The Common Sense of Political Economy

Let us start on the assumption that the consumer’s income is as a matter of fact distributed in a certain way. He buys
Oa of commodity A at the price
aa,
Ob of commodity B at the price
bb,
Oc of commodity C at the price
cg, etc. We construct the curves severally as in
Fig. 16, on the principles already illustrated, in every case starting from the same initial hypothesis. Each commodity is measured on the axis of X in its own conventional unit, but the unit on the axis of Y is uniform. We can now suppose
any one of the curves (say the curve of B) to set forth (as a first approximation, subject to the secondary inaccuracies and inconsistencies dwelt on in the last chapter) the marginal significance of B at any point of supply, the quantity that would be purchased at any given price, and the surplus of satisfaction over enjoyment attendant on the consumption of any quantity, provided always that A, C, etc., can be obtained in any quantities desired at the prices
aa,
cg, etc. But the moment we suppose the price of B to rise and the consumption to contract we may find the consumer taking more of A or C as a substitute, and in that case
Oa would no longer represent the amount of A that would be consumed at the price of
aa. Nor would the curve as it stands (unless by accident) represent the relation between price and quantity at any other point either. The curves of A and C therefore may change their form for every value of
bb and are drawn up on the supposition that it is constant, whereas the curve of B is drawn up expressly to illustrate the significance of changes in that value, regarded as causes or effects of a change in the magnitude of
Ob.

In constructing the curve of B we must be supposed to register the value of
bb for any value of
Ob, or
vice versa, as the resultants of all the complex readjustments of expenditure caused by a change of supply, or a change of price, in B, the prices of A, C, etc., remaining constant. And if we start in every case from the actual prices
aa,
bb,
cg, etc., we may thus trace the curves of A, B, C, etc., severally and independently, and
any one of them will then be valid as long as all the others are cancelled and the original data (
aa, etc.) treated as constant; but no two of them will represent a system of relations between changing quantities and marginal values which holds contemporaneously for both of them.

We have now sufficiently developed the fact that we can only regard such a curve as we have been discussing as valid in isolation. But it will be instructive to consider a little further the nature of the reaction of a change in the price of one commodity upon the demand for another. A glance at any of the figures will shew that a rise in the price of a commodity (A), while it will always cause a contraction of the quantity purchased, will sometimes increase and sometimes diminish the amount of money spent on it. And in either case it may cause an increased expenditure on the readiest substitute (B). Thus a rise in the price of A, whether causing an increased expenditure on A or not, may easily cause an increased expenditure on A and B between them. This may extend to other commodities also; but since the man’s total resources are not increased by the rise in the price of A, economies must be effected somewhere. Thus a rise in the price of A may cause an increased consumption of B but a diminished consumption of C.

In some cases this result might be the direct, not the indirect, effect of the rise in the price of A; for there are commodities which are complementary to each other as well as commodities which are substitutes. Thus a man may have a taste for
café au lait but not for
café noir, so that if the price of coffee rose it might check his purchases of milk. If the total expenditure on the two commodities were reduced, then some other expenditure would be increased.

Thus every modification in the price of any one commodity reacts on the demand curves, or curves of total estimated value, of some other, ideally of all other, commodities, services, and opportunities. A system of such curves purporting to represent the whole range of any man’s scale of preferences would be mutually destructive, for each one only represents the possibilities of a sliding scale of purchases and prices on the supposition that there is no movement in any of the others. Any one curve represents a track, movement along which incidentally modifies some one or more of the other tracks, and which is itself modified by a movement along any one of them. This is the meaning of the principle so constantly insisted on by Pareto, that the marginal significance of any commodity is a function not only of the quantity we possess of that particular commodity but also of the quantity we possess (including zero as a quantity) of other, ideally of all other, commodities. The quantities of all desired things, services, and opportunities which we command, and the marginal significances we attach to them, are therefore a system of magnitudes which mutually determine each other within the limits imposed by our total command of resources.

Well, then, taking these curves as indicating, severally, the consumer’s own estimate of the addition to his total satisfaction which the existence of each market confers upon him, his resources and alternative opportunities being what they are, can we say that as the market in A does under existing circumstances yield the net additional satisfaction corresponding to the mixtilinear area shewn by the curve of A, and the market in B the corresponding area shewn by the curve of B, the two areas added together will indicate the total additional satisfaction yielded by the two markets?

Manifestly not. Let A and B be tea and coffee. Now there are (or may be) services that can be rendered either by tea or coffee indifferently. If the rise in the price of tea, while making the consumer buy less tea, makes him buy more coffee, this is manifestly the case. The curve of A, therefore, shews the value not of the whole service which is actually rendered by the tea the man consumes, but that part of the services only which could not be rendered by coffee. And in like manner the curve of B represents that part of the services rendered by coffee which could not be rendered by tea. Thus, if we first take the advantage we derive from the tea market on the supposition that the coffee market is open as an alternative, and then the advantage we derive from the coffee market on the supposition that the tea market is open as an alternative, and then add the two together, we shall have arrived at something very different from the total advantage which the two markets together confer upon us; for that range of wants which can be indifferently satisfied by tea or by coffee will have evaded our estimate altogether. When we estimate tea it escapes and is transferred to coffee, and when we estimate coffee it escapes and is transferred to tea.

If we suppose the effect of the closing of the markets to be cumulative, then if we take tea first this common service will escape to coffee, changing the form of its curve and increasing the mixtilinear area for any given abscissa. If we then close the coffee market too, the value of the common service will be apprehended and registered under the head of coffee; whereas if we had taken coffee first it would have been the tea curve that would have been modified, and the common service would have been evaluated there; but in neither case would the sum of the areas shown by the original curves, drawn out severally on the basis of existing alternatives, give us any evaluation of the service that can be rendered indifferently by either of the commodities.

And again, the service which can be rendered by tea or coffee indifferently, but not by anything else, does not exhaust the whole service that they do now severally render. If when the tea and coffee markets are closed the cocoa market remains open, the alternatives still available may enable a considerable portion of the services now rendered by tea and coffee still to be performed. Perhaps, indeed, an important part of the services which they render is discharged by the hot water and not by the infusions or solutions it contains. So that we shall not capture the whole of the significance of the service actually rendered by tea till we have closed all access to hot water—nor then either, for the most important of all its services could be rendered by cold water.

But when commodities are complementary to each other, the several curves, instead of not counting certain values at all, will count them twice (or many times) over. To enjoy tea we require fuel and a kettle, and we value a teapot and cup, and the value we attach to tea depends upon our command of these things. Or there might be a man who found cream with his tea essential to high enjoyment. If such a man declared that he would go up to £1 for two ounces of tea sooner than give up his Christmas Day treat, the estimate might be made on the supposition that he could command an adequate supply of cream for a few pence. If he were asked about cream he might say that he would give £1 for a small jugful once a year sooner than give up his Christmas celebration, but that would be on the supposition that the tea would cost him a few pence. If we added the two estimates together we should have counted nearly all the enjoyment of tea-with-cream twice.

These sources of confusion have, as a matter of fact, puzzled many a student of marginal and total significance, and obscured many an exposition of them. For example, we are told that a man gets a loaf of bread for a few pence, for which he would give his whole fortune sooner than go without it. Nay, by a still deeper confusion we are told that the value of an initial supply of bread is “infinite.” And it has been suggested that a wheat curve should stand at an infinite height at the origin—that is to say, should be what mathematicians call asymptotal to the axis of Y. This at once prompts the question, “How about water?” Should the curve of water be asymptotal to the axis of Y too? If it were so, we should have an extreme case of repeated counting of the same value; for a man dying of thirst would certainly not attach an “infinite” value to a crumb of bread. He would not give a drop of water for it. But of course the truth is that price cannot be “infinite.” If a millionaire paid his whole fortune for the smallest crumb of bread he could see, the price would be high but not “infinite.” Moreover, even if we substitute more accurate language for talk about “infinities,” and say that if a man had plenty of water he would give all the rest of his possessions for a certain supply of bread, or if he had plenty of bread he would give them all for a certain supply of water, it remains true that if he is without either bread or water he can but offer all the fortune he has for both, and we cannot take the two previous suppositions as applicable concurrently.

Nor must we raise the initial value of bread by crediting it with relieving us from all the agony we should endure if we had water but nothing to eat, and credit water with relieving us from all the agony we should endure if we had bread to eat but nothing to drink, and then put down the sum to their joint credit; for to be without both food and drink would not involve suffering equal to this sum.

The outcome of all this inquiry is a more enlightened perception that the importance to us of increased supplies of any one commodity depends not only on the degree to which we are supplied with that commodity, but also on the degree to which we are supplied with all other alternative or complementary commodities. And since our general state of vitality and sensitiveness may be regarded as complementary to every desired experience, we may venture on the generalisation that theoretically the marginal significance of any commodity depends primarily on our supply of that commodity, secondarily on our supply of the most obvious substitutes and complements, and remotely on our supply of all things, whether in the circle of exchange or not, which in any way affect our vitality.

Hitherto we have been trying to evaluate the loss of desired experiences which the closing of a market would involve to a given individual, on the supposition that he could still obtain the same total amounts of all other commodities that he would be able now to obtain, should he choose (from change of taste or convictions or for any other reason) entirely to give up purchasing the commodity in question. We may express this by saying that his total resources or income are to remain the same, but that this particular market is to be closed to him. We are neglecting the lowered marginal significance of other commodities which would follow his increased purchases.
*24 Now let us suppose the reverse case, that while his income remains the same some new possibility is opened to him: bicycles or motor-cars are invented, or new fruits are imported, or opportunities of study or of hearing good music or of travel are organised, and he finds that by contracting his expenditure on other articles to the total amount of
Ox (
Fig. 17), and expending the sum thus saved on the freshly opened alternative represented on the figure, by the sacrifice of an area equivalent to
yx he will gain the total area contained between the axes, the line
xp, and the curve. This newly opened opportunity then will present him with a total advantage of the mixtilinear area above
yp for the expenditure of the same income. Whether this will be for his ultimate good or not is of course quite another question. We have seen ample reasons for declining to assume anything of the kind.
*25 But at any rate he has now got something for which he would have been willing to sacrifice the whole mixtilinear area, and has only surrendered the area
yx for it. Measured by his own immediate desires, then, there is the gain indicated.

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.

It would be useless to attempt to indicate this change diagrammatically, for, as we have seen, every curve is changed by a change in the supplies of other commodities as well as that to which it specially refers. If we were, therefore, to draw up a man’s curve of a certain commodity on the supposition that he was poor, and then again on the supposition that he was rich, the only fixed point on which we could rely would be that if he continued to consume the commodity at all, he would consume it down to the same point of objective value as before, but that the objective unit would have a lower psychic significance. Whether he would consume more or less of the commodity, whether his surplus satisfaction would, measured in coin, be greater or smaller, and if greater in coin whether it would be greater psychologically or not, and what its proportional significance to his whole satisfaction would be, we should have no means of determining. The two curves, therefore, would have no significant relation to each other. All we can say is that if the man’s expenditure is wise, he enjoys a larger total area of satisfaction as the marginal satisfaction which a shilling will command diminishes; but that it really is so would be a rash assumption.

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.

Thus when we imagine a curve that rises rapidly as we recede from the actual rate of supply towards the origin we may very generally detect ourselves arbitrarily and tacitly assuming both a gradual (or sudden) exclusion of all natural substitutes and a continued command not only of the strictly complementary commodities but of all the other things necessary to continued life and sensitiveness. That is to say, we begin by considering how much we give for a loaf of bread, all our other supplies and open alternatives being what they are, and consider what inconvenience we should actually suffer if we happened to be “short of bread” one day; but when our imagination travels back towards the origin we not only cut down our supply of bread, but silently cut ourselves off from increased supplies of potatoes, etc., until at last we find ourselves in a besieged city—but always with a good supply of water. And during this process the significance of money has itself indefinitely changed. Money, as we have seen, represents open alternatives. And in a besieged city a shilling represents less and less of the common objects of desire. Many things it cannot get at all. Of many other things it can get very little. The only things of which it may possibly be able to get more than before are such as have little relevancy to our distressed condition and narrowed opportunities—jewels and works of art, for instance. So the value of the unit in which we estimate our rising want as we approach the origin is itself declining, owing to the changed conditions that affect the whole society in which we live.

Thus an attempt to trace an individual curve back towards the origin is legitimate, and its results are interesting, suggestive, and enlightening, in proportion as the condition “other things remaining the same” is observed. But as in the case of any great and essential article or group of articles of consumption we can scarcely imagine the origin to be approached owing to an actual rise in the price while other things remain equal, such curves must depend for their construction on imaginative estimates of the value we ourselves should under present conditions attach to small increments of the commodity at given margins; not on attempts to reconstruct conditions that might really raise the market price to a high figure.

It may well be asked whether a method that needs so much guarding and explaining is worth adopting at all. The answer is that the principle of declining marginal significances is absolutely fundamental. The doctrine of surplus value in the thing bought over and above the value of the price paid, is an inevitable deduction from it. The awakened mind must, and as a matter of fact does, speculate upon it. It underlay the old distinction between value in use and value in exchange. It underlies modern discussions of the significance of a more even distribution of wealth. It is intimately connected with the relation of Economics to life. A want of a clear understanding of it brings perpetual confusion into our speculations and entangles the student in perplexities and contradictions. And it is therefore of the very first importance that we should try to find out exactly what it is and how far it takes us.

Moreover, though we cannot assume a system of curves of total significance to co-exist and to retain its general validity while modifications take place in one or more of the supplies, yet we may assume that, in spite of all the modifications which are perpetually taking place, all the curves of commodities, some supply of which is still enjoyed, continue to be such that in the neighbourhood of the actual supply an advance would mean an increased, and a retreat a diminished, marginal significance. That is to say, at and about the point of the actual supply, the curve, however fluid we may consider its form, will always preserve the property of declining as we recede from the origin.

What we have regarded as a source of disturbance and confusion in our attempts to construct individual psychic curves would become an essential element for consideration in the construction of a curve representing the collective or communal scale spoken of in Book I. (pages 142
sqq.). That scale, as we saw, is purely objective, and is not susceptible of any consistent psychic interpretation, though it ultimately rests on psychic phenomena. If we take any given commodity, and ask not how much any individual would take of it at a given price, other things being equal, but how much the community would take, other things being equal, the term “other things being equal” has essentially changed its significance. When dealing with the individual, “other things being equal” would mean that all the substitutes were to be had at their present prices. When we are dealing with the community we cannot mean any such thing. For obviously if the price of any one commodity were seriously changed, the consumption of substitutes or complementary commodities would also be changed, and if this were done on the large scale it must alter their prices also. By “other things remaining equal” then, we must now mean “no changes taking place in the conditions on which other commodities may be obtained, except such as are directly involved in the reactions of the supposed change of price in the commodity under direct consideration.” Those changes themselves must necessarily be considered, and the estimates as to how much the public will take of any given commodity at such and such prices must be based on the consideration of the actual effect which the price would have on the general expenditure of the public, at the prices which that general expenditure would determine, if no independent causes changed the supply of other commodities. Dealers might be able to form a fairly accurate estimate of the course the curve would take in the near neighbourhood of actual experience, but might have no means of forming a close estimate at points near the origin, for example, or near the point of intersection with the abscissa.
*26

In such a communal curve of a single commodity, the mixtilinear area above the rectangle of price paid would have no consistent psychic significance. It would be made up of satisfactions corresponding alike to the halfpence of Cobbett and those of the millionaire. The figure would merely represent the objective fact that persons could be found who, under existing circumstances, would pay for so much of the commodity at the rates represented by the successive ordinates; and, therefore, the area in question would represent satisfactions for each of which some one would pay the money unit sooner than go without it, but they would have no psychic parity or equality at all.

If we compare a communal curve with an individual one, the former certainly appears to have a firmer and more defined significance, for it represents the tangible fact that so much of the commodity would be bought at such a price. But it will be noted that this objective fact is merely the resultant of the play of innumerable psychic forces which take causal precedence of it. It is a perfect illustration of the Aristotelian distinction between that which is first relatively to the observer, and that which is first in the order of nature. The observer of the market who has little concern with psychology finds the phenomena of the market directly accessible, and, if he works back towards the psychic phenomena at all, he does so from the basis of the objective facts. But the apparent firmness of these objective facts really rests on what has perhaps appeared to us the quagmire of the psychic data which are first in the causal order of nature.

Finally, we have to note that with the collective, as with the individual curves, it is impossible to construct a system the members of which shall be simultaneously valid; for any change in the selection between the alternative points presented by the form of any one curve reacts upon the forms of all the others. If we start with the existing state of things, we might trace a curve for any one commodity, shewing the prices which would result from a reduction of the supply by one-tenth, two-tenths, etc., on the supposition that the supply of all other commodities remained what it is; and then, returning to the supposition of a normal supply of the first commodity, we might trace a curve with respect to a second, and so forth. But the members of the system thus created would each start from the basis of the present state of things and on the supposition that no change took place in the supply of any commodity but the one under direct treatment. The conditions, therefore, on which they are constructed would mutually cancel each other, and only one could be regarded as valid at a time.

APPENDIX TO CHAPTERS II. AND III.

We have generally assumed that the same curve may represent, with a sufficient approximation to accuracy, both the total excess of satisfaction over payment for a given amount purchased, and also the system of relations between prices and the quantities that would be purchased. But this assumption will not always be justified.

If a man’s income rises or falls, he does not increase or diminish his expenditure upon every article of consumption.
*27 The consumption of bread
per capita is likely to be larger, not only relatively but absolutely, in a poor man’s household than in a rich one’s. Thus a marked diminution in a man’s effective income may actually increase his purchases of bread. Now if such a practical diminution is caused by a rise in the prices of articles other than bread, there is nothing surprising in an increased consumption of bread resulting from it. But it may be that it is a rise in the price of bread itself which contracts the man’s general resources, and we may then have an apparently anomalous result, for in that case a rise in the price of bread may make him buy more of it; and within certain limits he may therefore take more bread when the price is higher than when it is lower.

This, however, does not affect the principle of declining marginal significance. It still remains true that if the man were deprived of half his stock of bread he would suffer more than twice as much as if he only forfeited a quarter of it.

On the principles finally formulated on page 461, we may construct the curve of marginal significances, shewing the surplus of satisfaction over payment for any given quantity purchased at a given price. But this curve, so far from representing with approximate accuracy the curve of price-and-quantity-purchased, will be of a wholly different character from it. The latter curve will, at this point, be sloping upwards as we recede from the origin. Within certain limits the higher the price the more the quantity purchased; but this will not be because the price is higher, but because the man is poorer. This example is an emphatic warning that no curves which depend for their validity upon the condition “other things remaining equal” can be fruitfully applied to any hypothesis that covers more than a small fraction of the whole area of a man’s vital experiences.

Before leaving this illustration we may note that if the rise in the price of bread is caused by a defective harvest, then, the total amount of wheat being reduced, and the consumption of a certain class of the community being increased, it is obvious that there must be a diminution of consumption in other classes of the community sufficient to cover both the deficiency in the crop and the extra consumption; and that means that the poor would outbid the rich for bread to a certain point, as they already completely outbid them for tripe.

If it is true that for a large proportion of the community the curve of price-and-quantity-consumed really has this rising slope in the neighbourhood of the actual supply, it seems possible that the poor may be forced deeper into this disastrous necessity of outbidding the rich as an incidental consequence of “corners” in the wheat-market manœuvred for financial purposes.

There is another case in which portions of a curve of marginal significance will entirely fail to coincide with the curve of price-and-quantity-purchased. We have seen that some curves of marginal significance rise in the region near the origin.
Fig. 18 represents such a case. For any price,
Oy, the figure suggests that there are two possibilities of purchase,
Ox₁ and
Ox₂. But a moment’s reflection will shew that the earlier portion of the curve cannot be interpreted in this way. To buy
Ox₁ would be to sacrifice
yx₁ and only to gain
Ozp₁x₁. The curve, therefore, only begins to be a curve of price-and-quantity-purchased after the point
k, at which the total area of the price would equal the total significance of the commodity.