Principles of Economics
1. In the Economics of Industry published by my wife and myself in 1879 an endeavour was made to show the nature of this fundamental unity. A short provisional account of the relations of demand and supply was given before the theory of Distribution; and then this one scheme of general reasoning was applied in succession to the earnings of labour, the interest on capital and the Earnings of Management. But the drift of this arrangement was not made sufficiently clear; and on Professor Nicholson's suggestion, more prominence has been given to it in the present volume.
2. The term "marginal" increment I borrowed from von Thünen's Der isolirte Staat, 1826-63, and it is now commonly used by German economists. When Jevons' Theory appeared, I adopted his word "final"; but I have been gradually convinced that "marginal" is the better.
Book I, Chapter I
Book I, Chapter II
5. The objections raised by some philosophers to speaking of two pleasures as equal, under any circumstances, seem to apply only to uses of the phrase other than those with which the economist is concerned. It has however unfortunately happened that the customary uses of economic terms have sometimes suggested the belief that economists are adherents of the philosophical system of Hedonism or of Utilitarianism. For, while they have generally taken for granted that the greatest pleasures are those which come with the endeavour to do one's duty, they have spoken of "pleasures" and "pains" as supplying the motives to all action; and they have thus brought themselves under the censure of those philosophers, with whom it is a matter of principle to insist that the desire to do one's duty is a different thing from a desire for the pleasure which, if one happens to think of the matter at all, one may expect from doing it; though perhaps it may be not incorrectly described as a desire for "self-satisfaction" or "the satisfaction of the permanent self." (See for instance T. H. Green, Prolegomena to Ethics, pp. 165-6.)
It is clearly not the part of economics to appear to take a side in ethical controversy: and since there is a general agreement that all incentives to action, in so far as they are conscious desires at all, may without impropriety be spoken of shortly as desires for "satisfaction," it may perhaps be well to use this word instead of "pleasure," when occasion arises for referring to the aims of all desires, whether appertaining to man's higher or lower nature. The simple antithesis to satisfaction is "dissatisfaction": but perhaps it may be well to use the shorter and equally colourless word "detriment" in its place.
It may however be noted that some followers of Bentham (though perhaps not Bentham himself) made this large use of "pain and pleasure" serve as a bridge by which to pass from individualistic Hedonism to a complete ethical creed, without recognizing the necessity for the introduction of an independent major premiss; and for such a premiss the necessity would appear to be absolute, although opinions will perhaps always differ as to its form. Some will regard it as the Categorical Imperative; while others will regard it as a simple belief that, whatever be the origin of our moral instincts, their indications are borne out by a verdict of the experience of mankind to the effect that true happiness is not to be had without self-respect, and that self-respect is to be had only on the condition of endeavouring so to live as to promote the progress of the human race.
7. This is specially true of that group of gratifications, which is sometimes named "the pleasures of the chase." They include not only the light-hearted emulation of games and pastimes, of hunts and steeplechases, but the more serious contests of professional and business life: and they will occupy a good deal of our attention in discussions of the causes that govern wages and profits, and forms of industrial organization.
Some people are of wayward temperament, and could give no good account even to themselves of the motives of their action. But if a man is steadfast and thoughtful, even his impulses are the products of habits which he has adopted more or less deliberately. And, whether these impulses are an expression of his higher nature or not; whether they spring from mandates of his conscience, the pressure of social connection, or the claims of his bodily wants, he yields a certain relative precedence to them without reflection now, because on previous occasions he has decided deliberately to yield that relative precedence. The predominant attractiveness of one course of action over others, even when not the result of calculation at the time, is the product of more or less deliberate decisions made by him before in somewhat similar cases.
8. See an admirable essay by Cliffe Leslie on The Love of Money. We do indeed hear of people who pursue money for its own sake without caring for what it will purchase, especially at the end of a long life spent in business: but in this as in other cases the habit of doing a thing is kept up after the purpose for which it was originally done has ceased to exist. The possession of wealth gives such people a feeling of power over their fellow-creatures, and insures them a sort of envious respect in which they find a bitter but strong pleasure.
Book I, Chapter III
12. The relation of "natural and economic laws," is exhaustively discussed by Neumann (Zeitschrift für die gesamte Staatswissenschaft, 1892) who concludes (p. 464) that there is no other word than Law (Gesetz) to express those statements of tendency, which play so important a part in natural as well as economic science. See also Wagner (Grundlegung, §§ 86-91).
15. Some parts of economics are relatively abstract or pure, because they are concerned mainly with broad general propositions: for, in order that a proposition may be of broad application it must necessarily contain few details: it cannot adapt itself to particular cases; and if it points to any prediction, that must be governed by a strong conditioning clause in which a very large meaning is given to the phrase "other things being equal."
Other parts are relatively applied, because they deal with narrower questions more in detail; they take more account of local and temporary elements; and they consider economic conditions in fuller and closer relation to other conditions of life. Thus there is but a short step from the applied science of banking in its more general sense, to broad rules or precepts of the general Art of banking: while the step from a particular local problem of the applied science of banking to the corresponding rule of practice or precept of Art may be shorter still.
Book I, Chapter IV
16. This Section is reproduced from a Plea for the creation of a curriculum in economics and associated branches of political science addressed to the University of Cambridge in 1902, and conceded in the following year.
Book II, Chapter I
19. We ought "to write more as we do in common life, where the context is a sort of unexpressed 'interpretation clause'; only as in Political Economy we have more difficult things to speak of than in ordinary conversation, we must take more care, give more warning of any change; and at times write out 'the interpretation clause' for that page or discussion lest there should be any mistake. I know that this is difficult and delicate work; and all that I have to say in defence of it is that in practice it is safer than the competing plan of inflexible definitions. Any one who tries to express various meanings on complex things with a scanty vocabulary of fastened senses, will find that his style grows cumbrous without being accurate, that he has to use long periphrases for common thoughts, and that after all he does not come out right, for he is half the time falling back into the senses which fit the case in hand best, and these are sometimes one, sometimes another, and almost always different from his 'hard and fast' sense. In such discussions we should learn to vary our definitions as we want, just as we say 'let x, y, z, mean' now this, and now that, in different problems; and this, though they do not always avow it, is really the practice of the clearest and most effective writers." (Bagehot's Postulates of English Political Economy, pp. 78, 9.) Cairnes also (Logical Method of Political Economy, Lect. VI.) combats "the assumption that the attribute on which a definition turns ought to be one which does not admit of degrees"; and argues that "to admit of degrees is the character of all natural facts."
20. When it is wanted to narrow the meaning of a term (that is, in logical language, to diminish its extension by increasing its intension), a qualifying adjective will generally suffice, but a change in the opposite direction cannot as a rule be so simply made. Contests as to definitions are often of this kind:—A and B are qualities common to a great number of things, many of these things have in addition the quality C, and again may the quality D, whilst some have both C and D. It may then be argued that on the whole it will be best to define a term so as to include all things which have the qualities A and B, or only those which have the qualities A, B, C, or only those which have the qualities A, B, D; or only those which have A, B, C, D. The decision between these various courses must rest on considerations of practical convenience, and is a matter of far less importance than a careful study of the qualities A, B, C, D, and of their mutual relations. But unfortunately this study has occupied a much smaller space in English economics than controversies as to definitions; which have indeed occasionally led indirectly to the discovery of scientific truth, but always by roundabout routes, and with much waste of time and labour.
Book II, Chapter II
21. For, in the words in which Hermann begins his masterly analysis of wealth, "Some Goods are internal, others external, to the individual. An internal good is that which he finds in himself given to him by nature, or which he educates in himself by his own free action, such as muscular strength, health, mental attainments. Everything that the outer world offers for the satisfaction of his wants is an external good to him."
Another arrangement is more convenient for some purposes:—
23. That part of the value of the share in a trading company which is due to the personal reputation and connection of those who conduct its affairs ought properly to come under the next head as external personal goods. But this point is not of much practical importance.
24. It is not implied that the owner of transferable goods, if he transferred them, could always realize the whole money value, which they have for him. A well-fitting coat, for instance, may be worth the price charged for it by an expensive tailor to its owner, because he wants it and cannot get it made for less: but he could not sell it for half that sum. The successful financier who has spent £50,000 on having a house and grounds made to suit his own special fancy, is from one point of view right in reckoning them in the inventory of his property at their cost price: but, should he fail, they will not form an asset to his creditors of anything like that value.
And in the same way from one point of view we may count the business connection of the solicitor or physician, the merchant or the manufacturer, at the full equivalent of the income he would lose if he were deprived of it; while yet we must recognize that its exchange value, i.e. the value which he could get for it by selling it, is much less than that.
26. "The bodies of men are without doubt the most valuable treasure of a country," said Davenant in the seventeenth century; and similar phrases have been common whenever the trend of political development has made men anxious that the population should increase fast.
27. The value of a business may be to some extent due to its having a monopoly, either a complete monopoly, secured perhaps by a patent; or a partial monopoly, owing to its wares being better known than others which are really equally good; and in so far as this is the case the business does not add to the real wealth of the nation. If the monopoly were broken down, the diminution of national wealth due to the disappearance of its value would generally be more than made up, partly by the increased value of rival businesses, and partly by the increased purchasing power of the money representing the wealth of other members of the community. (It should, however, be added that in some exceptional cases, the price of a commodity may be lowered in consequence of its production being monopolized: but such cases are very rare, and may be neglected for the present.)
Again, business connections and trade reputations add to the national wealth, only in so far as they bring purchasers into relation with those producers who will meet their real wants most fully for a given price; or in other words, only in so far as they increase the extent to which the efforts of the community as a whole meet the wants of the community as a whole. Nevertheless when we are estimating national wealth, not directly but indirectly as the aggregate of individual wealth, we must allow for these businesses at their full value, even though this partly consists of a monopoly which is not used for the public benefit. For the injury they do to rival producers was allowed for in counting up the values of the businesses of those rivals; and the injury done to consumers by raising the price of the produce, which they buy was allowed for in reckoning the purchasing power of their means, so far as this particular commodity is concerned.
A special case of this is the organization of credit. It increases the efficiency of production in the country, and thus adds to national wealth. And the power of obtaining credit is a valuable asset to any individual trader. If, however, any accident should drive him out of business, the injury to national wealth is something less than the whole value of that asset; because some part at least of the business, which he would have done, will now be done by others with the aid of some part at least of the capital which he would have borrowed.
There are similar difficulties as to how far money is to be reckoned as part of national wealth; but to treat them thoroughly would require us to anticipate a good deal of the theory of money.
28. As Cournot points out (Principes Mathématiques de la Théorie des Richesses, ch. II.), we get the same sort of convenience from assuming the existence of a standard of uniform purchasing power by which to measure value, that astronomers do by assuming that there is a "mean sun" which crosses the meridian at uniform intervals, so that the clock can keep pace with it; whereas the actual sun crosses the meridian sometimes before and sometimes after noon as shown by the clock.
Book II, Chapter III
29. Bacon, Novum Organon IV., says "Ad opera nil aliud potest homo quam ut corpora naturalia admoveat et amoveat, reliqua natura intus agit" (quoted by Bonar, Philosophy and Political Economy, p. 249).
32. Thus flour to be made into a cake when already in the house of the consumer, is treated by some as a consumers' good; while not only the flour, but the cake itself is treated as a producers' good when in the hand of the confectioner. Carl Menger (Volkswirthschaftslehre, ch. I. § 2) says bread belongs to the first order, flour to the second, a flour mill to the third order and so on. It appears that if a railway train carries people on a pleasure excursion, also some tins of biscuits, and milling machinery and some machinery that is used for making milling machinery; then the train is at one and the same time a good of the first, second, third and fourth orders.
33. This is Jevons' definition (Theory of Political Economy, ch. V.), except that he includes only painful exertions. But he himself points out how painful idleness often is. Most people work more than they would if they considered only the direct pleasure resulting from the work; but in a healthy state, pleasure predominates over pain in a great part even of the work that is done for hire. Of course the definition is elastic; an agricultural labourer working in his garden in the evening thinks chiefly of the fruit of his labours; a mechanic returning home after a day of sedentary toil finds positive pleasure in his garden work, but he too cares a good deal about the fruit of his labour; while a rich man working in like manner, though he may take a pride in doing it well, will probably care little for any pecuniary saving that he effects by it.
34. Thus the Mercantilists who regarded the precious metals, partly because they were imperishable, as wealth in a fuller sense than anything else, regarded as unproductive or "sterile" all labour that was not directed to producing goods for exportation in exchange for gold and silver. The Physiocrats thought all labour sterile which consumed an equal value to that which it produced; and regarded the agriculturist as the only productive worker, because his labour alone (as they thought) left behind it a net surplus of stored-up wealth. Adam Smith softened down the Physiocratic definition; but still he considered that agricultural labour was more productive than any other. His followers discarded this distinction; but they have generally adhered, though with many differences in points of detail, to the notion that productive labour is that which tends to increase accumulated wealth; a notion which is implied rather than stated in the celebrated chapter of The Wealth of Nations which bears the title, "On the Accumulation of Capital, or on Productive and Unproductive Labour." (Comp. Travers Twiss, Progress of Political Economy, Sect, VI., and the discussions on the word Productive in J. S. Mill's Essays, and in his Principles of Political Economy.)
35. Among the means of production are included the necessaries of labour but not ephemeral luxuries; and the maker of ices is thus classed as unproductive whether he is working for a pastry-cook, or as a private servant in a country house. But a bricklayer engaged in building a theatre is classed as productive. No doubt the division between permanent and ephemeral sources of enjoyment is vague and unsubstantial. But this difficulty exists in the nature of things and cannot be completely evaded by any device of words. We can speak of an increase of tall men relatively to short, without deciding whether all those above five feet nine inches are to be classed as tall, or only those above five feet ten. And we can speak of the increase of productive labour at the expense of unproductive without fixing on any rigid, and therefore arbitrary line of division between them. If such an artificial line is required for any particular purpose, it must be drawn explicitly for the occasion. But in fact such occasions seldom or never occur.
36. All the distinctions in which the word Productive is used are very thin and have a certain air of unreality. It would hardly be worth while to introduce them now; but they have a long history; and it is probably better that they should dwindle gradually out of use, rather than be suddenly discarded.
The attempt to draw a hard and fast line of distinction where there is no real discontinuity in nature has often done more mischief, but has perhaps never led to more quaint results, than in the rigid definitions which have been sometimes given of this term Productive. Some of them for instance lead to the conclusion that a singer in an opera is unproductive, that the printer of the tickets of admission to the opera is productive; while the usher who shows people to their places is unproductive, unless he happens to sell programmes, and then he is productive. Senior points out that "a cook is not said to make roast meat but to dress it; but he is said to make a pudding.... A tailor is said to make cloth into a coat, a dyer is not said to make undyed cloth into dyed cloth. The change produced by the dyer is perhaps greater than that produced by the tailor, but the cloth in passing through the tailor's hands changes its name; in passing through the dyer's it does not: the dyer has not produced a new name, nor consequently a new thing." Pol. Econ. pp. 51, 2.
38. Thus in the South of England population has increased during the last hundred years at a fair rate, allowance being made for migration. But the efficiency of labour, which in earlier times was as high as that in the North of England, has sunk relatively to the North; so that the low-waged labour of the South is often dearer than the more highly-paid labour of the North. We cannot thus say whether the labourers in the South have been supplied with necessaries, unless we know in which of these two senses the word is used. They have had the bare necessaries for existence and the increase of numbers, but apparently they have not had the necessaries for efficiency. It must however be remembered that the strongest labourers in the South have constantly migrated to the North; and that the energies of those in the North have been raised by their larger share of economic freedom and of the hope of rising to a higher position. See Mackay in Charity Organization Journal, Feb. 1891.
39. If we considered an individual of exceptional abilities we should have to take account of the fact that there is not likely to be the same close correspondence between the real value of his work for the community and the income which he earns by it, that there is in the case of an ordinary member of any industrial class. And we should have to say that all his consumption is strictly productive and necessary, so long as by cutting off any part of it he would diminish his efficiency by an amount that is of more real value to him or the rest of the world than he saved from his consumption. If a Newton or a Watt could have added a hundredth part to his efficiency by doubling his personal expenditure, the increase in his consumption would have been truly productive. As we shall see later on, such a case is analogous to additional cultivation of rich land that bears a high rent: it may be profitable though the return to it is less than in proportion to the previous outlay.
41. Thus a dish of green peas in March, costing perhaps ten shillings, is a superfluous luxury: but yet it is wholesome food, and does the work perhaps of three pennyworth of cabbage; or even, since variety undoubtedly conduces to health, a little more than that. So it may be entered perhaps at the value of fourpence under the head of necessaries, and at that of nine shillings and eightpence under that of superfluities; and its consumption may be regarded as strictly productive to the extent of one-fortieth. In exceptional cases, as for instance when the peas are given to an invalid, the whole ten shillings may be well spent, and reproduce their own value.
For the sake of giving definiteness to the ideas it may be well to venture on estimates of necessaries, rough and random as they must be. Perhaps at present prices the strict necessaries for an average agricultural family are covered by fifteen or eighteen shillings a week, the conventional necessaries by about five shillings more. For the unskilled labourer in the town a few shillings must be added to the strict necessaries. For the family of the skilled workman living in a town we may take twenty-five or thirty shillings for strict necessaries, and ten shillings for conventional necessaries. For a man whose brain has to undergo great continuous strain the strict necessaries are perhaps two hundred or two hundred and fifty pounds a year if he is a bachelor: but more than twice as much if he has an expensive family to educate. His conventional necessaries depend on the nature of his calling.
Book II, Chapter IV
42. This and similar facts have led some people to suppose not only that some parts of the modern analysis of distribution and exchange are inapplicable to a primitive community; which is true: but also that there are no important parts of it that are applicable; which is not true. This is a striking instance of the dangers that arise from allowing ourselves to become the servants of words, avoiding the hard work that is required for discovering unity of substance underlying variety of form.
44. Professor Clark has made the suggestion to distinguish between Pure Capital and Capital Goods: the former is to correspond to a waterfall which remains stationary; while Capital Goods are the particular things which enter and leave the business, as particular drops pass through the waterfall. He would of course connect interest with pure capital, not with capital goods.
46. Adam Smith's distinction between fixed and circulating capital turned on the question whether the goods "yield a profit without changing masters" or not. Ricardo made it turn on whether they are "of slow consumption or require to be frequently reproduced"; but he truly remarks that this is "a division not essential, and in which the line of demarcation cannot be accurately drawn." Mill's modification is generally accepted by modern economists.
48. Just as for practical purposes it is better not to encumber ourselves with specifying the "income" of benefit which a man derives from the labour of brushing his hat in the morning, so it is better to ignore the element of capital vested in his brush. But no such consideration arises in a merely abstract discussion: and therefore the logical simplicity of Jevons' dictum that commodities in the hands of consumers are capital has some advantages and no disadvantages for mathematical versions of economic doctrines.
49. A short forecast of some of this work may be given here. It will be seen how Capital needs to be considered in regard both to the embodied aggregate of the benefits derivable from its use, and to the embodied aggregate of the costs of the efforts and of the saving needed for its production: and it will be shown how these two aggregates tend to balance. Thus in V. IV., which may be taken as in some sense a continuation of the present chapter, they will be seen balancing directly in the forecasts of an individual Robinson Crusoe; and—for the greater part at least—in terms of money in the forecasts of a modern business man. In either case both sides of the account must be referred to the same date of time; those that come after that date being "discounted" back to it; and those that come before being "accumulated" up to it.
A similar balancing in regard to the benefits and the costs of capital at large will be found to be a chief corner stone of social economy: although it is true that in consequence of the unequal distribution of wealth, accounts cannot be made up from the social point of view with that clearness of outline that is attainable in the case of an individual whether a Robinson Crusoe, or a modern business man.
In every part of our discussion of the causes that govern the accumulation and the application of productive resources, it will appear that there is no universal rule that the use of roundabout methods of production is more efficient than direct methods; that there are some conditions under which the investment of effort in obtaining machinery and in making costly provision against future wants is economical in the long run, and others in which it is not: and that capital is accumulated in proportion to the prospectiveness of man on the one hand, and on the other to the absorption of capital by those roundabout methods, which are sufficiently productive to remunerate their adoption. See especially IV. VII. 8; V. IV.; VI. I. 8; and VI. VI. 1.
The broader forces, that govern the production of capital in general and its contribution to the national income, are discussed in IV. VII. IX.-XI.: the imperfect adjustments of the money measures of benefits and costs to their real volume are discussed chiefly in III. III.-V; IV. VII.; and VI. III.-VIII.; the resulting share in the total product of labour and capital, aided by natural resources, which goes to capital, is discussed chiefly in VI. I. II. VI.-VIII. XI. XII.
Some of the chief incidents in the history of the definitions of Capital are given in Appendix E.
Book III, Chapter II
50. A woman may display wealth, but she may not display only her wealth, by her dress; or else she defeats her ends. She must also suggest some distinction of character as well as of wealth; for though her dress may owe more to her dressmaker than to herself, yet there is a traditional assumption that, being less busy than man with external affairs, she can give more time to taking thought as to her dress. Even under the sway of modern fashions, to be "well dressed"—not "expensively dressed"—is a reasonable minor aim for those who desire to be distinguished for their faculties and abilities; and this will be still more the case if the evil dominion of the wanton vagaries of fashion should pass away. For to arrange costumes beautiful in themselves, various and well-adapted to their purposes, is an object worthy of high endeavour; it belongs to the same class, though not to the same rank in that class, as the painting of a good picture.
51. It is true that many active-minded working men prefer cramped lodgings in a town to a roomy cottage in the country; but that is because they have a strong taste for those activities for which a country life offers little scope.
53. As a minor point it may be noticed that those drinks which stimulate the mental activities are largely displacing those which merely gratify the senses. The consumption of tea is increasing very fast, while that of alcohol is stationary; and there is in all ranks of society a diminishing demand for the grosser and more immediately stupefying forms of alcohol.
54. This doctrine is laid down by Banfield, and adopted by Jevons as the key of his position. It is unfortunate that here as elsewhere Jevons' delight in stating his case strongly has led him to a conclusion, which not only is inaccurate, but does mischief by implying that the older economists were more at fault than they really were. Banfield says "the first proposition of the theory of consumption is that the satisfaction of every lower want in the scale creates a desire of a higher character." And if this were true, the above doctrine, which he bases on it, would be true also. But, as Jevons points out (Theory, 2nd Ed. p. 59), it is not true: and he substitutes for it the statement that the satisfaction of a lower want permits a higher want to manifest itself. That is a true and indeed an identical proposition: but it affords no support to the claims of the Theory of Consumption to supremacy.
56. The formal classification of Wants is a task not without interest; but it is not needed for our purposes. The basis of most modern work in this direction is to be found in Hermann's Staatswirthschaftliche Untersuchungen, Ch. II., where wants are classified as "absolute and relative, higher and lower, urgent and capable of postponement, positive and negative, direct and indirect, general and particular, constant and interrupted, permanent and temporary, ordinary and extraordinary, present and future, individual and collective, private and public."
Some analysis of wants and desires is to be found in the great majority of French and other Continental treatises on economics even of the last generation; but the rigid boundary which English writers have ascribed to their science has excluded such discussions. And it is a characteristic fact that there is no allusion to them in Bentham's Manual of Political Economy, although his profound analysis of them in the Principles of Morals and Legislation and in the Table of the Springs of Human Action has exercised a wide-spread influence. Hermann had studied Bentham; and on the other hand Banfield, whose lectures were perhaps the first ever given in an English University that owed much directly to German economic thought, acknowledges special obligations to Hermann. In England the way was prepared for Jevons' excellent work on the theory of wants, by Bentham himself; by Senior, whose short remarks on the subject are pregnant with far-reaching hints; by Banfield, and by the Australian Hearn. Hearn's Plutology or Theory of the Efforts to satisfy Human Wants is at once simple and profound: it affords an admirable example of the way in which detailed analysis may be applied to afford a training of a very high order for the young, and to give them an intelligent acquaintance with the economic conditions of life, without forcing upon them any particular solution of those more difficult problems on which they are not yet able to form an independent judgment. At about the same time as Jevons' Theory appeared, Carl Menger gave a great impetus to the subtle and interesting studies of wants and utilities by the Austrian school of economists: they had already been initiated by von Thünen, as is indicated in the Preface to this Volume.
Book III, Chapter III
57. It cannot be too much insisted that to measure directly, or per se, either desires or the satisfaction which results from their fulfilment is impossible, if not inconceivable. If we could, we should have two accounts to make up, one of desires, and the other of realized satisfactions. And the two might differ considerably. For, to say nothing of higher aspirations, some of those desires with which economics is chiefly concerned, and especially those connected with emulation, are impulsive; many result from the force of habit; some are morbid and lead only to hurt; and many are based on expectations that are never fulfilled. (See above I. II. 3, 4.) Of course many satisfactions are not common pleasures, but belong to the development of a man's higher nature, or to use a good old word, to his beatification; and some may even partly result from self-abnegation. (See I. II. 1.) The two direct measurements then might differ. But as neither of them is possible, we fall back on the measurement which economics supplies, of the motive or moving force to action: and we make it serve, with all its faults, both for the desires which prompt activities and for the satisfactions that result from them. (Compare "Some remarks on Utility" by Prof. Pigou in the Economic Journal for March, 1903.)
58. See Note I. in the Mathematical Appendix at the end of the Volume. This law holds a priority of position to the law of diminishing return from land; which however has the priority in time; since it was the first to be subjected to a rigid analysis of a semi-mathematical character. And if by anticipation we borrow some of its terms, we may say that the return of pleasure which a person gets from each additional dose of a commodity diminishes till at last a margin is reached at which it is no longer worth his while to acquire any more of it.
The term marginal utility (Grenz-nutz) was first used in this connection by the Austrian Wieser. It has been adopted by Prof. Wicksteed. It corresponds to the term Final used by Jevons, to whom Wieser makes his acknowledgments in the Preface (p. xxiii. of the English edition). His list of anticipators of his doctrine is headed by Gossen, 1854.
59. It may be noticed here, though the fact is of but little practical importance, that a small quantity of a commodity may be insufficient to meet a certain special want; and then there will be a more than proportionate increase of pleasure when the consumer gets enough of it to enable him to attain the desired end. Thus, for instance, anyone would derive less pleasure in proportion from ten pieces of wall paper than from twelve, if the latter would, and the former would not, cover the whole of the walls of his room. Or again a very short concert or a holiday may fail of its purpose of soothing and recreating: and one of double length might be of more than double total utility. This case corresponds to the fact, which we shall have to study in connection with the tendency to diminishing return, that the capital and labour already applied to any piece of land may be so inadequate for the development of its full powers, that some further expenditure on it even with the existing arts of agriculture would give a more than proportionate return; and in the fact that an improvement in the arts of agriculture may resist that tendency, we shall find an analogy to the condition just mentioned in the text as implied in the law of diminishing utility.
62. Such a demand schedule may be translated, on a plan now coming into familiar use, into a curve that may be called his demand curve. Let Ox and Oy be drawn the one horizontally, the other vertically. Let an inch measured along Ox represent 10 lbs. of tea, and an inch measured along Oy represent 40d.
m1 being on Ox and m1p1 being drawn vertically from m1; and so for the others. Then p1p2.... p8 are points on his demand curve for tea; or as we may say demand points. If we could find demand points in the same manner for every possible quantity of tea, we should get the whole continuous curve DD' as shown in the figure. This account of the demand schedule and curve is provisional; several difficulties connected with it are deferred to chapter v.
63. Thus Mill says that we must "mean by the word demand, the quantity demanded, and remember that this is not a fixed quantity, but in general varies according to the value." (Principles, III. II. 4.) This account is scientific in substance; but it is not clearly expressed and it has been much misunderstood. Cairnes prefers to represent "demand as the desire for commodities and services, seeking its end by an offer of general purchasing power, and supply as the desire for general purchasing power, seeking its end by an offer of specific commodities or services." He does this in order that he may be able to speak of a ratio, or equality, of demand and supply. But the quantities of two desires on the part of two different persons cannot be compared directly; their measures may be compared, but not they themselves. And in fact Cairnes is himself driven to speak of supply as "limited by the quantity of specific commodities offered for sale, and demand by the quantity of purchasing power offered for their purchase." But sellers have not a fixed quantity of commodities which they offer for sale unconditionally at whatever price they can get: buyers have not a fixed quantity of purchasing power which they are ready to spend on the specific commodities, however much they pay for them. Account must then be taken in either case of the relation between quantity and price, in order to complete Cairnes' account, and when this is done it is brought back to the lines followed by Mill. He says, indeed, that "Demand, as defined by Mill, is to be understood as measured, not, as my definition would require, by the quantity of purchasing power offered in support of the desire for commodities, but by the quantity of commodities for which such purchasing power is offered." It is true that there is a great difference between the statements, "I will buy twelve eggs," and "I will buy a shilling's worth of eggs." But there is no substantive difference between the statement, "I will buy twelve eggs at a penny each, but only six at three halfpence each," and the statement, "I will spend a shilling on eggs at a penny each, but if they cost three halfpence each I will spend ninepence on them." But while Cairnes' account when completed becomes substantially the same as Mill's its present form is even more misleading. (See an article by the present writer on Mill's Theory of Value in the Fortnightly Review for April, 1876.)
64. We may sometimes find it convenient to speak of this as a raising of his demand schedule. Geometrically it is represented by raising his demand curve, or, what comes to the same thing, moving it to the right, with perhaps some modification of its shape.
65. The demand is represented by the same curve as before, only an inch measured along Ox now represents ten million pounds instead of ten pounds. And a formal definition of the demand curve for a market may be given thus:—The demand curve for any commodity in a market during any given unit of time is the locus of demand points for it. That is to say, it is a curve such that if from any point P on it, a straight line PM be drawn perpendicular to Ox, PM represents the price at which purchasers will be forthcoming for an amount of the commodity represented by OM.
66. That is, if a point moves along the curve away from Oy it will constantly approach Ox. Therefore if a straight line PT be drawn touching the curve at P and meeting Ox in T, the angle PTx is an obtuse angle. It will be found convenient to have a short way of expressing this fact; which may be done by saying that PT is inclined negatively. Thus the one universal rule to which the demand curve conforms is that it is inclined negatively throughout the whole of its length.
It will of course be understood that "the law of demand" does not apply to the demand in a campaign between groups of speculators. A group, which desires to unload a great quantity of a thing on to the market, often begins by buying some of it openly. When it has thus raised the price of the thing, it arranges to sell a great deal quietly, and through unaccustomed channels. See an article by Professor Taussig in the Quarterly Journal of Economics (May, 1921, p. 402).
67. It is even conceivable, though not probable, that a simultaneous and proportionate fall in the price of all teas may diminish the demand for some particular kind of it; if it happens that those whom the increased cheapness of tea leads to substitute a superior kind for it are more numerous than those who are led to take it in the place of an inferior kind. The question where the lines of division between different commodities should be drawn must be settled by convenience of the particular discussion. For some purposes it may be best to regard Chinese and Indian teas, or even Souchong and Pekoe teas, as different commodities; and to have a separate demand schedule for each of them. While for other purposes it may be best to group together commodities as distinct as beef and mutton, or even as tea and coffee, and to have a single list to represent the demand for the two combined; but in such a case of course some convention must be made as to the number of ounces of tea which are taken as equivalent to a pound of coffee.
Again, a commodity may be simultaneously demanded for several uses (for instance there may be a "composite demand" for leather for making shoes and portmanteaus); the demand for a thing may be conditional on there being a supply of some other thing without which it would not be of much service (thus there may be a "joint demand" for raw cotton and cotton-spinners' labour). Again, the demand for a commodity on the part of dealers who buy it only with the purpose of selling it again, though governed by the demand of the ultimate consumers in the background, has some peculiarities of its own. But all such points may best be discussed at a later stage.
68. A great change in the manner of economic thought has been brought about during the present generation by the general adoption of semi-mathematical language for expressing the relation between small increments of a commodity on the one hand, and on the other hand small increments in the aggregate price that will be paid for it: and by formally describing these small increments of price as measuring corresponding small increments of pleasure. The former, and by far the more important, step was taken by Cournot (Recherches sur les Principes Mathématiques de la Théorie des Richesses, 1838); the latter by Dupuit (De la Mesure d'utilité des travaux publics in the Annales des Ponts et Chaussées, 1844), and by Gossen (Entwickelung der Gesetze des menschlichen Verkehrs, 1854). But their work was forgotten; part of it was done over again, developed and published almost simultaneously by Jevons and by Carl Menger in 1871, and by Walras a little later. Jevons almost at once arrested public attention by his brilliant lucidity and interesting style. He applied the new name final utility so ingeniously as to enable people who knew nothing of mathematical science to get clear ideas of the general relations between the small increments of two things that are gradually changing in causal connection with one another. His success was aided even by his faults. For under the honest belief that Ricardo and his followers had rendered their account of the causes that determine value hopelessly wrong by omitting to lay stress on the law of satiable wants, he led many to think he was correcting great errors; whereas he was really only adding very important explanations. He did excellent work in insisting on a fact which is none the less important, because his predecessors, and even Cournot, thought it too obvious to be explicitly mentioned, viz. that the diminution in the amount of a thing demanded in a market indicates a diminution in the intensity of the desire for it on the part of individual consumers, whose wants are becoming satiated. But he has led many of his readers into a confusion between the provinces of Hedonics and Economics, by exaggerating the applications of his favourite phrases, and speaking (Theory, 2nd Edn. p. 105) without qualification of the price of a thing as measuring its final utility not only to an individual, which it can do, but also to "a trading body," which it cannot do. These points are developed later on in Appendix I. on Ricardo's Theory of value. It should be added that Prof. Seligman has shown (Economic Journal, 1903, pp. 356-363) that a long-forgotten Lecture, delivered by Prof. W. F. Lloyd at Oxford in 1833, anticipated many of the central ideas of the present doctrine of utility.
An excellent bibliography of Mathematical Economics is given by Prof. Fisher as an appendix to Bacon's translation of Cournot's Researches, to which the reader may be referred for a more detailed account of the earlier mathematical writings on economics, as well as of those by Edgeworth, Pareto, Wicksteed, Auspitz, Lieben and others. Pantaleoni's Pure Economics, amid much excellent matter, makes generally accessible for the first time the profoundly original and vigorous, if somewhat abstract, reasonings of Gossen.
Book III, Chapter IV
69. We may say that the elasticity of demand is one, if a small fall in price will cause an equal proportionate increase in the amount demanded: or as we may say roughly, if a fall of one per cent. in price will increase the sales by one per cent.; that it is two or a half, if a fall of one per cent. in price makes an increase of two or one half per cent. respectively in the amount demanded; and so on. (This statement is rough; because 98 does not bear exactly the same proportion to 100 that 100 does to 102.) The elasticity of demand can be best traced in the demand curve with the aid of the following rule. Let a straight line touching the curve at any point P meet Ox in T and Oy in t, then the measure of the elasticity at the point P is the ratio of PT to Pt.
If PT were twice Pt, a fall of 1 per cent. in price would cause an increase of 2 per cent., in the amount demanded; the elasticity of demand would be two. If PT were one-third of Pt, a fall of 1 per cent. in price would cause an increase of 1/3 per cent. in the amount demanded; the elasticity of demand would be one-third; and so on. Another way of looking at the same result is this:—the elasticity at the point P is measured by the ratio of PT to Pt, that is of MT to MO (PM being drawn perpendicular to Om); and therefore the elasticity is equal to one when the angle TPM is equal to the angle OPM; and it always increases when the angle TPM increases relatively to the angle OPM, and vice versâ. See Note III. in the Mathematical Appendix.
70. Let us illustrate by the case of the demand for, say, green peas in a town in which all vegetables are bought and sold in one market. Early in the season perhaps 100 lb. a day will be brought to market and sold at 1s. per lb., later on 500 lb. will be brought and sold at 6d., later on 1,000 lb. at 4d., later still 5,000 at 2d., and later still 10,000 at 1½d. Thus demand is represented in fig. (4), an inch along Ox representing 5,000 lbs. and an inch along Oy representing 10d. Then a curve through p1p2 ... p5, found as shown above, will be the total demand curve. But this total demand will be made up of the demands of the rich, the middle class and the poor. The amounts that they will severally demand may perhaps be represented by the following schedules:—
These schedules are translated into curves figs. (5), (6), (7), showing the demands of the rich, the middle class and the poor represented on the same scale as fig. (4). Thus for instance AH, BK and CL each represents a price of 2d. and is .2 inches in length; OH = .16 in. representing 800 lb., OK = .5 in. representing 2,500 lb. and OL = .34 in. representing 1,700 lb., while OH + OK + OL = 1 inch, i.e. = Om4 in fig. (4) as they should do. This may serve as an example of the way in which several partial demand curves, drawn to the same scale, can be superimposed horizontally on one another to make the total demand curve representing the aggregate of the partial demand.
71. We must however remember that the character of the demand schedule for any commodity depends in a great measure on whether the prices of its rivals are taken to be fixed or to alter with it. If we separated the demand for beef from that for mutton, and supposed the price of mutton to be held fixed while that for beef was raised, then the demand for beef would become extremely elastic. For any slight fall in the price of beef would cause it to be used largely in the place of mutton and thus lead to a very great increase of its consumption: while on the other hand even a small rise in price would cause many people to eat mutton to the almost entire exclusion of beef. But the demand schedule for all kinds of fresh meat taken together, their prices being supposed to retain always about the same relation to one another, and to be not very different from those now prevailing in England, shows only a moderate elasticity. And similar remarks apply to beet-root and cane-sugar. Compare the note on p. 100.
72. See above ch. II. § 1. In April 1894, for instance, six plovers' eggs, the first of the season, were sold in London at 10s. 6d. each. The following day there were more, and the price fell to 5s.; the next day to 3s. each; and a week later to 4d.
73. This estimate is commonly attributed to Gregory King. Its bearing on the law of demand is admirably discussed by Lord Lauderdale (Inquiry, pp. 51-3). It is represented in fig. (8) by the curve DD', the point A corresponding to the ordinary price. If we take account of the fact that where the price of wheat is very low, it may be used, as it was for instance in 1834, for feeding cattle and sheep and pigs and for brewing and distilling, the lower part of the curve would take a shape somewhat like that of the dotted line in the figure. And if we assume that when the price is very high, cheaper substitutes can be got for it, the upper part of the curve would take a shape similar to that of the upper dotted line.
74. Chronicon Preciosum (A.D. 1745) says that the price of wheat in London was as low as 2s. a quarter in 1336: and that at Leicester it sold at 40s. on a Saturday, and at 14s. on the following Friday.
75. Thus the general demand of any one person for such a thing as water is the aggregate (or compound, see V. VI. 3) of his demand for it for each use; in the same way as the demand of a group of people of different orders of wealth for a commodity, which is serviceable in only one use, is the aggregate of the demands of each member of the group. Again, just as the demand of the rich for peas is considerable even at a very high price, but loses all elasticity at a price that is still high relatively to the consumption of the poor; so the demand of the individual for water to drink is considerable even at a very high price, but loses all elasticity at a price that is still high relatively to his demand for it for the purpose of cleaning up the house. And as the aggregate of a number of demands on the part of different classes of people for peas retains elasticity over a larger range of price than will that of any one individual, so the demand of an individual for water for many uses retains elasticity over a larger range of prices than his demand for it for any one use. Compare an article by J. B. Clark on A Universal Law of Economic Variation in the Harvard Journal of Economics, Vol. VIII.
76. When a statistical table shows the gradual growth of the consumption of a commodity over a long series of years, we may want to compare the percentage by which it increases in different years. This can be done pretty easily with a little practice. But when the figures are expressed in the form of a statistical diagram, it cannot easily be done, without translating the diagram back into figures; and this is a cause of the disfavour in which many statisticians hold the graphic method. But by the knowledge of one simple rule the balance can be turned, so far as this point goes, in favour of the graphic method. The rule is as follows:—Let the quantity of a commodity consumed (or of trade carried, or of tax levied etc.) be measured by horizontal lines parallel to Ox, fig. (9), while the corresponding years are in the usual manner ticked off in descending order at equal distances along Oy. To measure the rate of growth at any point P, put a ruler to touch the curve at P. Let it meet Oy in t, and let N be the point on Oy at the same vertical height as P: then the number of years marked off along Oy by the distance Nt is the inverse of the fraction by which the amount is increasing annually. That is, if Nt is 20 years, the amount is increasing at the rate of 1/20, i.e. of 5 per cent. annually; if Nt is 25 years, the increase is 1/25 or 4 per cent. annually; and so on. See a paper by the present writer in the Jubilee number of the Journal of the London Statistical Society, June 1885; also Note IV, in the Mathematical Appendix.
78. In examining the effects of taxation, it is customary to compare the amounts entered for consumption just before and just after the imposition of the tax. But this is untrustworthy. For dealers anticipating the tax lay in large stocks just before it is imposed, and need to buy very little for some time afterwards. And vice versâ when a tax is lowered. Again, high taxes lead to false returns. For instance, the nominal importation of molasses into Boston increased fiftyfold in consequence of the tax being lowered by the Rockingham Ministry in 1766, from 6d. to 1d. per gallon. But this was chiefly due to the fact that with the tax at 1d., it was cheaper to pay the duty than to smuggle.
79. A single table made out by the great statistician Engel for the consumption of the lower, middle and working classes in Saxony in 1857, may be quoted here; because it has acted as a guide and a standard of comparison to later inquiries. It is as follows:—
Working-men's budgets have often been collected and compared. But like all other figures of the kind they suffer from the facts that those who will take the trouble to make such returns voluntarily are not average men, that those who keep careful accounts are not average men; and that when accounts have to be supplemented by the memory, the memory is apt to be biassed by notions as to how the money ought to have been spent, especially when the accounts are put together specially for another's eye. This border-ground between the provinces of domestic and public economy is one in which excellent work may be done by many who are disinclined for more general and abstract speculations.
Information bearing on the subject was collected long ago by Harrison, Petty, Cantillon (whose lost Supplement seems to have contained some workmen's budgets), Arthur Young, Malthus and others. Working-men's budgets were collected by Eden at the end of the last century; and there is much miscellaneous information on the expenditure of the working classes in subsequent Reports of Commissions on Poor-relief, Factories, etc. Indeed almost every year sees some important addition from public or private sources to our information on these subjects.
It may be noted that the method of le Play's monumental Les Ouvriers Européens is the intensive study of all the details of the domestic life of a few carefully chosen families. To work it well requires a rare combination of judgment in selecting cases, and of insight and sympathy in interpreting them. At its best, it is the best of all: but in ordinary hands it is likely to suggest more untrustworthy general conclusions, than those obtained by the extensive method of collecting more rapidly very numerous observations, reducing them as far as possible to statistical form, and obtaining broad averages in which inaccuracies and idiosyncrasies may be trusted to counteract one another to some extent.
Book III, Chapter V
80. Our illustration belongs indeed properly to domestic production rather than to domestic consumption. But that was almost inevitable; for there are very few things ready for immediate consumption which are available for many different uses. And the doctrine of the distribution of means between different uses has less important and less interesting applications in the science of demand than in that of supply. See e.g. V. III. 3.
81. The working-class budgets which were mentioned in Ch. IV. § 8 may render most important services in helping people to distribute their resources wisely between different uses, so that the marginal utility for each purpose shall be the same. But the vital problems of domestic economy relate as much to wise action as to wise spending. The English and the American housewife make limited means go a less way towards satisfying wants than the French housewife does, not because they do not know how to buy, but because they cannot produce as good finished commodities out of the raw material of inexpensive joints, vegetables etc., as she can. Domestic economy is often spoken of as belonging to the science of consumption: but that is only half true. The greatest faults in domestic economy, among the sober portion of the Anglo-Saxon working-classes at all events, are faults of production rather than of consumption.
82. In classifying some pleasures as more urgent than others, it is often forgotten that the postponement of a pleasurable event may alter the circumstances under which it occurs, and therefore alter the character of the pleasure itself. For instance it may be said that a young man discounts at a very high rate the pleasure of the Alpine tours which he hopes to be able to afford himself when he has made his fortune. He would much rather have them now, partly because they would give him much greater pleasure now.
Again, it may happen that the postponement of a pleasurable event involves an unequal distribution in Time of a certain good, and that the Law of Diminution of Marginal Utility acts strongly in the case of this particular good. For instance, it is sometimes said that the pleasures of eating are specially urgent; and it is undoubtedly true that if a man goes dinnerless for six days in the week and eats seven dinners on the seventh, he loses very much; because when postponing six dinners, he does not postpone the pleasures of eating six separate dinners, but substitutes for them the pleasure of one day's excessive eating. Again, when a person puts away eggs for the winter he does not expect that they will be better flavoured then than now; he expects that they will be scarce, and that therefore their utility will be higher than now. This shows the importance of drawing a clear distinction between discounting a future pleasure, and discounting the pleasure derived from the future enjoyment of a certain amount of a commodity. For in the latter case we must make separate allowance for differences between the marginal utilities of the commodity at the two times: but in the former this has been allowed for once in estimating the amount of the pleasure; and it must not be allowed for again.
83. It is important to remember that, except on these assumptions there is no direct connection between the rate of discount on the loan of money, and the rate at which future pleasures are discounted. A man may be so impatient of delay that a certain promise of a pleasure ten years hence will not induce him to give up one close at hand which he regards as a quarter as great. And yet if he should fear that ten years hence money may be so scarce with him (and its marginal utility therefore so high) that half-a-crown then may give him more pleasure or save him more pain than a pound now, he will save something for the future even though he have to hoard it, on the same principle that he might store eggs for the winter. But we are here straying into questions that are more closely connected with Supply than with Demand. We shall have to consider them again from different points of view in connection with the Accumulation of Wealth, and later again in connection with the causes that determine the Rate of Interest.
We may however consider here how to measure numerically the present value of a future pleasure, on the supposition that we know, (i) its amount, (ii) the date at which it will come, if it comes at all, (iii) the chance that it will come, and (iv) the rate at which the person in question discounts future pleasures.
If the probability that a pleasure will be enjoyed is three to one, so that three chances out of four are in its favour, the value of its expectation is three-fourths of what it would be if it were certain: if the probability that it will be enjoyed were only seven to five, so that only seven chances out of twelve are in its favour, the value of its expectation is only seven-twelfths of what it would be if the event were certain, and so on. [This is its actuarial value: but further allowance may have to be made for the fact that the true value to anyone of an uncertain gain is generally less than its actuarial value (see the note on p. 209).] If the anticipated pleasure is both uncertain and distant, we have a twofold deduction to make from its full value. We will suppose, for instance, that a person would give 10s. for a gratification if it were present and certain, but that it is due a year hence, and the probability of its happening then is three to one. Suppose also that he discounts the future at the rate of twenty per cent. per annum. Then the value to him of the anticipation of it is 3/4 × 80/100 × 10s. i.e. 6s. Compare the Introductory chapter of Jevons' Theory of Political Economy.
84. Of course this estimate is formed by a rough instinct; and in any attempt to reduce it to numerical accuracy (see Note V. in the Appendix), we must recollect what has been said, in this and the preceding Section, as to the impossibility of comparing accurately pleasures or other satisfactions that do not occur at the same time; and also as to the assumption of uniformity involved in supposing the discount of future pleasures to obey the exponential law.
Book III, Chapter VI
85. This term is a familiar one in German economics, and meets a need which is much felt in English economics. For "opportunity" and "environment," the only available substitutes for it, are sometimes rather misleading. By Conjunctur, says Wagner (Grundegung, Ed. III. p. 387), "we understand the sum total of the technical, economic, social and legal conditions; which, in a mode of national life (Volkswirthschaft) resting upon division of labour and private property,—especially private property in land and other material means of production—determine the demand for and supply of goods, and therefore their exchange value: this determination being as a rule, or at least in the main, independent of the will of the owner, of his activity and his remissness."
86. Some further explanations may be given of this statement; though in fact they do little more than repeat in other words what has already been said. The significance of the condition in the text that he buys the second pound of his own free choice is shown by the consideration that if the price of 14s. had been offered to him on the condition that he took two pounds, he would then have to elect between taking one pound for 20s. or two pounds for 28s.: and then his taking two pounds would not have proved that he thought the second pound worth more than 8s. to him. But as it is, he takes a second pound paying 14s. unconditionally for it; and that proves that it is worth at least 14s. to him. (If he can get buns at a penny each, but seven for sixpence; and he elects to buy seven, we know that he is willing to give up his sixth penny for the sake of the sixth and the seventh buns: but we cannot tell how much he would pay rather than go without the seventh bun only.)
It is sometimes objected that as he increases his purchases, the urgency of his need for his earlier purchases is diminished, and their utility falls; therefore we ought to continually redraw the earlier parts of our list of demand prices at a lower level, as we pass along it towards lower prices (i.e. to redraw at a lower level our demand curve as we pass along it to the right). But this misconceives the plan on which the list of prices is made out. The objection would have been valid, if the demand price set against each number of pounds of tea represented the average utility of that number. For it is true that, if he would pay just 20s. for one pound, and just 14s. for a second, then he would pay just 34s. for the two; i.e. 17s. each on the average. And if our list had had reference to the average prices he would pay, and had set 17s. against the second pound; then no doubt we should have had to redraw the list as we passed on. For when he has bought a third pound the average utility to him of each of the three will be less than that of 17s.; being in fact 14s. 8d. if, as we go on to assume, he would pay just 10s. for a third pound. But this difficulty is entirely avoided on the plan of making out demand prices which is here adopted; according to which his second pound is credited, not with the 17s. which represents the average value per pound of the two pounds; but with the 14s., which represents the additional utility which a second pound has for him. For that remains unchanged when he has bought a third pound, of which the additional utility is measured by 10s.
The first pound was probably worth to him more than 20s. All that we know is that it was not worth less to him. He probably got some small surplus even on that. Again, the second pound was probably worth more than 14s. to him. All that we know is that it was worth at least 14s. and not worth 20s. to him. He would get therefore at this stage a surplus satisfaction of at least 6s., probably a little more. A ragged edge of this kind, as mathematicians are aware, always exists when we watch the effects of considerable changes, as that from 20s. to 14s. a pound. If we had begun with a very high price, had descended by practically infinitesimal changes of a farthing per pound, and watched infinitesimal variations in his consumption of a small fraction of a pound at a time, this ragged edge would have disappeared.
87. Prof. Nicholson (Principles of Political Economy, Vol. I and Economic Journal, Vol. IV.) has raised objections to the notion of consumers' surplus, which have been answered by Prof. Edgeworth in the same Journal. Prof. Nicholson says:—"Of what avail is it to say that the utility of an income of (say) £100 a year is worth (say) £1000 a year?" There would be no avail in saying that. But there might be use, when comparing life in Central Africa with life in England, in saying that, though the things which money will buy in Central Africa may on the average be as cheap there as here, yet there are so many things which cannot be bought there at all, that a person with a thousand a year there is not so well off as a person with three or four hundred a year here. If a man pays 1d. toll on a bridge, which saves him an additional drive that would cost a shilling, we do not say that the penny is worth a shilling, but that the penny together with the advantage offered him by the bridge (the part it plays in his conjuncture) is worth a shilling for that day. Were the bridge swept away on a day on which he needed it, he would be in at least as bad a position as if he had been deprived of eleven pence.
Let OH be the amount which is sold there at the price HA annually, a year being taken as our unit of time. Taking any point M in OH let us draw MP vertically upwards to meet the curve in P and cut a horizontal line through A in R. We will suppose the several lbs. numbered in the order of the eagerness of the several purchasers: the eagerness of the purchaser of any lb. being measured by the price he is just willing to pay for that lb. The figure informs us that OM can be sold at the price PM; but that at any higher price not quite so many lbs. can be sold. There must be then some individual who will buy more at the price PM, than he will at any higher price; and we are to regard the OMth lb. as sold to this individual. Suppose for instance that PM represents 4s., and that OM represents a million lbs. The purchaser described in the text is just willing to buy his fifth lb of tea at the price 4s., and the OMth or millionth lb. may be said to be sold to him. If AH and therefore RM represent 2s., the consumers' surplus derived from the OMth lb. is the excess of PM or 4s. which the purchaser of that lb. would have been willing to pay for it over RM the 2s. which he actually does pay for it. Let us suppose that a very thin vertical parallelogram is drawn of which the height is PM and of which the base is the distance along Ox that measures the single unit or lb. of tea. It will be convenient henceforward to regard price as measured not by a mathematical straight line without thickness, as PM; but by a very thin parallelogram, or as it may be called a thick straight line, of which the breadth is in every case equal to the distance along Ox which measures a unit or lb. of tea. Thus we should say that the total satisfaction derived from the OMth lb. of tea is represented (or, on the assumption made in the last paragraph of the text is measured) by the thick straight line MP; that the price paid for this lb. is represented by the thick straight line MR and the consumers' surplus derived from this lb. by the thick straight line RP. Now let us suppose that such thin parallelograms, or thick straight lines, are drawn from all positions of M between O and H, one for each lb. of tea. The thick straight lines thus drawn, as MP is, from Ox up to the demand curve will each represent the aggregate of the satisfaction derived from a lb. of tea; and taken together thus occupy and exactly fill up the whole area DOHA. Therefore we may say that the area DOHA represents the aggregate of the satisfaction derived from the consumption of tea. Again, each of the straight lines drawn, as MR is, from Ox upwards as far as AC represents the price that actually is paid for a lb. of tea. These straight lines together make up the area COHA; and therefore this area represents the total price paid for tea. Finally each of the straight lines drawn as RP is from AC upwards as far as the demand curve, represents the consumers' surplus derived from the corresponding lb. of tea. These straight lines together make up the area DCA; and therefore this area represents the total consumers' surplus that is derived from tea when the price is AH. But it must be repeated that this geometrical measurement is only an aggregate of the measures of benefits which are not all measured on the same scale except on the assumption just made in the text. Unless that assumption is made the area only represents an aggregate of satisfactions, the several amounts of which are not exactly measured. On that assumption only, its area measures the volume of the total net satisfaction derived from the tea by its various purchasers.
89. Harris On Coins 1757, says "Things in general are valued, not according to their real uses in supplying the necessities of men; but rather in proportion to the land, labour and skill that are requisite to produce them. It is according to this proportion nearly, that things or commodities are exchanged one for another; and it is by the said scale, that the intrinsic values of most things are chiefly estimated. Water is of great use, and yet ordinarily of little or no value; because in most places, water flows spontaneously in such great plenty, as not to be withheld within the limits of private property; but all may have enough, without other expense than that of bringing or conducting it, when the case so requires. On the other hand, diamonds being very scarce, have upon that account a great value, though they are but little use."
90. There might conceivably be persons of high sensibility who would suffer specially from the want of either salt or tea: or who were generally sensitive, and would suffer more from the loss of a certain part of their income than others in the same station of life. But it would be assumed that such differences between individuals might be neglected, since we were considering in either case the average of large numbers of people; though of course it might be necessary to consider whether there were some special reason for believing, say, that those who laid most store by tea were a specially sensitive class of people. If it could, then a separate allowance for this would have to be made before applying the results of economical analysis to practical problems of ethics or politics.
91. Some ambiguous phrases in earlier editions appear to have suggested to some readers the opposite opinion. But the task of adding together the total utilities of all commodities, so as to obtain the aggregate of the total utility of all wealth, is beyond the range of any but the most elaborate mathematical formulæ. An attempt to treat it by them some years ago convinced the present writer that even if the task be theoretically feasible, the result would be encumbered by so many hypotheses as to be practically useless.
Attention has already (pp. 100, 105) been called to the fact that for some purposes such things as tea and coffee must be grouped together as one commodity: and it is obvious that, if tea were inaccessible, people would increase their consumption of coffee, and vice versâ. The loss that people would suffer from being deprived both of tea and coffee would be greater than the sum of their losses from being deprived of either alone: and therefore the total utility of tea and coffee is greater than the sum of the total utility of tea calculated on the supposition that people can have recourse to coffee, and that of coffee calculated on a like supposition as to tea. This difficulty can be theoretically evaded by grouping the two "rival" commodities together under a common demand schedule. On the other hand, if we have calculated the total utility of fuel with reference to the fact that without it we could not obtain hot water to obtain the beverage tea from tea leaves, we should count something twice over if we added to that utility the total utility of tea leaves, reckoned on a similar plan. Again the total utility of agricultural produce includes that of ploughs; and the two may not be added together; though the total utility of ploughs may be discussed in connection with one problem, and that of wheat in connection with another. Other aspects of these two difficulties are examined in V. VI.
Prof. Patten has insisted on the latter of them in some able and suggestive writings. But his attempt to express the aggregate utility of all forms of wealth seems to overlook many difficulties.
92. In mathematical language the neglected elements would generally belong to the second order of small quantities; and the legitimacy of the familiar scientific method by which they are neglected would have seemed beyond question, had not Prof. Nicholson challenged it. A short reply to him has been given by Prof. Edgeworth in the Economic Journal for March 1894; and a fuller reply by Prof. Barone in the Giornale degli Economisti for Sept. 1894; of which some account is given by Mr Sanger in the Economic Journal for March 1895.
As is indicated in Note VI. in the Mathematical Appendix, formal account could be taken of changes in the marginal utility of money, if it were desired to do so. If we attempted to add together the total utilities of all commodities, we should be bound to do so: that task is however impracticable.
93. The notion of consumers' surplus may help us a little now; and, when our statistical knowledge is further advanced, it may help us a great deal to decide how much injury would be done to the public by an additional tax of 6d. a pound on tea, or by an addition of ten per cent. to the freight charges of a railway: and the value of the notion is but little diminished by the fact that it would not help us much to estimate the loss that would be caused by a tax of 30s. a pound on tea, or a tenfold rise in freight charges.
Reverting to our last diagram, we may express this by saying that, if A is the point on the curve corresponding to the amount that is wont to be sold in the market, data can be obtained sufficient for drawing the curve with tolerable correctness for some distance on either side of A; though the curve can seldom be drawn with any approach to accuracy right up to D. But this is practically unimportant, because in the chief practical applications of the theory of value we should seldom make any use of a knowledge of the whole shape of the demand curve if we had it. We need just what we can get, that is, a fairly correct knowledge of its shape in the neighbourhood of A. We seldom require to ascertain the total area DCA; it is sufficient for most of our purposes to know the changes in this area that would be occasioned by moving A through small distances along the curve in either direction. Nevertheless it will save trouble to assume provisionally, as in pure theory we are at liberty to do, that the curve is completely drawn.
There is however a special difficulty in estimating the whole of the utility of commodities some supply of which is necessary for life. If any attempt is made to do it, the best plan is perhaps to take that necessary supply for granted, and estimate the total utility only of that part of the commodity which is in excess of this amount. But we must recollect that the desire for anything is much dependent on the difficulty of getting substitutes for it. (See Note VI. in the Mathematical Appendix.)
95. That is to say, if £30 represent necessaries, a person's satisfaction from his income will begin at that point; and when it has reached £40, an additional £1 will add a tenth to the £10 which represents its happiness-yielding power. But if his income were £100, that is £70 above the level of necessaries, an additional £7 would be required to add as much to his happiness as £1 if his income were £40: while if his income were £10,000, an additional £1000 would be needed to produce an equal effect (compare Note VIII. in the Appendix). Of course such estimates are very much at random, and unable to adapt themselves to the varying circumstances of individual life. As we shall see later, the systems of taxation which are now most widely prevalent follow generally on the lines of Bernoulli's suggestion. Earlier systems took from the poor very much more than would be in accordance with that plan; while the systems of graduated taxation, which are being foreshadowed in several countries, are in some measure based on the assumption that the addition of one per cent. to a very large income adds less to the wellbeing of its owner than an addition of one per cent. to smaller incomes would, even after Bernoulli's correction for necessaries has been made.
It may be mentioned in passing that from the general law that the utility to anyone of an additional £1 diminishes with the number of pounds he already has, there follow two important practical principles. The first is that gambling involves an economic loss, even when conducted on perfectly fair and even terms. For instance, a man who having £600 makes a fair even bet of £100, has now an expectation of happiness equal to half that derived from £700, and half that derived from £500; and this is less than the certain expectation of the happiness derived from £600, because by hypothesis the difference between the happiness got from £600 and £500 is greater than the difference between the happiness got from £700 and £600. (Compare Note IX. in the Appendix and Jevons, l. c. Ch. IV.) The second principle, the direct converse of the first, is that a theoretically fair insurance against risks is always an economic gain. But of course every insurance office, after calculating what is a theoretically fair premium, has to share in addition to it enough to pay profits on its own capital, and to cover its own expenses of working, among which are often to be reckoned very heavy items for advertising and for losses by fraud. The question whether it is advisable to pay the premium which insurance offices practically do charge, is one that must be decided for each case on its own merits.
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