The Common Sense of Political Economy

Thus any actual transactions made in consequence of a mistake in estimating the equilibrating price at any given moment will theoretically alter the equilibrating price itself, even apart from its main effect in driving customers to the purchase of substitutes.
*25 But although the consequences of mistakes may change the equilibrating price, there always exists ideally such a price at any given moment, if it can but be discovered; that is to say, there is always a price such that, if it were now recognised and proclaimed, a single set of transactions at that price would produce equilibrium. We have therefore reached a very definite conception of the real or natural market price at any given moment. It is the price that corresponds to the point on the collective scale, as it actually exists at the moment, which would be reached if the rival dealers all read the minds of the purchasers correctly; that it to say, it is determined by the quantity of the commodity in the market, and the dispositions of the persons constituting the market. The price actually current in the market at any moment is determined and proclaimed in accordance with the conjectural estimates of those ultimate factors as read by the sellers.

We may now formulate the law of the market thus:—Since every desire for a unit that is gratified must stand objectively higher on the scale than any desire for a unit that is not gratified, it follows that if there are
x units of the commodity in the market they will go to gratify the
x desires for a unit highest on the scale. And since the price at which all the units are sold will be the same, and will be determined by the significance of the lowest desire for a unit that is gratified, it follows that the position of the
xth unit on the collective scale will determine the market price. It will be readily understood, however, that the units in the collective scale taken
seriatim will not each shew a decline that can be expressed in coin of the realm. If the supply of the English wheat market were 125,000,000 cwt., every two successive hundredweights would not shew a decline of even a farthing. Between any two prices, therefore, that the customs of the market recognise there will be many units, and we think of them all as marginal. They will represent the last units purchased by many individuals, and the lowest gratified desire for a unit on the part of each of these several purchasers will conform more closely in one case and less in another to the actual price. One will only just make up his mind to take it, and the other will be on the verge of taking a unit more, but the marginal units will occupy the same position upon all the individual scales to within the smallest sum that can be expressed in price. We may repeat this statement in several alternative forms: If there are
x units of a commodity in the market they will go to the supply of the
x estimates of a unit which stand highest on the relative scales of the purchasers, and will satisfy the claims of the purchasers
pari passu down to a uniform degree of relative intensity; the point to which the supply will reach determines what that degree of relative intensity and the corresponding price shall be. Or: In order that any desire for a unit of the commodity should be gratified it must be one of the
x desires that stand highest on the collective scale, and those desires that are just admitted,
i.e. that take the lowest of these
x highest places, coincide with the equilibrating price, and determine the price which will be paid for all. Or, to vary the formula once more: All the desires for a unit of the commodity which stand relatively higher on my scale than the point represented by the equilibrating price will be gratified, and none of those that stand lower will; and therefore the equilibrating price will exactly correspond with the gratified desire that stands lowest on the relative scale; all the other gratified desires will stand higher on the scale, and all desires that stand lower will fail to be gratified.

We shall now proceed to some further considerations which, while threatening to complicate our conception of the market, will in reality simplify it. Hitherto we have supposed that all the wares brought into the market are to be sold at any price that can be got, and that the minds of the sellers have been exclusively devoted to ascertaining what their goods will be worth to the customers at the various margins; except that in one instance the value that the wares might have to the seller himself was incidentally mentioned.
*26 We must now go on to an express examination of this case. It may very well be that some or all of the dealers would rather not sell at all than sell below some particular price; that is to say, they have put a reserve price on their goods. There may be many reasons for this, the most obvious being that the goods have a direct and immediate use for the sellers themselves. A woman may bring her damsons to market, and may be willing to sell them if she can get a certain price for them, but may prefer keeping them for home consumption if she cannot get that price. Say that she will not sell unless she can get 5d. a pound. Another may be willing to sell at 4d., but will go no lower than that; and so forth. It might also well happen (theoretically it would be a normal case) that just as the typical purchaser might be willing to buy plums at 6d., but would buy more at 5d. and more still at 4d., so the woman who brought her plums to market would reserve a few for her own consumption if it turned out that 5d. was the price that ruled the market, would reserve more if the price were 4d., but would sell her whole stock if she could get 6d. for them. That would simply mean that she preferred 6d. even to a single pound of damsons, but that if the choice was not between a pound of damsons and 6d., but between a pound of damsons and 5d., she would find a first and a second pound, and so on up to, say, a twenty-first pound, preferable to 5d., but 5d. preferable to a twenty-second pound; whereas if the alternative were a pound of damsons or 4d. she would prefer the twenty-eighth pound of damsons to the price in money, but would prefer the price in money to the twenty-ninth pound. In that case, if 4d. ruled in the market she would reserve 28 lbs. for her home use, if 5d. ruled she would reserve 21 lbs., and if 6d. ruled, none at all.

Now the reader will note that in making these suppositions we have simply been drawing up the position of successive pounds of plums on the relative scale of the stall-keeper, just as if she were a customer. If she prefers 6d. to a first pound of damsons, 5d. to a twenty-second, and 4d. to a twenty-ninth, the effect on the market is precisely the same as if all her plums were in possession of another seller who had no reserve price, and she herself were a potential purchaser of 28 lbs. at 4d., and of 21 lbs. at 5d., but of none at all at 6d.; and at the close of the market she will take home no plums if the ruling price is 6d., 21 lbs. if it is 5d., and 28 if it is 4d., just exactly as if she had come with the same relative scale into a market in which there was the same supply of plums, but none of them hers. It would be stretching language too far to talk of the seller at a reserved price as being a purchaser, but obviously her effect upon the market is precisely the same as if she were; and when we state the conditions that determine the market prices, in their ultimate forms of “quantity of the commodity in the market” and “relative scales of the persons constituting the market,” we have already included in the latter not only the whole body of purchasers but the whole body of sellers at reserved prices.

In our first rough analysis of the market we distinguished between the buyers who know their own wants individually, and the sellers who form an estimate of the collective wants of the buyers, and also of the amount of the commodity which there is to satisfy them. But we must now substitute for this distinction between people the finer analysis that distinguishes between functions or capacities, and we shall see that the seller, whose primary function is to represent the whole body of consumers in his dealings with each individual consumer, may also himself be a consumer, and in that capacity may take his place by the side of the other consumers. This may be conveniently illustrated by taking the case of a farmer who has got in his wheat harvest and may thrash out and sell when he chooses. Let us follow him to the corn market with his specimens of wheat. If the prices that rule are low and he thinks they will rise later on, he will perhaps sell a certain amount of his stock, for he is pressed for a little ready money. But as the prices are not what he considers satisfactory, and as he expects them to improve, and as his want of ready money as distinct from his desire to maximise his total resources is a rapidly declining quantity, he will decline to sell the greater part of his stock. He may therefore have a very complete and sensitive scale of reserved prices, reserving the whole of his stock if prices are very low, and five-sixths, four-sixths, three-sixths, etc., according to a scale of rising prices. What is conceivable in the case of the plums, what seems natural in the case of the corn, may be very general in the case of livestock. Perhaps few men would take their horses, pigs, or sheep to the fair or market ready to sell them literally at any price they could get. There will, consciously or unconsciously, be some reserve price, however low, in almost every case; and if the farmer’s stock is large, it is probable that he may be willing to sell a portion of it on terms which he would by no means accept for the whole.

Thus in considering markets, even of such perishable goods as damsons, or butter and eggs, much more in considering markets in general, when the nature of the goods is not specified, we must take into consideration the fact that different portions of the stock will be held back according to the prices that rule. Market price, then, depends on (1) the amount of the stock in the market, and (2) the scales of preference of all those persons who constitute the market; and this phrase includes those whom we think of as sellers as well as those whom we think of as buyers. If the farmer who goes to market with the hope of selling 1500 quarters of wheat will hold back none of his wheat at 28s., 100 quarters at 27s., 300 quarters at 26s., 700 at 25s., and his whole stock of 1500 at 24s., then he stands, with reference to his effect on the whole market, exactly as if he were two men, one of whom throws his whole 1500 quarters upon the market without reserve, and the other of whom comes to market simply as a purchaser and is willing to buy 100 quarters at 27s., 300 quarters at 26s., 700 quarters at 25s., and 1500 quarters at 24s. The whole of his 1500 quarters, then, must be regarded as being in the market, and his preferences must be included, together with those of the purchasers, in drawing up the general scale of preferences which, together with the quantity in the market, determines the equilibrating price.

Note, then, that just as buyers will take back from the market a relatively large amount of corn in preference to the money they have paid for it if prices are low, and a relatively small amount if prices are high, so, in precisely the same way, the sellers at a reserve will take back a relatively large amount of corn in preference to the money which they might have had instead of it if the prices are low, and a relatively small amount if prices are high. The seller at a reserve asserts his preference in competition with that of the purchasers just as much as the purchasers assert theirs in competition with each other. The purchaser’s determination not to sell the last 100 quarters unless he can get 28s. for them, constitutes a conditional demand for 100 quarters of exactly the same nature as that of the buyer who is willing to take 100 quarters at 28s. if he cannot get them for less. The fact that the one man probably hoped that the price would be low and that he would bring a great deal of corn out of the market, leaving money instead of it, and that the other hoped that prices would be high and that he would take a great deal of money out of the market, leaving corn instead of it, simply means that each hopes to find that the things he has are high on the objective scale relatively to the things he has not. This is a circumstance important in many contexts, but not directly relevant to the fixing of the theoretical price. For this theoretical price is reached by ignoring, amongst other things, the sundry artifices by which, in accordance with their special interests, the persons constituting a market endeavour to conceal or modify the ultimate facts; which ultimate facts are the amount of stock, and the state of their own and other people’s preferences.

The theoretical identity of the purchaser, and the seller with a reserved price, or rather the fact that the true analysis must distinguish between functions rather than organs, is very clearly seen in the case of a sale by auction, where the owner of the property is willing to sell a number of things if he can get satisfactory prices for them, but is not willing to sell them without reserve. The articles are all put up to sale, and the owner himself may, if he likes, appear in the crowd of bidders and assert his own scale of preferences exactly like the rest, by offering a price, though what he is actually doing is not offering to buy, but refusing to sell. The form in which this is done is usually to give the auctioneer instructions not to sell under a certain price, but the fact that this is popularly called “buying in” shews that the points of identity between holding and buying have, in this instance at least, been generally grasped.

Returning to the country market, it may strain the reader’s imagination to think of a stall-keeper who has brought damsons to the market, intending to sell, finding the ruling price so low that, instead of selling the whole, or even any part of her stock, she becomes a purchaser of more. Yet to suppose this would only mean that under some circumstances a seller might buy in all his own stock, and then further become a purchaser of the stock of others, and this supposition is by no means extravagant. A peasant who grows a little choice fruit never thinks of eating it; he will tell you that he cannot afford to eat it. Many Norwegian peasants make butter for the market, and buy margarine to eat. So a fairly well-to-do farmer’s wife may sell the plums she thinks will fetch the best price, and make her winter stock of jam out of a commoner sort, gathered from her own trees or bought in the market; and if for any reason she has been widely mistaken in her expectations as to the price at which she could sell any particular fruit, she might find it best to keep and use, and even to add to, what she had originally meant to sell, and sell what she had meant to keep and use. The reverse case, which illustrates the same theory, is more easily realised. A housewife who has just gathered her own damsons and goes to a closely adjacent market with the intention of buying more, and proceeding to a jam boiling on a lordly scale, may find the prices so unexpectedly high as to induce her hastily to send home for her stock and sell the whole of it, perceiving that, at such a price, there are many available substitutes for the damsons which would come cheaper for her own winter use.

But we have already seen that the stall-keepers may refuse to sell at a certain price for other reasons than that the goods in question would be worth this reserved price to themselves for their own uses and purposes. They refuse early in the morning to sell at prices which would get rid of their whole stock in a few hours or minutes because they expect a constant flow of potential customers throughout the day. At the moment, then, they have a reserve price, not on their own account, to meet their personal wants, but in anticipation of the wants of others. At the moment these anticipations determine the place which the commodity takes on their own relative scales just as much as if they wanted it for their own use; and if this speculative holding of stocks ceased, the price would tumble down. In the case of swiftly perishable commodities that deteriorate by frequent transport, such as fresh fruit, we probably think of the wares as coming into the hands of the ultimate consumers within a few hours. In such cases we hardly realise that the attempt of the sellers to hit the equilibrating price for the whole day is really of the nature of a speculative holding back of the commodity, and keeps up the market price. It is, however, of exactly the same nature as actions that we think of at once in this light. Here, as elsewhere, it is only a question of degree. Take wheat, for example. When the farmer has harvested his crop he does not necessarily contemplate getting rid of it within a few hours, or even a few days or weeks, and his attempt to gauge the mind of the purchasers might include in its scope the probable wants of eleven months hence. Speculation enters no more really into his dealings than it does into those of the stall-keeper with the stock of plums who thinks of the persons who will be in the market six hours hence, but it enters more obviously, and is more easily recognised as speculative, because it covers a longer period. The stall-keeper does not recognise her own doings as speculative, but the seller of wheat very probably does; and therefore it is more likely that speculative buying will become specialised and that the grower and the dealer will be different persons in the case of wheat than in the case of plums. Indeed we do not readily think of speculation in plums at all. If we think of an intended seller of plums becoming a purchaser because of the low price plums are fetching, we take it for granted that she wants them for her own use. It does not readily occur to us (nor to her either) that if she believes the right price to be 6d., and if a neighbouring stall-keeper is selling at 4d., it would be good business for her to buy up her neighbour’s stock to sell again; and yet it would obviously be so if her estimate is correct. In the corn market, on the other hand, where speculation has reached the conscious stage, we can easily imagine a farmer taking up some of the functions of a dealer. In that case, if he came to the market to sell, but found that corn was at a considerably lower figure than he thought the facts would ultimately justify, he might buy corn instead of selling it. And of course any person who neither possessed a stock of wheat nor expected to need any great quantity for his own use might, in like manner, buy at a low figure, simply because he expected customers to be forthcoming willing to pay a higher price later on in the season.

Thus, while we think in the first instance of the purchasers as the persons who want the commodity for use, and of the seller as reflecting the minds of the purchasers who are not present at the moment, it is obvious on reflection that the parts may be reversed. The possessor of a stock of any commodity may himself be a potential consumer, and in that case his wants are registered on the collective scale of preferences; and on the other hand the function of reader of the public mind, anticipator of future wants, or speculator as to the wants of the portion of the public not present in person, may be taken by the buyer who does not possess, just as well as by the seller who possesses.

We can now restate the function of the market with a fuller insight into some of the conceptions it involves. A market is the machinery by which those on whose scales of preference any commodity is relatively high are brought into communication with those on whose scales it is relatively low, in order that exchanges may take place to mutual satisfaction until equilibrium is established. But this process will always and necessarily occupy time. The persons potentially constituting the market will not all be present at the same time, and therefore the composition of the collective scale (on which, together with the total amount of the commodity in existence, the ideal point of equilibrium depends) must be a matter of estimate and conjecture. The transactions actually conducted at any moment will be determined in relation to the anticipated possibilities of transactions at other moments. Speculation as to these future possibilities will be more or less elaborate and conscious according to the nature of the market and the length of time over which the adjustment will be likely to extend. But speculation is always present when any possessor of the commodity refuses to sell at the moment at a price which he knows he will be prepared to accept ultimately (whether an hour or eleven months hence), if satisfied that he can do no better; or if any purchaser refuses at the moment to give a price to which he knows he will ultimately be willing to rise should the alternative be to go without the commodity; or if any one buys at a price below which he would ultimately sell sooner than keep the stock for his own use. The legitimate function of such speculation is to secure the transaction of business on a broader view, and on a correcter estimate of the whole range of relevant facts, than could be arrived at without it. If no one at first has a correct conception of the facts, a series of tentative estimates, and the observation of the transactions that take place under their influence, may gradually reveal them; and if we could eliminate all error from speculative estimates and could reduce derivative preferences to exact correspondence with the primary preferences which they represent, and on which they are based, the actual price would always correspond with the ideal price.

But as liability to error is incident to speculation by its very nature, and as it plays a really important commercial part in some markets, it is natural that certain people should specialise in taking the risks, and should receive some remuneration for it. It is in fact the principle of all insurance. Dealings in wheat and cotton “futures” furnish a good example. We will take cotton. It is often important for a manufacturer to be able to know at what price he will be able to get raw cotton some months hence, in order that he may at once take a contract to supply so much cotton cloth at such and such times with better knowledge of what his expenses will be. But it would not be convenient to him actually to buy and store the raw cotton in advance. He therefore enters into a bargain with a dealer to supply him with so much cotton of specified quality, say three months hence, at a certain price. This is ordering “future” cotton. The seller has not the goods, but he reckons on being able to get them when the time for fulfilling his bargain comes, at a price which will remunerate him for his risk and his work. If he deals on a large scale and knows his business his risk will be small, for his mistakes in over- and under-estimating the price at which he will finally have to buy will cancel each other; but the risks of his individual clients, being taken over a smaller area and with less specialised knowledge, would be considerable. They are therefore willing to avert them by paying a small commission, in the disguised form of prices slightly in excess on the average of what the actual market prices will be.

Beyond this simple and commercially useful speculation there is an immense amount of gambling in wheat and cotton “futures”; and since all anticipations are ultimately based on the place of wheat or cotton on actual scales of significance, and on the volume of the crops, and as we have seen that it may be to a dealer’s advantage that he should know the truth himself and that others should not know it, it may often happen that speculators have a strong interest in circulating false reports as to an anticipated shortage, say, in the cotton crop. But the general question of speculative markets we will reserve for treatment in connection with the stock market, to which we may now proceed.

The market in stocks and shares, as well as giving occasion for all we need say on the subject of purely speculative or gambling markets, furnishes excellent examples of many of the points we have already touched on. Only a very broad and general treatment will be attempted here. In practice there are innumerable complications and refinements, the consideration of which would only be confusing. We will begin with the issue of loans. If a Government attempts to raise a loan at 6 or 4 or 2½ per cent it makes a definite promise to pay so much a year. It calls this promise £100 at 6 per cent, or whatever it may be. What it really is, is a promise to pay £6 per annum with the option (under whatever conditions may be named) of cancelling this promise by the payment of £100. This promise, with this condition, it offers for sale at a certain price, £99 or £86 or whatever it may be, which is its estimate of what will be the marginal value of its promises (when issued to the extent contemplated) to pay such and such an annual sum. If its anticipations are correct, or are an underestimate, the loan will be successfully negotiated. If it has overestimated the marginal significance of its promise the loan will fail.

But some of those who purchase the Government’s promises will do so merely as tradesmen buy goods for stock, in order to sell them again at a profit. This they do on a speculative estimate of the place which the promises will ultimately take on the collective scale of the public. Their calculations may be correct; or it may be that they have formed an underestimate and that they, or those to whom they first sold, make handsome profits before the stock settles down into the hands of those who themselves really want to draw their £6 or £2:10s. a year in return for their money. Or, on the other hand, it may happen that the speculative buyers overestimate the interest of the public, and although the loan is “negotiated” successfully, yet when the original purchasers for stock attempt to place their shares among the public they find that they can only do so at a lower figure than they had anticipated, perhaps at an absolute loss.

An interesting case of this occurred a few years ago. In April 1902, towards the end of the Boer War, the British Government desired to negotiate a loan of £32,000,000. They offered a nominal £100 at 2½ per cent (that is to say, a claim for £2:10s. per annum) at £93:10s., and whereas they asked for £32,000,000 only, no less than £350,000,000 was “subscribed” for; that is to say, persons representing an aggregate demand for a nominal £350,000,000 declared that they were desirous of purchasing for £93:10s. a claim for £2:10s. per annum. This would seem at first sight to mean that, whereas the Government believed that an issue of three hundred and twenty thousand fresh promises would bring the marginal significance of a Government promise to pay £2:10s. a year down to £93:10s., the buyers, who either wished to hold the promises or expected to be able to sell them at a profit, estimated that it would require three million five hundred thousand such promises to bring the marginal value down to that figure. But this is not really the case; for many of those who applied for a certain number of shares did not either expect or wish to get them all. They believed indeed that the whole three hundred and twenty thousand promises, and more, could ultimately be placed out at something above £93:10s., so that they could get a reasonable profit on any that were assigned to them, and they believed that if every individual purchaser applied for as many as he wished to hold or expected to be able to sell at a profit more than the whole issue would be applied for. In that case, obviously some would get less than they asked for. So the best chance for a man to get as many as he wanted was to apply for more. It is true that every one would not be able to get all he wanted in any case, for there would not be enough to supply them, but the man who made a modest claim for the amount he wanted might get a fraction of it only, whereas if he applied for two or three or ten or twenty times as much as he wanted he might come nearer his true mark; and if he turned out to be amongst the boldest and shrewdest he might get just what he wanted. But this is risky. It all depends on what other people ask for. A man might find that he had overshot the mark, and having asked for twenty times as much as he wanted might actually get twice as much. It is the consideration of this risk that limits his application. Thus three million five hundred thousand was not a genuine record of how many promises the buyers, speculative and other, collectively desired to hold, or expected to be able to sell at a profit over £93:10s., but was the complex resultant of each man’s estimate of what he himself could profitably hold or deal in, and what he expected other men would ask for, beyond what they could profitably hold or sell. Leaving this aside, we return to the fact that the speculative buyers thought that the whole stock could be placed well above £93:10s. On the day of issue the market value of the stock was £93:15s.

Soon afterwards the war came to an end, and the natural expectation was that the holders would be in a still better position than before; for the Government was now sure not to borrow any more money, that is to say, not to put any more Consols on the market, and seeing that an additional supply lowers the marginal value of any stock, this averted a danger. But to every one’s surprise Consols fell, and ultimately, on December 9 of the same year, they reached their lowest point of £92:2:6. This shewed that the purchasers had overestimated the marginal significance of the stock to persons who actually desired to buy a right to £2:10s. a year on Government security. The Government, however, had negotiated their loan on their own terms, and it was the speculators (not necessarily the original speculators, some or all of whom would have got rid of their Consols before this time) who bore the loss.

It must be carefully observed that when Consols rise or fall there is never at any time the slightest doubt as to the exact promise that is being purchased or the certainty that it will be kept. The revenue a holder derives from his stock in Consols is in no way affected by a change in their price, and when the “credit” of the Government is said to be better or worse than it was this does not mean that there is the slightest estimated risk of its failing punctually to fulfil its promises. It merely means that the marginal significance attached by the public to the certainty of receiving from the Government £2:10s. per annum has risen or fallen.

If it is a question not of negotiating a loan but of floating a Company the process might take many forms. It might be in part similar to the one we have just examined. The Company, on the credit of its rights or property, might issue “debentures,” or definite promises to pay so much a year in return for such a sum of money paid down. As the public will always prefer Government security to any other, the Company in that case would have to promise a higher rate of interest than that offered by the Government in order to induce people to invest in it. That is to say, it would not be able to sell its promises to pay £1 a year for so much as the Government can. But in principle it would be selling the same thing, namely, a claim to an annual (or half-yearly or quarterly) revenue. It might also issue “preference shares” in the form of promises to pay the holders sums dependent, up to a certain point, upon the degree of success which the Company realises. That is to say, the Company might undertake, after paying the sums due on the debentures and making proper allowance for a reserve fund, for replacement of stock and so forth, to devote any surplus to the payment of dividends to the holders of preference stock up to, say, 4½ or 5 per cent. Then there would be “ordinary shares.” The holders of these might be entitled to nothing at all unless there was a further surplus after the holders of the preference stock had received their full percentage, but might then be entitled to the whole of that surplus, however great, without sharing it with the holders of debentures or preference stock.

In such a case the holders of debentures know exactly what they are invited to buy: it is so many pounds and shillings a year; and it is as safe as the credit of the Company can make it. The holders of preference shares do not know so well what they are buying; for the Company may remain solvent, but may not be able to pay the full percentage up to which these preference shareholders have the first claim. They know that they will not get more than a certain revenue, but they cannot be quite sure that they will get as much. And, again, the holders of ordinary stock know still less what they are buying; for the Company, while remaining solvent, may pay them no dividends at all; but, on the other hand, if it turns out to be successful, there is no limit placed on the dividends they may receive.

All these different stocks may therefore be offered to the public, and, as in the case of the loan, they may be applied for, partly by people who want to hold them, and partly by people who think they can sell them at a profit. The different stocks—debenture, preference, and ordinary—may, on the day of issue, all stand at different prices in the market; but there are regulations against allowing Companies to issue their stock at a discount. That is to say, a Company that says its capital is £100,000 must actually have received at least that sum, minus such charges as may be legitimately put down to expenses of issue, and are set forth as such in their published statements; whereas a Government or a Municipality may call its obligation to pay £3:10s. or £6 a year £100, and may sell it at £99 or £93, or what it can get.

When once the stock is issued, however, though it goes on being called £100, it is really a claim for a certain fixed sum per annum, or for a fixed fractional share in a sum of undetermined amount dependent upon the success of the concern and the judgment of the directors; and it will sell in the market for what it is worth.

Turning now from new issues to dealings in existing stock, we ask, “When equilibrium is once established, why is it ever disturbed?” New issues are analogous to annual crops. A large amount of the commodity comes into existence at a certain point or points of the commercial organism, and must be distributed thence over the whole. But when a stock has been thus distributed, and is in a state of equilibrium in the hands of those on whose relative scales it stands highest, so that no one who does not possess it values it, relatively to other things in the circle of exchange, as highly as any one who has it, why is there still a market in it?

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

It is clear, therefore, that the ultimate buyer and seller will not meet unless the difference in the marginal position of the stock on their scales is pronounced enough to leave a surplus of advantage on each side after payment of a double commission to the broker and the subtraction of the difference between the buying and selling price of the jobber; for what the seller receives is short of what the purchaser pays by these sums. Thus there will presumably be disturbance of equilibrium, that the market does not rectify, of every degree within these limits, but the market will not allow the disturbance to transgress these limits.

Now the jobber, being a dealer, buys only in order to sell, and in making a price he may be regarded ideally as estimating that the price at which he buys (technically known as the “selling price,” because it is the price at which the public can sell) will induce as many sales on the part of the public as the price at which he sells (technically “the buying price”) will induce purchases. That is to say, he estimates that there are as many shares in the hands of holders, on whose scale they are below his buying price minus the broker’s commission, as will suffice to bring the marginal value of this stock on the scales of all other persons down to his selling price plus the broker’s commission.

But this estimate, just because it is an estimate, is to some degree speculative and liable to error; and the jobber may find that in order to sell what he has bought, or in order to put himself into the position of being able to deliver the stock he has sold, he may have to lower his selling or raise his buying price, and thus the prices may change because the jobbers have miscalculated the dispositions of the public. And, again, the dispositions of the public may actually change between the day on which a bargain is made and the settling day; either because something has really happened to affect the credit or prospects of certain Companies, or because new possibilities of investment have been opened, or because there is a growing feeling of confidence and enterprise abroad, or because some general shock, or disaster, or rumour has affected the public resources or the public nerves, or for any other reason. And, therefore, it may happen that before the settling day comes, persons who have bought stock at a certain price may find that they could sell it again at a profit even after paying another commission. And it may be that the causes which have produced this change of price do not affect them, so that, while preferring to hold the stock at the price they gave for it, they prefer selling it at the price it now commands. Naturally, a man who prefers £4:10s. a year to £100 may prefer £101 to £4:10s. a year. So a man who had bought at £100 (including all commissions) with the full intention of holding, and drawing his dividends, might be glad to resell before the time for settling came, at a net price of £101. In that case his broker would debit him with the price of the stock when he bought it, and credit him with the price when he sold it, charge his commission, and then pay over the balance; and there would never be any “settlement” in the shape of transfer of stock and payment of money at all. Into the machinery by which such “clearances” of mutually cancelling transactions are conducted we need not enter.
*27

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

It is not necessary for our present purpose to enter any further upon the machinery or the proceedings of the Stock Exchange; but a very few words may be useful. If a transaction has not been cancelled by a transaction in the opposite sense before the settling day, it must then be settled. But on “contango” day, which is the day but one before “settling day,” persons who are under contract to pay money, or to deliver stock which they do not possess, will have to make arrangements for the settlement, and this they may do either by borrowing money or borrowing stock to meet their obligations, thus settling their account with the Stock Exchange, but remaining liable to persons outside the market; or by making arrangements to “carry over” their obligations to the next settling day, which is equivalent to borrowing within the market itself. Borrowing stock (a comparatively rare operation in most markets) consists in receiving stock, depositing money in security for the return not of the identical certificates, but of others of the same stock, and undertaking meanwhile to secure the lender in all the pecuniary privileges that would have accrued to him had the stock remained in his name. Into the technicalities of “carrying over” we need not enter. Nor need we discuss the purchase and sale of “options,” which is merely another form of betting on the rise or fall of stocks.

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

The great law of the market, then, holds its way, in the main, subject only to secondary disturbances from the fringe of speculative and gambling transactions that twines around it. But when the speculation consists in the establishment of a “corner” or monopoly
*28 it may produce a disastrous disorganisation, and the gambling is always ruinous collectively to those who engage in it and profitable only to the agents.

We have now completed our analysis of various types of the open and competitive market; and we shall have no difficulty in understanding other forms of sale in which some of the conditions we have assumed are modified. It will be remembered that the function of a market is to bring into communication with each other persons on whose scales one or more commodities occupy different relative places; and henceforth we shall speak of a market wherever there is any institution, machinery, or system of connections that performs this function. The wider the area of communication and the more intimate its nature, the more nearly do we approach the ideal market. But however contracted the area and however imperfect the communication, the essential characteristic of a market is manifested
pro tanto, if there is any contact or communication at all. Thus, in an oriental bazaar where the principle of fixity of retail price does not exist even nominally, the seller declines the function of putting present and absent potential purchasers into open relation with each other. He tries to isolate each customer, and should he succeed, it is more than likely that if half a dozen of his customers met, after transacting business with him, they would find that they were very far from having brought their several scales into equilibrium with each other, and they might probably be able to transact business with each other on terms of mutual satisfaction. In such a case the bazaar can hardly be said to establish a market price in any sense, except so far as it affords a field of observation for any one who has time and skill to profit by it. All we can say is that in each bargain the seller’s bottom price is still determined (for the moment) by his speculations as to what he could get from other customers or (ultimately) by what the article would be worth to himself, whereas the purchaser’s top price is determined (ultimately) by the place the article occupies on his own scale or (for the moment) by what he believes he could induce some other dealer to part with it for. And the question of what other customers will pay depends on their scales and the question of what other dealers will take depends upon their estimates of the amount of the commodity on sale and their surmises as to the scales of possible purchasers. Thus even here the same facts ultimately govern the situation, but the sellers make no pretence of helping to reveal them to the buyers.

At the opposite extreme to this individual bargaining on each transaction is the fixed price of commodities and services which is said to be determined in Indian villages by rigid tradition. Here the economic pressures fail to break the resistance offered by a mental conception of the fitness of things; but they are effective within the limits so prescribed. A man will not buy unless the article or service is worth the price to him; and he will hardly continue to make the article, or render the service, if any preferable alternative is open to him. I have known a Scandinavian peasant decline an order for a baling-spoon because it was not worth his while to make it at the traditional price, and he would not charge, or even consent to receive, anything above it. There was no other artist that could supply his place in the neighbourhood, so that he could have raised his price with perfect security. But even if the force of tradition had not only prevented him from raising his price, but had also compelled him to accept the order, he would still have had the resource of executing the order at his leisure and meanwhile turning to more eligible alternative applications of his time.

In the case of the retail sellers in any city or district, there is a loosely organised market of the same type as that in the country market-place, but it may be more difficult for the individual purchaser to know the different prices of goods in all the different shops than to compare the prices in the different stalls; and as distances are greater one shop may perhaps safely charge the customers in its neighbourhood a rather higher price than they would have to pay half a mile or a mile farther from their home, even if they are aware of the difference. Here it will be a question of each individual customer estimating the marginal significance of the penny spent or saved, and the sacrifice involved in travelling the extra distance. Again, a very high percentage of the marketers in a country town are more or less expert purchasers, and can judge accurately of the quality of the goods and grade them with some fineness, whereas a large percentage of the customers at the shop will have to take the shopman’s word, in many cases, for the superiority of a more highly priced article. Hence there is a general feeling that the shopman is bound faithfully to communicate his special information both as to current prices and as to the true quality of the goods to the customer. It is understood that a small fee to him as an expert adviser is included in the price he charges, and if he does not honestly render the corresponding service some resentment is justified. All these considerations constitute special features and limitations of this market, but they leave the essential principles unaffected.

Retail prices, however, sometimes offer a stubborn resistance to economic pressures even in a highly organised industrial community. The retail price of some articles seems to acquire a traditional fixity of an almost constitutional nature. When, a generation ago, a celebrated firm of London hat-makers raised the price of their silk hats, people were so much startled and shocked that they began to wonder whether they would be charged 1s. 1d. at the turnstile of the Royal Academy. In the retail market all kinds of frictions and conventions obstruct the action of changed economic conditions. The effect of these changes has to force its way through narrower channels in the case of retail than in the case of wholesale prices. Hence wholesale markets are notoriously more sensitive than retail. No doubt this is partly because many retail prices can only be modified by relatively large units. Fluctuations of even a farthing on a half-quartern loaf constitute a considerable percentage on the price, and this is the smallest variation that can express itself in the retail trade; whereas much smaller proportional differences may express themselves in the wheat and flour markets. But this does not explain everything. Sometimes there is a combination amongst the retailers to keep up the price, and limit the sale. An importer of bananas found that he could not sell his imports in Liverpool because the retailers would not lower the selling price, and the customers would not buy the increased supply at the current prices. He was obliged to import six London costermongers to hawk the bananas at the cheap rate in order to break down the combination. Sometimes on the contrary there is a custom that prevents prices being raised. The supply of milk in the country is often uncertain, but if the farmer cannot meet all the requirements of his customers he does not raise the price, as he often could do, and so cut off the demands lowest on the relative scales. He tells each customer how much “he can let him have” that day, and charges the usual price. It is difficult to give any reason for this except that it is the custom. In London, too, the retail price of milk is constant, but a milk famine caused by a heavy fall of snow will break through the tradition, and famine prices will be charged. But it is interesting to note that in such a crisis the milkman may probably assume, within limits, an uncommercial attitude, and may ask some of his customers to go short of a little of the supply they would have taken even at the famine price so as to enable him to allow more to a neighbouring house where there is a baby. In this case the price is not strictly competitive. It may be noticed, further, that retail prices often retain an obstinate connection with the units of small change. It has often been observed that minor expenses are lighter in a country in which the unit is the franc than those in which it is the florin. And sometimes the effect of a system of coinage long abolished may still be traced in the scale of retail prices. But we need not enter into further details. It is enough to have pointed out how the law of the market manifests itself in retail trade, and how many varied forces combine with it, react upon it, and impede it.

Sale by auction furnishes an example of another type of market. Here, as in the oriental bazaar, the seller declines to name the price, and tries to get the maximum amount for each separate lot. His public, however, is restricted, and as each lot is put up and disposed of in its announced order he cannot hold back his goods on an estimate of the wants of possible purchasers not present at the moment but likely to appear before the market closes; whereas the purchasers may regulate their bids by their knowledge of possibilities of purchase elsewhere open. Where there are a number of lots of approximately the same character and value, offered in succession, the purchasers undertake the speculative estimate of each other’s scales of preference, and a man who would give £10 for any one of eight lots sooner than go without, may decline to bid more than £5 for the first because he thinks that when the seven relatively highest demands have been satisfied, no unsatisfied demand will be left that stands above £5 on any one’s scale. He may be disappointed. Others may be playing the same game, and when the last lot is put up, a rival who would have let him have the first lot at £5:5s. may run him up to his £10 limit for the last, or may take it from him at £10:5s.

The notorious uncertainty of the results of a
bona fide sale by auction, if the purchasers are not experts, illustrates the important part that accidental circumstances may play in an imperfect market, the operations of which are contracted to a few minutes. And the failure of such a market to secure a final equilibrium is illustrated by the frequency with which bargains are made and re-sales effected on the ground, before the company disperses. But the fundamentally determining conditions are just the same as in the ordinary market. The quantity of the commodity on the spot, or elsewhere conveniently accessible, and the relative scales of the persons present, as affected by their own wants or their estimates of the wants of others with whom they can subsequently deal, are the underlying facts which determine the prices.

It is hardly necessary to follow this line of inquiry any further. Sales by Dutch auction, and clearance sales in shops, for instance, will readily yield to the same analysis.

The sellers of a commodity often succeed in establishing two or more markets and keeping them separate. That is to say, they manage to deal with several groups of purchasers who are not aware of each other’s doings, and who therefore never come to constitute a single market. Their object is to extract a higher price from those more willing or more able to pay, and at the same time to draw in the poorer purchasers by offering them lower terms. It is currently and credibly stated that the same milkman in London will supply the same quality of milk at different prices in different streets. A lady who happens, through any circumstances, to be living in a house which suggests a larger income than her dress or general style does, may easily find that as long as she takes her purchases away from certain shops without leaving her address she gets things at what she regards as reasonable prices, but if she yields to the urgent request of the shopman to be allowed to send the goods home, as soon as her address is known the prices are raised against her. The shopmen in some fashionable streets are said to have different morning and afternoon prices, and cases are reported of wealthy ladies, of an economic turn, who have sent humbler friends or dependants in the morning to ascertain and note the price of a number of articles, and have themselves come in their carriages in the afternoon to make their selection, and have insisted on paying no more than the price mentioned to the pedestrian witness of the morning (whom they have brought with them), as against the very different prices cited to them in the afternoon.

In this and similar cases, where a differentiation is successfully carried out, the purchases of those to whom the higher tariff is charged are no doubt less in extent than they would otherwise have been; and the tradesman must either be willing to do a smaller amount of business at a larger profit, or must find a market for his surplus goods at a still lower figure than that at which he might have sold them to his better-class customers. To have made all into a single market, however, would have involved a lowering of prices over the whole area of his transactions; and the still greater lowering of the price of a portion of them which is now necessary may be more than compensated for by the maintenance of a high level over the rest of his dealings. Nor does it follow that such a tradesman is making exorbitant profits. It is conceivable that he could not carry on trade successfully by any other process; for it may be that his general expenses are such that if he had but one price, whether high or low, he would be unable to conduct business remuneratively; if high, because he would not have a sufficient volume of custom, if low, because it would not be sufficiently profitable. But if, having secured his expensive site and all other needful apparatus, he can secure high prices for a considerable portion of his wares, and without any considerable addition to his initial and general expenditure can increase his volume of trade by adding a low price section, then this latter addition may just enable him to carry on his business; for it may afford him some advance on the out-of-pocket expenses on the particular stock, though not on a high enough scale, were it uniform, to meet his whole expenses and yield him a suitable income.

A particularly clear and familiar case that illustrates this process is that of a private school in which pupils are freely received on reduced terms. Where the school is so well established that the Principal could, if he chose, always keep it full at the nominal terms, or would only run a comparatively small risk of having vacancies, then of course to take a pupil at reduced terms is to make a genuine commercial sacrifice; and unless it is made for the sake of securing a valuable connection, or some other similar purpose, it will be an act of benevolence towards the persons who are allowed to pay the lower terms. The Principal in that case is actuated by other than economic considerations in the transaction. But it may well be that the prospect of filling the house with pupils at the nominal terms is remote, or at best uncertain; and seeing that all such expenses as rent, salaries, and so forth, must be incurred whether the house is full or, say, only two-thirds full, it will be better to have boys who pay anything more than their keep than to have absolute vacancies. The expenses, it is true, could not be met or the establishment run on these terms if they were general. But there are always a certain number of full-paying pupils, and there are occasional runs of good fortune during which the house is full or nearly full of such. And pupils at reduced terms break the severity of the loss when vacancies are not filled by pupils on full terms. But occasionally mistakes will be made. A boy will be taken on reduced terms, and it will be found that he actually excludes a full-paying pupil who subsequently applies, though it was not anticipated that he would do so. Under these circumstances it will be to the master’s credit if the poor but favoured boy is treated with the full measure of cordiality which might naturally have fallen to him under other circumstances. Or again it may happen that a boy who is eligible on account of his connection, or of abilities which seem likely to do credit to the school, or who for any other reason excites the genuine interest, goodwill, or compassion of the Principal, cannot afford full terms, and is refused owing to the expected arrival of a paying pupil who does not actually arrive. In such a case the Principal may be left lamenting (according to the circumstances, or more probably according to his mental habit), either that his prudence was at fault, or that his benevolence suffered a temporary eclipse at an unfortunate moment.

This example of a private school further illustrates the difficulty of carrying out the system of two scales of charges; for since it is well known that pupils are pretty freely taken at reduced terms, there is always a large class of parents who come to regard the terms mentioned in the prospectus as a mere basis for negotiations; and the Principal will often find it difficult to extract his full terms from clients who, though wealthy, have a keen eye for the “most favoured nation” clause in any treaty to which they are parties. Perhaps the only case in which a differentiation of charges is widely accepted with open eyes by all concerned is that of medical attendance. The differentiation is said to be elaborately systematised by the medical faculty, and probably their clients are very imperfectly acquainted with its details, but, broadly speaking, they are aware that they pay more or less according to their means, and perhaps comparatively few of them would complain, however well they knew the difference in the charges made to their poorer neighbours and to themselves. Even here, however, it is probable that doctors, and still more dentists, could make interesting revelations of attempts on the part of clients to beat down their charges on a variety of pleas ultimately based on the knowledge that they are charging less to others who are poorer.

Before turning to another special type of market it will be instructive to note that in all these cases of high-price and low-price markets, kept apart from each other, the purchasers in the low-price market have an advantage. It is (naturally) those who are charged high who complain. The others have part of the price paid for them. They are served on terms which could not be permanently offered to them unless others were paying higher. But when the transaction is looked at not from the purchaser’s point of view, but from that of a would-be seller who, owing to any circumstance, is excluded from the high-price market, it is resented as a wrong and an injury and is described as “dumping.”

Let us now go on to examine the monopolist’s market. In the open competitive market the sellers pursue their several interests independently of each other, and the buyers are in such communication with each other that each knows what bargains the others are making. We have just been examining cases in which the communication between the buyers is imperfect, or in which tariff or other barriers prevent them from acting on the information it gives them. Let us now examine the effect of monopoly or combination amongst the sellers. Starting from the principle that, given the state of the scales of preference of the community, the price is determined by the amount of the commodity in the market, we see at once that if any one could control the amount of the commodity he would be able (within certain limits) to determine the price. Or if all the dealers in the market agreed on a certain price, the amount which the customers would take would determine itself automatically. So if any one controls the total supply, instead of attempting to strike the equilibrating price for the whole stock he may fix on some higher price, and sell as much of the stock as he can at that price. Perhaps he thinks he could sell two-thirds of his stock at a price twice as high as that at which he could sell the whole. If so, by destroying or withholding from sale one-third of the stock he could realise four-thirds of the sum for which the whole stock would sell. We have seen why this cannot be done in an open competitive market. Each seller is afraid that the unsold third may include his stock, in other words that it may be he who withdraws his stock from sale and his rival that secures the higher price. But if there is a monopoly, or, which amounts to the same thing, a combination amongst the sellers, then the monopolist or syndicate have the option between fixing the price and letting the quantity sold fix itself, or fixing the quantity that they will sell and letting the price fix itself. In the one case they form a speculative estimate of the amount that will sell at the price, and in the other of the price at which the amount they put on the market will sell. The theory of the monopolist market rests, of course, on the same broad principles as those on which the theory of the competitive market is based. The price is determined by the relative scales of the consumers (or their speculative representatives), and the quantity of the commodity that enters the market. But the seller (or syndicate of sellers) is not confined to ascertaining the equilibrating price. He can himself modify it by determining the amount of the commodity offered for sale, or can directly determine it and thereby modify the total amount of sales. But whichever he fixes the other will fix itself. He cannot fix both the quantity he will sell and the price at which he will sell it. Thus the specific difference between a monopolist and an open market is that in the open market the sellers, as such, are simply more or less imperfect mirrors of the minds of the buyers, and know that the point on the collective scale down to which the wants of the buyers will be satisfied is fixed beyond their control by the quantity of the commodity available, whereas in the monopolist market the sellers not only attempt to ascertain the wants of the purchasers but also determine to what point it will serve their own purposes to satisfy them; and it will be observed that at any given moment the open competitive market so far conforms to the monopolist type that the sellers speculatively fix a price and thereby determine the rate at which the commodity shall flow into the hands of the consumers. Only their tentative estimates are based on the supposition that the whole available amount of the commodity will be disposed of during the period over which the market extends; and there is no necessity that any such underlying supposition should determine the prices fixed by the monopolist or the syndicate. The special problems connected with monopolist or syndicate markets have been forced into prominence by the course which industry has recently taken, and they merit a much more elaborate discussion than can be given to them in this treatise; but the main characteristics of monopoly have perhaps been sufficiently indicated for general theoretical purposes.

Hitherto (apart from the stock-market) we have taken our examples chiefly from the class of concrete wares which we usually think of as produced pretty nearly in the form in which they are consumed; and moreover most of them have been things which are ultimately applied either to one object only or to various closely related objects. Potatoes, it is true, must be boiled, or otherwise transformed by fire, before they are consumed; and only a few of the damsons will be eaten in the state in which they are brought to the market; but both potatoes and damsons in whatever forms, and in whatever combinations they are finally consumed, are for the most part still recognisable. That is to say, it needs no effort of imagination to feel the identity of what we eat with the tuber or fruit as it was sold in the market. Whereas, though we all of us know that some of our chairs, tables, and bedsteads are made of wood, that boats are built of it, that broom handles, spade and rake shafts, rafters, doors, window-frames, props to hold up the roofs in coal-mines, and sleepers to underlie railway lines, are all made of it, yet we are not usually strictly conscious of the tree in all these articles; and it takes a craftsman like King Alfred or a poet like Walt Whitman to reverse the process and see all these things in the trees themselves. A tree, then, can be transformed and disguised, and applied to an enormous number of varied purposes. When it is sawn into planks, seasoned, and recognised as “wood,” some of the alternative uses of the tree have been irrevocably renounced, but an immense number of varied applications are still possible. If a commodity exists in a form, such as timber, which awaits a number of skilled and varied transformations before it assumes the shapes in which it will directly minister to human wants, does that introduce any essential modification into the machinery of the market? Or is it all just the same as if it were, like a potato or a plum, in a form in which it only awaits domestic operations before it is consumed? In technical language: Is the market in raw materials governed by the same psychological laws, and does it work by the same machinery as those that dominate the market in completely manufactured articles or in products ready for the consumer?

Broadly speaking, the answer to these questions has been given in advance. We have seen that the various applications of milk, for instance, economically administered, must all be in marginal equilibrium with each other, and that they all constitute claims on the general stock. And if we pass from the individual to the collective scale, we see that though one purchaser has both a cat and a baby to provide for, and another has a baby but no cat, and a third a cat but no baby, the cats and babies alike will be normally supplied to a point at which their marginal wants, as estimated by their several providers and expressed in their equivalents in gold, occupy identical places on the several relative scales. The variety of application then makes no difference to the law of the market. And neither does the necessity for further operations before consumption. The damsons which are to be eaten raw, those which are to be baked in a pie, and those which are to be made into jam, must all be brought into equilibrium of marginal significance in a perfectly administered household; and, in a perfectly organised market, they will all fall into equilibrium of price, though one person buys for one purpose, another for another, and yet another for three or four at once. What matters to the formation of the market price is where the thing stands on the individual scale, not why it stands there. And if wood of a given quality takes a certain place on a certain man’s scale, it does not matter whether it is because he wants to play with it in his amateur workshop, or to make book-shelves for himself with it, or to build a summerhouse, or to make tables and chairs and washstands with it not for himself but for others. It is enough that he wants it so much as to give it such and such a place on his scale. And those who stand at or near the goal of use and those who stand more or less remote from it, but in a direct line to it, enter into competition with each other on the same terms. Unless some special convenience or immunity is offered, the plum-seller does not ask whether the purchaser wants plums for private use, or for the supply of a great jam factory; and in the same way a timber-seller deals with any one who will give him a convenient order whether a long or short series of transformations awaits the material after it leaves his hands, and whether it will be exchanged many or few times or not at all before it reaches the actual user. All the different applications that can be made of wood constitute demands. It occupies a certain place on the scale of this man in virtue of its possible application to this purpose, and of that man in virtue of its possible application to that, and on a third man’s in virtue of many possible applications, held in marginal balance with each other; and whether they wish to apply it to these varied purposes on their own account, or on account of another man with whom they have made a bargain, or on a speculative estimate of the wants of others with whom they intend to deal, all their demands will enter into competition with each other, and will find their equilibrium at the point at which their marginal valuations coincide.

If a craftsman wants timber in order to make washstands and tables for sale, then it has a derivative value to him, because the things made out of it will have a direct value to others, so that the ascertained or estimated place of washstands and tables on other people’s scales, gives timber a certain place on his, and so helps to constitute the demand for wood, and to determine its place on the collective scale; and naturally the ascertained or estimated place of ploughs, waggons, bookshelves, props, platforms, roof-trees, and a thousand other things, has precisely the same action, all of them giving to wood a derivative value dependent on the immediate value of the things that can be made out of it. And all the derivative values, balanced against each other, determine the place that wood, of a given quality, itself occupies upon the collective scale.

We can now answer a question which must often have risen in the reader’s mind. We have spoken hitherto of the amounts of any commodity which exist, at any moment, in the possession or under the control of the persons who constitute a market, as though they were fixed; and so, of course, for the moment, they are. But what has determined these quantities, and to what extent can they be modified? The damson crop is affected by the number of trees, and by the season. When once matured it cannot be increased by anything I can do to-day or to-morrow; and even when the trees were planted, none could tell the exact amount of fruit that they would bear in any given year. In like manner when I sow wheat or oats, I can have no assurance of the exact amount of the return that I shall get. But we are well accustomed to this speculative and uncertain element in all problems of administration; and seeing that I may be able to apply the same land to growing cereals and other crops in rotation, or to pasture, or to fruit-growing, or to market-gardening, I may increase the output of any one of the products, or groups of products, at the expense of the others, on an estimate of the marginal significance that the average yield, year by year, is likely to have. The determination of the supply of damsons or wheat, therefore, is arrived at by considering alternative applications of land, just as the supply of tables and washstands is determined by a consideration of the various applications of wood. And as the immediate desire for these articles of furniture constitutes a derivative desire for wood, and puts in a claim on the market in wood, so the immediate desire for wheat and damsons constitutes a derivative desire for the possession or control of land, and puts in a claim on the market in land of exactly the same essential nature as the claims on any other market.

The supply of one market then, so far as it is capable of regulation by the action of man, constitutes a demand upon some other market. As we go higher and higher upstream towards the ultimate sources from which all human wants are satisfied, and examine them in less and less differentiated forms, we shall find that the market in them embraces, and directly or indirectly balances, an ever-wider range of the tastes and desires of the community. But the law of the market never changes. The price is always determined by estimates of the quantity of the commodity available and estimates of the relative scales of the community. Nothing can affect the market price of anything which does not affect one of these factors.

We can see now very clearly how marketing and the law of the market connect themselves with domestic administration. The consumption of such goods as we have generally taken for our examples, damsons, potatoes, wheat, and so forth, is continuous. The housewife buys her damsons for the year in one or two lots, but she makes the greater part of them into jam, and they are consumed throughout the whole course of the year. She keeps proper control of the key of the store-room, and only issues jam to meet a certain urgency of requirement. She may, therefore, be regarded as speculatively holding back the greater part of her store in anticipation of needs that will arise in future. She endeavours in her mind to estimate the whole series of demands which will be made throughout the year, and to reach an equilibrating standard of urgency up to which any demand must rise in order to justify the issuing of a pot of jam to meet it. If at first she is too easy, she finds her store running out too fast, and as it were “raises the price.” If at first she was too strict she finds that the rate of consumption is unnecessarily slow and she lowers the standard of urgency. All this may be seen in miniature even in the helping of a single pudding. A certain lady of narrow means, when she gave her children a jam-roll, used to begin helping the elder children liberally; after a time she would see that it would not go round on that scale, would draw up and economise in the middle, and then, finding she had made enough economies, would relax again for the younger children. (
N.B.—The observation was made and the record preserved by one of the children that came towards the middle.) The principles, therefore, on which the housewife holds back or issues her stores, and those on which the merchant or dealer reserves or sells his wares, are identical in so far as they both aim at equilibration of marginal values, only the housewife is estimating the ultimate vital and social importance of increments on individual scales with which she is conversant, and the merchant, as such, is only considering places on the collective scale, the equivalence of which to each other is purely objective.

The actual distribution of any harvest over the time which it has to cover may be shared in any proportions by the consumer and the dealer. Plums, as we have seen, may well be bought for the whole year at once by the consumer; but this is not likely to be the case with wheat. The ultimate consumer as a rule takes his wheat in the form of bread, and never stores more than the supply for a few hours, or at most days. Some few people still bake at home; and there is also a demand for flour for other cooking purposes, so that a small part of the wheat for the year will be stored by housekeepers for some weeks or months in advance, in the shape of flour. But the greater part will remain in the hands of the miller and the dealer, so that the work of distributing it over the claims of the year, which in the case of jam is (at least in old-fashioned houses) still a branch of domestic administration, is in the case of wheat a branch of commerce.

A different type again may be found in the case of new potatoes. Here there is never any accumulated stock that needs to be distributed either commercially or domestically over a long period. The potatoes mature day by day; and week by week, perhaps, they are brought into the market and sold without any speculative or vicarious reserve price that looks beyond the close of the day. The continuous flow of actual consumption is maintained by the purchases made at these weekly markets. So that here the relation between the ultimate scales of preference and the stream of supply is very direct and continuous, and there would seem to be little room for speculative estimate of future wants, whether domestic or commercial. With winter or store potatoes the case is different.

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

So the law of the market holds for any commodity whether it is near or far from the condition in which it will be finally applied to the satisfaction of human desires. Only, when it is still relatively far therefrom, that is to say in a relatively undifferentiated state, in which numerous alternatives are still possible, a wider circle of claims will have to be balanced against each other and brought, by estimate and experiment, into relation with each other, than when it is in its later stages of differentiated elaboration.

Hence there may often, for a time, be a difference in the terms on which it is possible to buy a thing that is in stock and the terms on which it is possible to get it to order. A manufacturer may have made largely to stock, thinking that the time would come when he might sell on terms which would justify him in having done so. But this is a matter of speculation, and if within months or years, as the case may be, the place of this article on the collective scale does not rise to the anticipated height, he may at last be glad to sell it for what he can get, because he has no alternative and can transform it into nothing else more valuable. But he would never have made this thing to order at the price at which he has now to sell it; for before he made it he had many alternatives. He might have made other things, which he now knows would have been a more eligible employment of his resources, or he might have made nothing at all, thereby saving expenditure on raw material, and perhaps, if he reduced his establishment, on wages. So it may happen that if you ask A to make the article to order, he will only consent to do so at a higher price than that which B will be willing to take for what he has in stock.