The Common Sense of Political Economy

It would be a great mistake to suppose that in such a case the portions of the curve and the stock about which we have no information are without influence upon the result. It is because the total amount of stock is what it is and because the curves are what they are that the whole amount of the stock, minus fourteen, is capable of satisfying all the demands down to the ordinate 20. There might, of course, be other combinations of data which would yield the same result, but that would be a coincidence. At any rate the result from which we start is determined by definite data, and our final result is as much determined by those data, of which we only possess the registered results, as by those which are represented by the fragments of the curves and the surplus of the supply which are given us in detail. What ultimately determines the price, then, is the whole amount of the commodity and the character of the individual curves.

We may suppose our information to be given in yet another form. Suppose a whole body of curves (no longer the same body we have represented in Figs. 19, etc.) has been reduced to two (
Fig. 24), and we have one of these collective curves given us from the origin onwards (
a). Concerning the other we are told that the total amount of stock (unspecified), if distributed exclusively amongst the consumers represented by this second curve, would satisfy them to the point with the ordinate 4. The course of this curve upward from the point in question towards the origin is given us for a certain distance (
b), but we do not know how far off the origin is. We measure 4 on the ordinate of (
a) at the origin, and then reverse (
b). The point of intersection will give us the price 17. But this again is only a disguised addition of the partial character that we have just examined. We do not know what the quantity of the commodity is, but we know how much it is in excess of any ordinate on curve (
b) which we choose to select, within the limits of our information. Thus we know that it is 63 in excess of the amount required to bring the ordinate of (
b) to 40, 39 in excess of that required to bring it to 20, and so forth. The reversed curve (
b), therefore, will secure that every point is at such a distance from the origin, or highest point of curve (
a), as to comply with the conditions specified in connection with Fig. 23; and the data of the latter figure can be reduced to the form presented in the other with perfect ease. The total amount of the commodity required to bring the ordinate of group (
b) from 40 to 4 is 63. We know from curve (
a) that 10 would be required to bring group (
a) to the same point. Starting then at the points of the two curves with ordinate 40 we have 63 – 10 (=53) as the surplus of the supply; and we can present the two curves from the points of ordinate 40 onwards, with a space of 53 between these two points, and obtain (
Fig. 25) the price by intersection precisely as in Fig. 23. But here, as before, the real process is one of addition. We could of course have started at any other point of (
b) lower than 40, and the corresponding point of (
a), with the same result. In fact our Fig. 25 includes all such alternatives in itself.

We can now understand the exact meaning of the confirmed habit of presenting the phenomena of the market under the form of a curve of “supply” and a curve of “demand,” the intersection of which determines the price. It is based in the first place on a division (irrelevant as we have seen) between those persons in the market who have, and those who have not, a certain stock of the commodity in question. The curve of the latter is given in its completeness, or, at any rate, the origin is marked and the portion of the curve which is sketched is made to begin at a defined distance from the origin. This is called the curve of demand. The other curve in then inserted as a reversed curve, and a definite ordinate is assumed either for the point at the origin or for a point at a defined distance from the origin; and this is called the supply curve. Now this curve is a curve of reserve prices, which, as we have seen,
*30 is merely another name for the demand curve of those who possess a stock of the commodity; and its reversal is merely a quick way of arriving at the results of addition. But in connection with it information is tacitly given us as to the surplus of the total stock over the amount required in order to gratify the whole market down to some given ordinate. The connection between these two pieces of information is arbitrary; for the vital information as to excess of supply over that required to bring the ordinates to a certain point, might just as well have been given us in connection with the other (so-called “demand”) curve, or partly in connection with one and partly in connection with the other, or without any specified connection with either of them. Thus, if we had not had the two curves given us at all, but only the whole collective curve, without distinction between possessor and non-possessor, and had also been told that the stock was enough to satisfy all claims down to the ordinate of 40 with a surplus of 53, we should have obtained exactly the same result. And if we suppose curve (
a) and curve (
b) alike to be miscellaneous groups, both of them made up of some persons who possess and some who do not possess supplies of the commodity, we shall still have precisely the same results.

But the distinctions which are irrelevant to the determination of the market price and of the quantities ultimately possessed by the individuals constituting the market do affect, as we have seen,
*31 the specific steps by which the price is discovered and the equilibrium reached. It is in the failure to distinguish between the methods by which that price is
discovered, and the ultimate facts by which it is
determined, that the current analysis of the market appears to me to fail. Though the division between buyers and sellers is not absolute (for we have seen
*32 that a man may be a buyer or a seller according to circumstances in the same market, and that the buyer may be a possessor of stock also), yet it is undoubtedly the “higgling” of buyer and seller that discovers the actual price. Hence the seductive character of the current representation, and the insidious character of its concealment of the ultimate nature of the market and market prices.

We will now proceed to the examination in detail of examples of the way in which relevant and irrelevant facts are usually confounded in the analysis of markets and market prices.

In his book on
The Economics of Distribution*33 (pages 11
sqq.) Mr. Hobson supposes that in a horse-market there are eight “sellers” (of horses of uniform quality) who have reserve prices running from £10 to £26, and ten “buyers” willing to give prices running from £15 to £30. The details may be thrown into the form of
Fig. 26. The figure is necessarily defective, for if H will sell at £26 and P will buy at £26, this involves a difference in the place of a horse upon the scales of preference of H and P, but Mr. Hobson does not tell us how great the difference is. It may be less than a farthing; that is to say, it may be that H would not sell at a farthing less than £26, and P would not buy at a farthing more. But that H would sell at £26 shews that he prefers £26 to the horse, though by never so little; and that P would buy at £26 shews that he prefers the horse to £26. A horse, then, stands on H’s scale at a little below £26, and on P’s at a little above. This is not shewn on our figure; but neither is it necessary for the purposes of our investigation.

Mr. Hobson proceeds to argue that if a price of anything above £21:10s. were set there would be more sellers than buyers, and if anything under £21 were set there would be more buyers than sellers, so that the price would settle somewhere between £21 and £21:10s. Anywhere within this range there would be an equal number of buyers and sellers.

This is all perfectly true, and it corresponds to our elaborate exposition of the market as a machinery for discovering the ideal equilibrating price.
*34 But if it is given as a statement of the data which determine that price it is quite needlessly complicated and gives us a number of irrelevant facts. If we know nothing at all as to who possess the horses but know the position a horse occupies on the relative scale of each of the persons concerned, we shall have, on
Figure 27, a statement of what prices would rule for any supply of horses from one to eighteen, and shall see that for eight horses it might be anything from £21 to £21:10s.

The relevant facts for determining the price, in the case supposed by Mr. Hobson, are found to be that there are eight horses altogether, and that the places that a horse occupies on the scales alike of A-H and I-R are as stated, and as represented in the diagram. The irrelevant facts are that the eight horses are at present in the possession of A-H, and that I-R are all without horses. When I say that the possession or non-possession of a horse is irrelevant, I mean that it is irrelevant if we know the position of a horse on the scale of preferences of each of the persons concerned. The possession or non-possession of a horse may no doubt affect that position, but so may the man’s health, or the health of his wife, or his age, or the fact that his wife has recently read Mrs. Hayes’s
Horsewoman, or that his daughter has read Xenophon
On Horsemanship, or a thousand other things. There may, in short, be an indefinite number of reasons why the horse occupies just this position on his relative scale, but as long as we know the fact we are indifferent to the causes. Given, then, the relevant facts, you may distribute the items between the groups just as you like. You may arrive at your conclusion by the method of addition or the method of intersection. You may deprive the whole alphabet from A to R of horses altogether, and throw eight horses from some other source upon the market, without reserve price; you may suppose that some in group A-H possess horses and others do not; but you will always bring out the identical result that the market price, virtual or actual, will be somewhere between £21 and £21:10s., and that the ultimate possessors of the horses will be H, G, F, R, Q, P, O, N. Naturally. They are the eight persons on whose scales of preference a horse (whether they have him to begin with or not) stands highest, and there are only eight horses altogether.

If the fundamental method of addition is adopted, it is obvious at once that no hypothesis as to which of the persons brings the horses into the market will in any way affect the result, and, on examination, the same will be found true if we adopt the method of intersection. On Mr. Hobson’s supposition, group I-R possess no horses, and group A-H possess eight. We know, then, that as there are eight horses altogether, we must so arrange the curves that between the highest of one group, R, and the highest of the other group, H (both included), there shall be eight units, so that whatever the point of intersection may be there shall be eight and only eight letters above it. This will give us
Fig. 28,*35 which will bring out the same ultimate possessors of horses and the same prices as we had in Fig. 27. But if we suppose that the eight horses were originally possessed by A, C, F, H, K, L, M, O, and that B, D, E, G, I, J, N, P, Q, R were without them, and proceed by intersection to determine the price and the ultimate possessors, we must again see to it that between R and H (both included) there are eight units, and again we shall obtain identical results (
Fig. 29). But this rearrangement of the individuals is really superfluous. We may suppose the down and up sloping series in Fig. 28 each to include possessors and non-possessors, according to the data of Fig. 27. This will in no way affect the result; nor is it necessary to have any information on the subject in order to split up the data of Fig. 27 in any way we like and place the two groups cross-wise, with the interval between their highest members determined by the datum as to the total number of horses.

It will be noted that Mr. Hobson gives us the whole of the facts. Mr. Marshall (
Principles of Economics, ed. 3, page 410) has a parallel example in which he only gives some of them. He supposes, in a corn-market, that at 37s. a quarter there will be “sellers” of 1000 quarters of wheat and “buyers” of 600; at 36s. “sellers” of 700 and “buyers” of 700; at 35s. “sellers” of 500 and “buyers” of 900.

The facts given us may be tabulated thus:—

Therefore (subtracting from the B figures the 600 required to bring the B’s to the 37s. point) we find that when all are satisfied down to the point of 37s., it will take—

It appears, then, that in the market altogether there are 1000 quarters more than would satisfy the group A, called “sellers,” down to 37s. (for they have 1000 quarters that they value at less than 37s., or they would not sell them at that price). It would take 300 of these to satisfy them down to the point of 36s. (for we are told that at 36s. they would hold back 300), and 200 more to satisfy them down to 35s. What we know of the curve of the group called “sellers” is therefore represented on
Fig. 30 (
a). As to the group B, called “buyers,” we do not know to what point they are already satisfied,
i.e. we do not know at what price they would begin to buy, but we know that 600 quarters (or 600 more than they already have) would bring them to the point 37s., and then another 100 would bring them to 36s., and another 200 yet to 35s. What we know of their curve, then, from the 37s. point onwards is represented on Fig. 30 (
b). In neither case do we know how far from the origins the curves start.

Let us add the two curves, starting at the points with the ordinate 37s. Fig. 30 (
c) gives us the result. Now we know that after all parties are satisfied to the point of 37s. there are 400 quarters left; and these will satisfy all parties to the point of 36s. Or we might adopt the method of intersection, placing 400 quarters between the 37s. points of the two curves. The result, of course, will be the same (
d). Both (
c) and (
d) can be constructed and read without reference to the initial distribution of the corn. If all the corn had originally been in the possession of the group A, or if half of it had been in A’s possession and half in B’s, or whatever the proportion had been, so long as the curves of significance remained the same, and the excess over the amount required to bring them all to the point 37s. remained 400, we should always have the same result. The course of the curves, then, and the amount of the excess, constitute our relevant information—relevant, that is, to the determination of the market price and the ultimate distribution of the excess. The irrelevant information is that the corn is now in the possession of group A.

A psychological objection may here be raised. It may be said that it is impossible that the curve of preference should be conceived irrespective of the possession or non-possession of the commodity. In the case of the horse-market it may be admitted that every man has a more or less determined relative estimate of the significance of a horse, and that we need not inquire how he came to form it. But in the case of the wheat we are asked to suppose that each man has a scale on which successive quarters of wheat are continuously registered with continuously declining significance. Now it may very well be that the man who comes into the market with the intention and hope of selling may buy when he becomes better informed of the facts, or
vice versa, yet some mental friction would have to be overcome, so that the curve would not decline regularly, but would break at certain points determined by the amount of corn the man possessed. The answer is that this may be, though it need not be, the case; but that in a large market such individual considerations will counteract each other, and the whole body of persons conducting the business will present a sensibly continuous curve.

The final outcome of these investigations is that the diagrammatic method of taking a buyers’ curve and a sellers’ curve and shewing by their intersection what the market price will be is perfectly legitimate if properly understood, but that if it is supposed to represent the ultimate facts which determine the price, it embodies and emphasises irrelevant matter. If it is supposed that the two curves are different in kind and represent two principles, that they could not equally well be represented as a single curve, or that the transference of any constituent elements from one to the other would affect the result, or that either curve might not contain the register of both buyers’ and sellers’ preferences, then the method is misleading and mischievous. In the higgling of the market the price
emerges as the result of the play of a conflict between buyers and sellers as such, which is not relevant to the ultimate facts and forces which
constitute that price. The method of intersection is, in fact, a mere disguise of the method of addition, and it might ignore the distinction between buyer and seller without affecting the result, as far as price and ultimate distribution are concerned. If adopted to shew the amount of business done under given conditions, the distinction between buyers and sellers and the intersection of their curves is a legitimate method; if adopted to shew the ultimate considerations that determine the market price, it is, to say the least of it, seriously misleading.

Our main conclusions are nothing new. They merely restate the results of the analysis of markets entered upon in Book I. Chapter VI. Given the total supply of the commodity, the market price that any single customer finds established is determined in the main by the demands of all the other purchasers, but in some degree by his own. If his demand is, in bulk, a very small portion of the whole, then its effect on the price will be correspondingly small, that is to say, the total curve will decline so slowly that the addition or withdrawal of an amount of the commodity sufficient to carry this one purchaser from his initial to his final increments will not perceptibly raise its ordinate. And therefore in dealing with any one individual separately we may assume the market price as already fixed by all the other individuals, and may then simply measure it off on the axis of
Y of the particular curve we are examining, and may draw a parallel to the axis of
X through that point. The abscissa of the point at which this parallel cuts the curve will measure the amount that this particular purchaser will take. We may put it in this way: the amount of any commodity which will flow, in obedience to the economic forces, to the satisfaction of any one consumer’s wants will be determined by his curve of preferences, by the similar curves of all the other claimants, and by the total amount of the commodity. This is the general law of distribution.

If we go on to ask what determines the quantity of the commodity, we find ourselves dealing once more with the identical problem that we have just solved. The flow of the productive forces into this or that industry is determined on exactly the same principles as the flow of the stock of any single commodity to the different consumers. To breed horses you need land, buildings, corn, apparatus of many kinds, and trained human faculty. In supplying horses, therefore, you demand all these things. To raise corn you need land, buildings, ploughs, waggons, gates, ships, machinery, and human faculty. In supplying corn, therefore, you demand these things. And so with all other commodities. Thus the supply of any commodity is itself a demand upon other commodities and services, and if we separate out the demand, say, for woodwork implied in the supply of each of the commodities into which it enters, we shall be doing just the same thing that we did when we separated out the demand for potatoes from all the individual budgets of the persons that composed the market. Here, as there, the share that each one gets is determined by the curve representing the urgency of the want it satisfies, by the similar curves of the other industries, and by the total available resources of the community. Thus the supply of any commodity is regulated by the combination of productive factors needed for its production and the rival claims of other commodities for the factors of this combination. Ultimately, then, we have at one end the undifferentiated and unmanipulated forces and materials of nature, the faculties (trained and untrained) of man, and the various modifications of the former by the latter, which exist at the moment. This constitutes the total available stock. And at the other end are the tastes and resources of each individual. The amount of the supply, at any moment, of this or that commodity (in its final and united form, or in any of its intermediate states or constituent elements) is determined by the attempts of the commercial community to gauge and anticipate individual wants and to regulate the flow and the combinations of the ultimate sources of supply in accordance with them.

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

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

If the demand (estimated significance) for a commodity increases, as represented by the upper dotted line in Fig. 31, the product will be increased from
Ox to
Ox₁. If it declines, as in the lower dotted line, the industry will shrink to
Ox₂. If, while the demand remains the same, some invention is made which doubles the quantity of the commodity which could be produced by the unit-factor of production, or, which is the same thing, halves the amount of the productive forces required to produce the units we have hitherto registered along
Ox, the dotted line parallel to the axis of
X will indicate the quantity which will be produced. We might equally well represent this latter change by retaining the length
Oy unchanged and doubling the height of the ordinate at every point, because the factors that would give the value
Oy in other industries will now be producing the units of our product, and therefore the anticipated satisfactions they yield, at double the previous rate. The unit of
Ox, therefore, will represent twice as much of the commodity, measured in its own proper unit, as before (
Fig. 32).

We have now to note that any very extensive departure from the existing state of things might affect the whole constitution of the unit on which we are working, for it might disturb the marginal relations between different kinds of human effort and different products or gifts of nature. And, as the value of anything can only be expressed objectively in terms of something else, changes or discoveries that affect the general fertility of human effort, and the significance of natural products and agents, cannot be recorded by any consistent objective method. Further, the diagrammatic illustrations which we have been using can only be regarded as applicable to cases in which we are examining a very small part of the whole field, so that we may consider the general conditions as stable. An attempt to draw up the whole scale of significance of any one of the main factors of production, carried back to the origin, would of course be quite futile. It would be impossible to imagine the origin at all nearly approached without such a disturbance in other conditions as would deprive our units of all continuous significance.

One other point of theoretical interest remains for investigation here. We have seen
*36 that the creation of the supply of undifferentiated human capacity is to be regarded in the main as itself constituting a branch of expenditure or “consumption.” It is determined, at any moment, by the scale of relative significance of this particular form of expenditure, “consumption,” or expression of impulse, which has ruled in the past. But the total capacity-for-effort that exists is not employed “economically.” What determines the amount that is devoted to the production of things that enter, or might enter, into the circle of exchange? Here, as in previous instances, we must begin with individual curves. Writers who have paid attention to the subject have usually regarded the output of human effort (spoken of under the rather dangerous abbreviation of “labour”) as limited by its irksomeness, and have represented its significance (at least after a certain point) as a negative quantity.

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

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

This way of putting it at once suggests that the man who sells his labour is selling something for which he himself has a demand of some kind, and that this demand should be represented as a positive, not a negative quantity. Reflection fully justifies this suggestion. The irksomeness of the labour by which we earn money is not really the only thing that we have to set against the advantages the money secures. It is only a negative expression of one element in the desirability of rest or leisure.
This latter is a positive conception, and it includes all output of effort upon the direct securing of things not in the circle of exchange, as well as rest. Our previous studies
*38 of the relations of positive and negative satisfactions and their diagrammatic representation will remove all difficulties from our path in this matter. We may treat “desirability of leisure” as positive, and may represent the
l curve with positive ordinates, as in
Fig. 34. We shall then get the same point as before, viz. 9, by intersection, and shall see that the whole diagram is no more than another disguise of the process of addition of curves.

We may read the
l curve, whether in Fig. 33 or in Fig. 34, thus:—We have no information as to the total of exchangeable commodities which the man could conceivably secure to himself by his extreme output of effort, reducing his leisure to the minimum requirements of rest and nutrition which would enable him to continue at the same level. But we know that if he had already reserved as much leisure as would reduce its marginal significance to 7, he would still have thirteen hours a day, to distribute between the further gratification of his desire for more leisure and the total gratification of his desire for things in the circle of exchange. The
p curve shews us that it will take seven of those thirteen hours to bring his desire for things in the circle of exchange down to the point of 7. That is to say, the marginal value of leisure, when eleven hours have been reserved for it, and of the reward of labour, when seven hours have been devoted to it, stand alike at 7. There are six hours more to be distributed between them. Add the curves together from this point, reversing
l (
Fig. 35), and we shall obtain our former result as to the point to which both sets of desires will be gratified. Two more hours will be devoted to work, making nine hours altogether, and four more to leisure, making fifteen hours altogether.
*39

For obvious reasons we have not carried our curves back to the origin. The assumption that “other things are equal” would be patently absurd at any great distance from the actual point of equilibrium. Even the range that we have actually allowed our curves to cover can only be justified by considerations of facility of demonstration.