at the margin. The distinction is not between the x units of the group severally, but between the significance of each of a number of qualitatively indistinguishable units when forming one of a group of x and when forming one of a group of x + 1. The one use of the term implies qualitative differences, the other presupposes qualitative identity, within the group. In our sense of the term, therefore, all the units of every group are always marginal units, whatever the margin may be; and therefore, naturally, the marginal distribution accounts for the whole product.

These two claims for gold, so far as they go, will cancel each other, and only the balance need be paid. Gold as a standard of value and a potential medium of exchange has been associated with the whole transaction; gold as an actual medium of exchange, only with a small part of it. But suppose A is under obligation to pay gold to B, and B is under obligation to pay gold not to him but to C, who in his turn is under obligation to pay gold not to B but to A. Then A is to receive gold from C and pay gold to B, B is to receive from A and pay to C, and C is to receive from B and pay to A—

so that in the end the gold will be exactly where it was at the beginning, if the obligations are equal; and if the various transactions are not of the same value in gold, the final state will only differ from the initial state by the margin beyond the area of coincidence. Here again it is clear that a sum of gold passing from A to B, and from B to C, and from C to A again, is making the same superfluous journeys that it was found easy to avoid in the simpler case when it passed from A to B and then back again from B to A.

We now pass to the social aspect of the question. Dropping for a moment the question of the commission taken in the form of the favourable chances of the table, it is clear that if there is any considerable transference of money from some of the players to others our general principle of declining marginal significance shews us that the gains will, on the average, be of less significance to the winners than the losses to the losers; so that there will be a net loss in the psychic significance of the collective wealth of the players. The money will have been transferred from the place in which it is more to the place in which it is less significant; for since the relative wealth or poverty of the players has no influence on their gain or loss, we may put it out of consideration, and may treat the gainer and loser as though they were equally wealthy; and in that case it is obvious that the gain, which advances from the existing margin onwards, will have less significance than the loss, which retreats from the existing margin backwards. We may illustrate this principle by passing for a moment from the gaming-table, and taking the case of a sweepstake on a horse-race. Each player makes a uniform stake, and the names of all the horses that are to run are then written on separate lots, and a sufficient number of blanks is put in to make the number of lots equal to the number of players. Each player then draws a lot, and the holder of the name of the horse that wins sweeps all the stakes. Now it is clear that if there are fifty players, each of them sacrifices his stake at the existing margin, whereas when they accumulate in the hands of the winner they advance, at a constantly declining significance, from the present margin downwards. Each stake, therefore, comes from where it is more and goes to where it is less significant.

Contrast the case of insurance against fire. There is an uncertain loss to be met. The margin of the man upon whom it falls suddenly and notably retreats. He receives sovereigns, each one of which is taken at the existing margin of the other insurers and is applied at his raised, because retreated, margin; so that the sovereigns come from where they are less and go to where they are more significant. Gambling and insurance, therefore, which have some elements in common, namely the certainty of the stake and the uncertainty of the issue, are, from the social point of view, exactly the opposite of each other. Gambling is a machinery for carrying money from where it is more to where it is less significant, and insurance is a machinery for carrying it from where it is less to where it is more significant.

Note, finally, that it is easy to exaggerate the magnitude of the material difference between prosperous and depressed times. The bulk of the business of the country goes on successfully all the time. It is only over a comparatively narrow margin that inflation and contraction succeed each other.

It will be a good exercise to see how far we can trace the meaning of such an act as subscribing a guinea to a famine fund in India. The root fact is that there is a shortage of food, and the inevitable deduction seems to be that man or beast must somewhere go so much short. *71 If the otherwise starving Hindus are fed, they must eat food that some one else would eat if they were left to starve. Now, if I subscribe a guinea, it is exceedingly improbable that I save that guinea out of food. Even if I did we should have to inquire in what way the food that I should have eaten gets, directly or indirectly, to the Hindu; but if I eat just as much as I should have done, the more perplexing question remains: Who abstains from food because I subscribe a guinea? How does my subscribing make him abstain, and how does the food from which he abstains reach India directly or indirectly? Let us consider the special circumstances, which would of course vary if the famine were not in India, but in China or Sicily. To begin with, we may assume that there is no actual lack of food-stuffs in British India as a whole, even in time of the severest famine. Probably there will be plenty of food near the famine-stricken districts, easily accessible. The trouble is not that there is no food, but that the ryot has no money or general command of wealth by which to get it. Nay, it is very possible that the starving ryot has himself managed to grow rice enough for sustenance and next year's seed, but has to sell to enable him to pay taxes. *72 Now a certain not inconsiderable part of the taxation of India is devoted to the payment of pensions and annuities in England. This, then, is the situation. India exports rice in order (amongst other things) to pay pensions in England. Suppose, in the first instance, that English pensioners or annuitants, who would actually have consumed a guinea's worth of Indian rice, determine to subscribe a guinea to the famine fund, and to go short of the food themselves. That is to say, they give up eating the rice and eat nothing else instead. The case would then be perfectly simple. The distressed ryots would either keep their own rice or buy rice from a neighbouring district, and India would export less rice by that amount. Money can in this case be eliminated from the question, and we can regard the English pensioner as simply giving the ryot a bill on himself for the price of the rice which he has never received. The ryot can then either keep his own rice and pay his taxes by his bill on the Englishman, or can buy rice from his neighbour with the bill and pay his taxes out of other resources. It would be exactly the same if you or I abstained from the rice, and subscribed the guinea. In that case the essential facts might be represented thus. I allow India to draw a bill on me for a guinea, and at the same time I abstain from eating rice. India, instead of selling rice to raise a guinea for the pensioner in England, sends him the bill upon me for that amount, and keeps and eats the rice; leaving me to pay the pension. But now, suppose that the subscribers, instead of abstaining from rice, abstain from stalls at the opera, or dishes of early asparagus or strawberries, or that they travel third class instead of first, or go without books they would otherwise have bought, or trench upon their other charities. How does this relieve the famine? The immediate answer is obvious and is the same as before. India has leave to draw a bill upon the subscriber, and, therefore, is not compelled to sell the rice. There is, therefore, so much more rice in India, and so much less in the general market, and it follows that somebody must go short. But the accounts are not "cleared" as they were in the former case, and we must pursue our inquiries further. Two apparently independent centres of disturbance have been established. On the one hand, the rice market in England is to a certain extent depleted. Our previous studies enable us to form a perfectly clear conception of what that would mean if it stood alone. What would have been the marginal demands had the supply been as great as usual would remain unsatisfied. The price of rice would rise, and certain people would either go without rice altogether, or would take less than usual. As we need not suppose that any of the phenomena we are examining affect the incomes of the majority of these abstainers, they would presumably increase their purchases of the most obvious substitutes for rice, let us say sago, tapioca, or Indian corn. And since at present we have seen no reason to suppose that the available supply of these substitutes would be in any way increased, these markets also would feel the reaction, and there would be a tendency to a rise. And so, in widening circles, the effect of a shortage in rice would diffuse itself, and minute abstinences would be the result, until the whole effect of the shortage was exhausted in the diminished satisfactions of a great number of individuals who had unconsciously and unintentionally made minute marginal concessions to fill up the hideous void in India, where for once we watch a margin actually running back, unless arrested, to the origin itself.

Returning to the public body, we may ask whether it should borrow capital for its enterprises or should raise it by taxation. Those who regard the receiving of interest as an evil in itself will presumably advocate the former course, but if they exclude the latter they will have to make a material sacrifice, for the satisfaction of their sentimental objection, which it will repay us to examine. Raising capital by taxation means compelling the willing and the unwilling alike to stand out of so much present satisfaction in order to secure a communal revenue in the future. Opinions will differ as to what return is adequate to justify the sacrifice. Suppose it is fixed at 5 per cent, that will mean that the effective majority of the community decides that the communal industries must be fed down to the point at which the marginal yield of capital is 5 per cent, but that less than £5 a year does not justify the enforcing of a saving of £100. Now, some members of the community would prefer to spend the share of their capital that they will be required to surrender and go without their share of the revenue it will produce; and others will think that a lower yield would justify the investment of capital and would like to save more and produce larger revenues. We may, if we like, ignore the unwillingness of the former class, and force them, without compunction, to conform to the communal standard of prudence; but nothing is gained by not allowing the others to be more prudent than the average. Suppose, for instance, that taxation (perhaps withholding dividends, which is simply a special form of taxation) has raised as much as the communal authority cares to exact as capital for the establishment of some new industrial undertaking; and suppose that a marginal significance of 5 per cent determines that amount. There will be members of the community who for one reason or another estimate future revenue relatively to present satisfactions more highly than the enforced standard requires. Suppose another £10,000 would bring the marginal yield of the capital down to 4¼ per cent, another £10,000 yet to 3¾, and yet another £10,000 to 3½ per cent; and suppose we could raise a loan of £20,000, but no more, if we offered 3¾ per cent. We should then know that we could not carry the margin of productivity down lower than 3¾ per cent without paying more for our capital than it was yielding at the margin, but that we could carry it down to that point. We may, therefore, borrow £20,000, pay for it at 3¾ per cent, and secure to the community the whole curvilinear area which stands above the rectangle of payment, beginning at a height of 1¼ above it and gradually declining to it. And this gain, against which there is nothing to set, has been secured by opening an opportunity to the more prudent of our fellow-citizens which they value. If we are amongst those who are personally willing to sink capital in the new industry till it reaches the marginal significance of 5 per cent, our more prudent neighbours have now not only helped us (as they would have done even if we had raised no loan) to drag our unwilling fellow-citizens up to our mark (which we have agreed to regard as an advantage), but have also made us a gratuitous present of further revenue. The sentimental objection against such a proceeding must be strong if it is to overrule its advantages. At any rate it is well to realise what the advantages are.

It would be out of the question to attempt an exhaustive analysis of the many-sided phenomenon of Trade Unionism. A Trade Union is, amongst other things, an intelligence department, enabling a man to know, better than he could find out for himself, where he is likely to find the marginal significance of his labour highest, and what that significance is likely to be. Further, it may be a benefit club, providing him with sick pay, out-of-work pay, or an old age pension. But its most characteristic functions are connected with the principle of collective bargaining. If a man earning 25s. a week thinks he is worth 28s., and his employer does not agree with him, and each is determined to act on his opinion, the man will leave his employment and will get work elsewhere if he can. The stake with which he has backed his opinion is a high one, for if he is wrong he will suffer heavily before he has found it out. And he may after all be right, in the sense that he really was worth 28s. to his employer, and would be to other employers if he could but get at them, but he may, nevertheless, fail to find any one else who will give him even 25s. On the other hand, the employer backs his opinion by a comparatively light stake, for if he loses the services of a man who would have been worth 28s. to him, and saves the wage he would have paid him, he is only the loser by the undetermined margin of the gain he would have made on employing him, and this will constitute a very small part of his income; whereas the workman risks the whole of his. The workmen, therefore, taken severally, are at a disadvantage in bargaining with the employer. If, however, the whole body, or a considerable number of them, determine to back their opinion, they will bring the stake of the employer individually to something more like equality with the individual stake made by each of them; for though it would make little difference to him to lose the services of one man, it would make a great difference to him to lose the services of many or of all of them. Moreover, by accumulating a fund they can hope to diminish their risk by gaining a power of resistance which will secure respectful treatment; and by spreading their sacrifices over a long period of preparation and accumulation they may make them at a lower total cost, should the worst come to the worst.

But as far as we have yet gone it would seem that both employer and employed would have an interest in ascertaining how much the man is really worth, and that the competition of the employers will tend to secure him in getting it; for, if the employers are always eager to take a man if he is willing to work for less than he is worth to them, will not every employer prefer making a shilling a week himself to seeing another make 1s. 6d.? And will he not, therefore, bid the man up until he is receiving his full economic wage? It would, therefore, seem that the machinery of Trade Unionism is a rather elaborate provision for the assistance of economic forces which are strong enough to look after themselves. But here an interesting point arises. Suppose two employers of a thousand hands each are paying 25s. a week to each of them, and that each employer knows that every man is really worth 28s. a week to him, i.e. if he lost the services of one man, at the margin of a thousand, it would reduce his own incomings by 28s. a week. It follows that it would pay each of them to take on a certain number of extra hands, not only at 25s. but at anything short of 28s. So it is generally argued that each of the employers will compete for the men with the other until the wage is raised to 28s. But this is not really so; for, if an employer took on, say, a hundred more men at 26s. or 27s., he would have to raise the wages of the thousand men he already employs by one or two shillings each. He would, if he raised wages to 26s., get a hundred new men worth 28s. each for 26s. and so make a clear profit of £10 a week, but he would have to pay a thousand extra shillings a week to his present men, and so would lose a clear profit he is now making of £50. If he got the new men at 27s., the gain would be £5 and the loss £100. The employers, of course, perfectly understand this practically, and consequently there is an automatic lock on the competition of the large employers, without the necessity of any formal combination or agreement amongst them. They will decline to bid for a few extra men and a small extra profit which would involve a greatly increased expenditure. Each, then, will contentedly remain at the point at which he stands. Theoretically, it would seem, it is only where there is a fringe of small employers that there is any effective competition amongst those already in the trade. If a small man who is not employing any hands at all, or is only employing two or three, sees his way to taking a job that would employ ten men, and making £1 a week clear profit, he may bid for them. There will only be, at most, two or three shillings a week to set against the gain. He, therefore, might become an effective competitor for labour in the market. But if the business is one that it is difficult to enter without the expenditure of large capital and the lapse of considerable time, the established employers will be shielded for a considerable period against competition from fresh employers, who have not the choice between normal and abnormal profit in the business, but only between the normal profit and none at all. This seems to be the true economic justification of collective bargaining; for, if the hands are sure of their case, they can, by the threat of a strike, place before the established employer the alternative that would face him if he were thinking of entering the trade, namely, the payment of the economic wage of 28s., or ceasing to conduct the business at all.

On the other hand the idea that life can be improved by a simple decree that higher wages shall be paid, in other words the hope of social regeneration by the enactment of a minimum wage, appears to be illusory. We have noted again and again that you cannot make a man worth so much a week by saying that he shall receive it, and that the economic forces will never induce any one to give a man more for his work than that work is worth to the giver. The only circumstances under which the enforcement of a minimum wage can be theoretically defended are when there is reason to believe that the economic conditions really justify a higher wage, but that friction and lethargy prevent the economic forces acting; or when the creation of a certain amount of unemployment is deliberately contemplated under the idea that it will be easier to deal with than a mass of employment at starvation wages. We start, then, from the thesis that if there are great bodies of persons in every country receiving starvation wages, it must be either because the economic forces cannot overcome certain frictions, or because the persons in question, under existing circumstances, are not industrially worth any more than they are receiving. If so, it is no use denouncing some one else for not giving them more than they are worth. We must either overcome the industrial frictions, or make them worth more where they are, or place them somewhere where they will be worth more. The steady tendency of present movements is to concentrate on the attempt to make them worth more. The cry for feeding school children, which defies all the wisdom of our fathers, justifies itself by pleading that ill-nourished children will be worth nothing, and, therefore, will get nothing, in the industrial world. This is only carrying a step further the principle that was acknowledged long ago in the State aid of education, and finally in the full acceptance of the national responsibility for the education of the people. But many are bitterly disappointed with the results of compulsory education and sceptical as to the value of our present methods, and are trying to conceive of a system of true education, at once industrial and human, that shall be a great instrument for training, sorting, and directing the faculties and developing the characters of the community, so as to make every talent available for the highest and most urgently needed function which it is capable of performing, and making every normally efficient man and woman worth enough at the margin to be able to command the means of a human life.