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diff --git a/10612-h/10612-h.htm b/10612-h/10612-h.htm new file mode 100644 index 0000000..8c5b1e4 --- /dev/null +++ b/10612-h/10612-h.htm @@ -0,0 +1,7155 @@ +<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 4.01 Transitional//EN"> +<html> +<head> + <title>Supply and Demand</title> + <meta content="text/html;charset=iso-8859-1" http-equiv="content-type"> + <style type="text/css"> + .law {margin-left: 2.5em;text-indent: -2.5em;margin-bottom: 1.33em; + font-weight: bold;} + .entry {margin-left: 2.5em; text-indent: -2.5em;} + .letter {margin-bottom: 1.33em;} + .footnote {margin-left: 2.5em;} + </style> +</head> +<body> + + +<pre> + +The Project Gutenberg EBook of Supply and Demand, by Hubert D. Henderson + +This eBook is for the use of anyone anywhere at no cost and with +almost no restrictions whatsoever. You may copy it, give it away or +re-use it under the terms of the Project Gutenberg License included +with this eBook or online at www.gutenberg.org + + +Title: Supply and Demand + +Author: Hubert D. Henderson + +Release Date: January 6, 2004 [EBook #10612] + +Language: English + +Character set encoding: ISO-8859-1 + +*** START OF THIS PROJECT GUTENBERG EBOOK SUPPLY AND DEMAND *** + + + + +Produced by Josh Cogliati and PG Distributed Proofreaders + + + + + +</pre> + +<a name="iii"> </a> +<h1>Supply and Demand</h1> +<p> +by Hubert D. Henderson M.A. +</p> +<p> +with an Introduction by J.M. Keynes M.A., C.B. +</p> +<a name="iv"> </a> +<p>1922. +</p> +<a name="v"> </a> +<p><a href="#contents">Skip to Contents</a><br> +<a href="#Index">Skip to Index</a></p> +<h2>Introduction</h2> +<p> +The Theory of Economics does not furnish a body +of settled conclusions immediately applicable to policy. +It is a method rather than a doctrine, an apparatus of +the mind, a technique of thinking, which helps its +possessor to draw correct conclusions. It is not difficult +in the sense in which mathematical and scientific +techniques are difficult; but the fact that its modes of +expression are much less precise than these, renders +decidedly difficult the task of conveying it correctly to +the minds of learners. +</p> +<p> +Before Adam Smith this apparatus of thought +scarcely existed. Between his time and this it has been +steadily enlarged and improved. Nor is there any +branch of knowledge in the formation of which Englishmen +can claim a more predominant part. It is not +complete yet, but important improvements in its +elements are becoming rare. The main task of the +professional economist now consists, either in obtaining +a wide knowledge of <i>relevant</i> facts and exercising +skill +in the application of economic principles to them, or in +expounding the elements of his method in a lucid, +accurate and illuminating way, so that, through his +instruction, the number of those who can think for +themselves may be increased. +</p> +<p> +This Series is directed towards the latter aim. It +is intended to convey to the ordinary reader and to the +uninitiated student some conception of the general +<a name="vi"> </a>principles of thought which economists now apply to +economic problems. The writers are not concerned to +make original contributions to knowledge, or even to +attempt a complete summary of all the principles of the +subject. They have been more anxious to avoid obscure +forms of expression than difficult ideas; and their +object has been to expound to intelligent readers, +previously unfamiliar with the subject, the most significant +elements of economic method. Most of the +omissions of matter often treated in textbooks are +intentional; for as a subject develops, it is important, +especially in books meant to be introductory, to discard +the marks of the chrysalid stage before thought had +wings. +</p> +<p> +Even on matters of principle there is not yet a +complete unanimity of opinion amongst professors. +Generally speaking, the writers of these volumes believe +themselves to be orthodox members of the Cambridge +School of Economics. At any rate, most of +their ideas about the subject, and even their prejudices, +are traceable to the contact they have enjoyed with the +writings and lectures of the two economists who have +chiefly influenced Cambridge thought for the past fifty +years, Dr. Marshall and Professor Pigou. +</p> +<p> +J.M. Keynes. +</p> +<a name="vii"> </a> +<h2><a name="contents">Contents</a></h2> +<h3 class="chap_head"><a href="#Chapter_I">Chapter I</a></h3> +<h3 class="chap_name">The Economic World</h3> +<p> +§1. Theory And Fact <a href="#1">1</a> +</p> +<p> +§2. The Division Of Labor <a href="#3">3</a> +</p> +<p> +§3. The Existence Of Order <a href="#5">5</a> +</p> +<p> +§4. Some Reflections Upon Joint Products <a href="#7">7</a> +</p> +<p> +§5. Some Reflections Upon Capital <a href="#11">11</a> +</p> +<p> +§6. The Fundamental Character Of Many Economic +Laws <a href="#17">17</a> +</p> +<h3 class="chap_head"><a href="#Chapter_II">Chapter II</a></h3> +<h3 class="chap_name">The General Laws of Supply and Demand</h3> +<p> +§1. Preliminary Statement Of Three Laws <a href="#18">18</a> +</p> +<p> +§2. Diagrams And Their Uses <a href="#21">21</a> +</p> +<p> +§3. Ambiguities Of The Expressions, "Increase In +Demand," Etc. <a href="#24">24</a> +</p> +<p> +§4. Reactions Of Changes In Demand And Supply On +Price <a href="#27">27</a> +</p> +<p> +§5. Some Paradoxical Reactions Of Price Changes On +Supply <a href="#30">30</a> +</p> +<p> +§6. The Disturbances Of Monetary Changes <a href="#33">33</a> +</p> +<p> +§7. The Trade Cycle <a href="#34">34</a> +</p> +<h3 class="chap_head"><a href="#Chapter_III">Chapter III</a></h3> +<h3 class="chap_name">Utility and the Margin of Consumption</h3> +<p> +§1. The Forces Behind Supply And Demand <a href="#37">37</a> +</p> +<p> +§2. The Law Of Diminishing Utility <a href="#40">40</a> +</p> +<a name="Viii"> </a> +<p>§3. The Relation Between Price And Marginal +Utility <a href="#43">43</a> +</p> +<p> +§4. The Marginal Purchaser <a href="#44">44</a> +</p> +<p> +§5. The Business Man As Purchaser <a href="#47">47</a> +</p> +<p> +§6. The Diminishing Utility Of Money <a href="#49">49</a> +</p> +<h3 class="chap_head"><a href="#Chapter_IV">Chapter IV</a></h3> +<h3 class="chap_name">Cost and the Margin of Production</h3> +<p> +§1. An Illustration From Coal <a href="#52">52</a> +</p> +<p> +§2. The Various Aspects Of Marginal Cost <a href="#55">55</a> +</p> +<p> +§3. The Dangers Of Ignoring The Margin <a href="#57">57</a> +</p> +<p> +§4. A Misinterpretation <a href="#59">59</a> +</p> +<p> +§5. Some Consequences Of A Higher Price Level <a href="#60">60</a> +</p> +<p> +§6. General Relation Between Price, Utility And +Cost <a href="#65">65</a> +</p> +<h3 class="chap_head"><a href="#Chapter_V">Chapter V</a></h3> +<h3 class="chap_name">Joint Demand and Supply</h3> +<p> +§1. Marginal Cost Under Joint Supply <a href="#66">66</a> +</p> +<p> +§2. Marginal Utility Under Joint Demand <a href="#69">69</a> +</p> +<p> +§3. A Contrast Between Cotton And Cotton-Seed, And +Wool And Mutton <a href="#71">71</a> +</p> +<p> +§4. The Importance Of Being Unimportant <a href="#74">74</a> +</p> +<p> +§5. Capital And Labor <a href="#76">76</a> +</p> +<p> +§6. Conclusions As To Joint Supply And Joint Demand <a href="#79">79</a> +</p> +<p> +§7. Composite Supply And Composite Demand <a href="#79">79</a> +</p> +<p> +§8. Ultimate Real Costs <a href="#82">82</a> +</p> +<h3 class="chap_head"><a href="#Chapter_VI">Chapter VI</a></h3> +<h3 class="chap_name">Land</h3> +<p> +§1. The Special Characteristics Of Land <a href="#83">83</a> +</p> +<p> +§2. The Scarcity Aspect <a href="#84">84</a> +</p> +<a name="Ix"> </a> +<p>§3. The Differential Aspect <a href="#87">87</a> +</p> +<p> +§4. The Margin Of Transference <a href="#94">94</a> +</p> +<p> +§5. The Necessity Of Rent <a href="#98">98</a> +</p> +<p> +§6. The Question Of Real Costs <a href="#100">100</a> +</p> +<p> +§7. Rent And Selling Price <a href="#102">102</a> +</p> +<h3 class="chap_head"><a href="#Chapter_VII">Chapter VII</a></h3> +<h3 class="chap_name">Risk-Bearing and Enterprise</h3> +<p> +§1. Profits And Earnings Of Management <a href="#104">104</a> +</p> +<p> +§2. The Payment For Risk-Bearing <a href="#104">104</a> +</p> +<p> +§3. Monte Carlo And Insurance <a href="#105">105</a> +</p> +<p> +§4. Risk Under Large Scale Organization <a href="#111">111</a> +</p> +<p> +§5. The Entrepreneur <a href="#113">113</a> +</p> +<p> +§6. Risk-Taking And Control <a href="#116">116</a> +</p> +<p> +§7. General Analysis Of Profits <a href="#117">117</a> +</p> +<h3 class="chap_head"><a href="#Chapter_VIII">Chapter VIII</a></h3> +<h3 class="chap_name">Capital</h3> +<p> +§1. A Reference To Marx <a href="#119">119</a> +</p> +<p> +§2. Waiting For Production <a href="#120">120</a> +</p> +<p> +§3. Waiting For Consumption <a href="#121">121</a> +</p> +<p> +§4. Capital Not A Stock Of Consumable Goods <a href="#123">123</a> +</p> +<p> +§5. The Essence Of Waiting <a href="#126">126</a> +</p> +<p> +§6. Individual And Social Saving <a href="#127">127</a> +</p> +<p> +§7. The Necessity Of Interest <a href="#129">129</a> +</p> +<p> +§8. The Supply Of Capital <a href="#130">130</a> +</p> +<p> +§9. Involuntary Saving <a href="#134">134</a> +</p> +<p> +§10. Interest And Distribution <a href="#137">137</a> +</p> +<h3 class="chap_head"><a href="#Chapter_IX">Chapter IX</a></h3> +<h3 class="chap_name">Labor</h3> +<p> +§1. A Retrospect On Laissez-Faire <a href="#139">139</a> +</p> +<p> +§2. Ideas And Institutions <a href="#141">141</a> +</p> +<a name="X"> </a> +<p>§3. The General Wage-Level <a href="#143">143</a> +</p> +<p> +§4. The Supply Of Labor In General <a href="#145">145</a> +</p> +<p> +§5. The Apportionment Of Labor Among Places <a href="#147">147</a> +</p> +<p> +§6. The Apportionment Of Labor Among Social Grades <a href="#149">149</a> +</p> +<p> +§7. The Apportionment Of Labor Among Occupations <a href="#153">153</a> +</p> +<p> +§8. Women's Wages <a href="#157">157</a> +</p> +<h3 class="chap_head"><a href="#Chapter_X">Chapter X</a></h3> +<h3 class="chap_name">The Real Costs Of Production</h3> +<p> +§1. Comparative Costs <a href="#162">162</a> +</p> +<p> +§2. The Allocation Of Resources <a href="#166">166</a> +</p> +<p> +§3. Utility And Wealth <a href="#170">170</a> +</p> +<p> +§4. Criteria Of Policy <a href="#172">172</a> +</p> +<a name="1"> </a> +<h1>Supply and Demand<br> +</h1> +<h3 class="chap_head"><a name="Chapter_I"></a>Chapter I</h3> +<h3 class="chap_name">The Economic World</h3> +<p> +§1. <i>Theory and Fact</i>. The controversy between the +"Theorist" and the "Practical Man" is common to +all branches of human affairs, but it is more than usually +prevalent, and perhaps more than usually acrid in the +economic sphere. It is always a rather foolish controversy, +and I have no intention of entering into it, but +its prevalence makes it desirable to emphasize a platitude. +Economic theory must be based upon actual +fact: indeed, it must be essentially an attempt, like all +theory, to <i>describe</i> the actual facts in proper sequence, +and in true perspective; and if it does not do this it is +an imposture. Moreover, the facts which economic +theory seeks to describe are primarily economic facts, +facts, that is to say, which emerge in, and are concerned +with, the ordinary business world; and it is, therefore, +mainly upon such facts that the theory must be based. +People sometimes speak as though they supposed the +economist to start from a few psychological assumptions +(e. g. that a man is actuated mainly by his own self-interest) +and to build up his theories upon such foundations +by a process of pure reasoning. When, therefore, +some advance in the study of psychology throws into +<a name="2"> </a>apparent disrepute such ancient maxims about human +nature, these people are disposed to conclude that the +old economic theory is exploded, since its psychological +premises have been shown to be untrue. Such an +attitude involves a complete misunderstanding not +merely of economics, but of the processes of human +thought. It is quite true that the various branches of +knowledge are interrelated very intimately, and that +an advance in one will often suggest a development in +another. By all means let the economist and psychologist +avoid a pedantic specialism and let each stray +into the other's province whenever he thinks fit. But +the fact remains that they are primarily concerned +with different things: and that each is most to be +trusted when he is upon his own ground. When, +therefore, the economist indulges in a generalization +about psychology, even when he gives it as a reason for +an economic proposition, in nine cases out of ten the +economics will not depend upon the psychology; the +psychology will rather be an inference (and very +possibly a crude and hasty one) from the economic +facts of which he is tolerably sure. +</p> +<p> +But the purpose of economic theory is not merely to +describe the facts of the economic world; it is to describe +them in their proper sequence and true perspective. +It must begin with those facts which are +most general and which have the widest possible +significance. Those are not likely to be the facts +which our practical experience forces most insistently +upon our notice. For it is the particular and not the +general, the differences between things rather than their +resemblances, that concern us most in daily life. Nor +<a name="3"> </a>are we likely to find the universal facts which we +require in the sphere of public controversy. We must +rather look for them in the dark recesses of our consciousness, +where are stored those truths which are so +obvious that we hardly notice them, which are so indisputable +that we seldom examine them, which seem so +trite that we are apt to miss their full significance. +</p> +<p> +§2. <i>The Division of Labor</i>. There is one such truth +in the economic sphere which it is essential to appreciate +vividly and fully, with the widest sweep of the imagination +and the sharpest clarity of thought. Man lives by +cooperating with his fellow-men. In the modern +world, that cooperation is of a boundless range and an +indescribable complexity. Yet it is essentially undesigned +and uncontrolled by man. The humblest +inhabitant of the United States or Great Britain depends +for the satisfaction of his simplest needs upon +the activities of innumerable people, in every walk of +life and in every corner of the globe. The ordinary +commodities which appear upon his dinner table +represent the final product of the labors of a medley of +merchants, farmers, seamen, engineers, workers of +almost every craft. But there is no human authority +presiding over this great complex of labor, organizing +the various units, and directing them towards the +common ends which they subserve. Wheel upon +wheel, in a ceaseless succession of interdependent +processes, the business world revolves: but no one has +planned and no one guides the intricate mechanism +whose smooth working is so vital to us all. Man, indeed, +can organize and has organized much. Within +<a name="4"> </a>a large factory the efforts of thousands of +work-people, +each engaged on the repetition of a single small process, +are fitted together so as to form an ordered whole by +the conscious direction of the management. Sometimes +factory is joined with factory, with farms, fisheries, +mines, with transport and distributing agencies, +as one gigantic business unit, controlled by a common +will. These giant businesses are remarkable achievements +of man's organizing gifts. The individuals who +control them wield an immense power, which so impresses +the public imagination that we dub them +"kings," "supermen," "Napoleons of industry." But +how small a portion of man's economic life is dominated +by such men! Even as regards the affairs of their own +businesses, how narrow, after all, are the limits of their +influence! The prices at which they can buy their +materials and borrow their capital, the quantities of +their products which the public will consume, are +factors at once vital to their prosperity and outside +their own control. +</p> +<p> +A great business, like a nation, may cherish visions of +self-sufficiency, may stretch its tentacles forward to the +consumer and backwards to its supplies of raw material; +but each fresh extension of its activities serves only +to multiply its points of contact with the outside world. +When those points are reached, the largest business, +like the smallest, is out on the open sea of an economic +system immeasurably larger and more powerful than +itself. There it must meet—the better perhaps for its +inherent strength and accumulated knowledge—the +impact of rude forces, which it is powerless to control. +Beneath the blasts of a trade depression, or some other +<a name="5"> </a>tendency of world-wide scope, the authority of the +mightiest industrial magnate, and equally of any +Government, assumes the same essential insignificance +as the pride of a man humbled by contact with the +elemental powers of nature. +</p> +<p> +§3. <i>The Existence of Order</i>. The parallel can be +pursued further with advantage. Just as in the world +of natural phenomena, which for long seemed to man so +wayward and inexplicable, we have come gradually +to perceive an all-pervading uniformity and order; so +there is manifest in the economic world, uniformity, +order, of a similar if less majestic kind. Upon the +cooperation of his fellowmen, man depends for the very +means of life: yet he takes this cooperation for granted, +with a complacent confidence and often with a naive +unconsciousness, as he takes the rising of to-morrow's +sun. The reliability of this unorganized cooperation +has powerfully impressed the imagination of many +observers. +</p> +<p> +"On entering Paris which I had come to visit," +exclaimed Bastiat some seventy years ago, "I said to +myself—Here are a million of human beings who would +all die in a short time if provisions of every kind ceased +to flow towards this great metropolis. Imagination is +baffled when it tries to appreciate the vast multiplicity +of commodities which must enter to-morrow through +the barriers in order to preserve the inhabitants from +falling a prey to the convulsions of famine, rebellion, +and pillage. And yet all sleep at this moment, and their +peaceful slumbers are not disturbed for a single instant +by the prospect of such a frightful catastrophe. On +<a name="6"> </a>the other hand, eighty departments have been laboring +to-day, without concert, without any mutual understanding, +for the provisioning of Paris." +</p> +<p> +The theme may well excite wonder. But wonder +should always be watched with a wary eye; for he is +apt to bring in his train a hanger-on called worship, +who can do nothing but mischief here. It is a short step +from a passage like that quoted above to a glorification +of the existing system of society, to a defence of all +manner of indefensible things; and a cross-grained +attitude towards all projects of reform. It is a short +step; but it is one which it is quite unjustifiable to take. +For the evils of our economic system are too plain to be +ignored; too many people have harsh personal experience +of the wastefulness of its production, the injustice +of its distribution; of its sweating, its unemployment +and slums. And when the attempt is made to plaster +over evils, such as these with obsequious rhetoric about +the majesty of economic law, it is not surprising that the +spirit of many men should revolt and that they should +retort by denying the existence of order in the business +world, by declaring that the spectacle which <i>they</i> see is +one of discord, confusion and chaos. And then we are +engulfed in a controversy as stale, flat and unprofitable +as that between the "theorist" and the "practical +man." +</p> +<p> +The truth is that the language of praise and obloquy +is quite inappropriate. In the first place, it may be well +to note that the order of which I have spoken manifests +itself not merely in those economic phenomena which +are beneficial to man, but hardly less in those which +work to his hurt. Even in those alternations of good +<a name="7"> </a>and bad trade, which spell so much unemployment and +misery, there is discernible a rhythmic regularity like +that of the process of the seasons, or the ebb and flow +of the tide. This is not an elegance to be admired. Furthermore, +in so far as the order comprises adjustments +and tendencies which are beneficial (as, indeed, is +mainly true), there is no warrant for assuming that these +are either adequate to secure a prosperous community +or dependent upon the social arrangements which happen +to exist. Let us, therefore, refrain from premature +polemics and examine in a spirit of detachment some +further aspects of the elaborate, but yet unorganized, +cooperation of which so much has been already said. +</p> +<p> +§4. <i>Some Reflections upon Joint Products</i>. A quite +inadequate idea of the complexity of this coöperation +is obtained by dwelling on the numbers of people who +participate in it, or the immense distances over which it +extends. The deficiency can be partially supplied by +referring to some of the more obvious of the many +subtle interconnections which exist between different +commodities and different trades. +</p> +<p> +There are innumerable groups of commodities (which +it is customary to term "joint products") such that the +production of one commodity belonging to the group +necessarily implies or very greatly facilitates the production +of the others. Wool and mutton; beef and +hides; cotton and cotton-seed are a few familiar illustrations. +The important feature of these "joint products" +is the fairly precise relation which must exist +between the quantities in which the different products +are supplied. If you plant a certain crop of cotton, it +<a name="8"> </a>will yield you so much cotton lint and so much +cotton-seed. +You can, of course, if you choose, throw away +part of the seed, as indeed at one time planters used to +do; but unless you do this, you cannot vary the proportions +of the two things which you will have for sale. +Similarly, if you keep a flock of sheep, or a herd of cattle, +you will obtain wool and mutton in the one case, or beef +and hides in the other, in proportions, which indeed you +can vary within certain limits by choosing a different +breed,[<a href="#8f1">1</a>] but which you cannot radically transform. +When, however, we turn to the uses to which these +products are put, no similar relation is to be discovered. +Cotton lint is used chiefly for making articles of clothing; +cotton-seed for crushing into oil, on the one hand, +and cake for cattle fodder on the other. There is no +apparent connection of any kind between the demands +for these different things, and still less is there any +obvious reason why these demands should bear to one +another the particular proportions which characterize +their respective supplies. It is very much the same with +wool and mutton; with beef and hides; with all "joint +products." Why should we consume mutton on the +one hand and woolen clothing on the other, in a ratio +at all commensurate with that in which they are +yielded by the sheep? +</p> +<p class="footnote"> +<a name="8f1">[1]</a> These possibilities of small variation are of +very great +importance +as will be shown in Chapter V, but they do not affect the +present argument. +</p> +<p> +What, then, might we expect to find if order was nonexistent +in the economic world? Surely that some +things such as wool would be produced in quantities +many times in excess of the demand for them, quite +<a name="9"> </a>possibly five, ten, or twenty times in excess; while +conversely the supplies of others such as mutton might +fall far short of what was required. But in practice we +find nothing of the sort. Somehow it comes about +that an equilibrium is established between the demand +for and the supply of every commodity; and that this +applies to wool and mutton, to beef and hides, as surely +as to commodities which are produced quite independently. +It is true that this equilibrium is a rough, +imperfect one; and it may happen that what is called a +"glut" of wool may co-exist for a short period with +what is called a scarcity of mutton. But qualifications +of this nature are in the strictest sense of the phrase, the +exceptions which prove the rule. For the departures +from equilibrium which gluts and scarcities represent +are always transient and are usually confined within +narrow limits. A strong prevailing trend towards an +adjustment of demand and supply is unmistakably +manifest amid all the vagaries of changing circumstance. +Let me carry the argument a step further for the +benefit of any reader who is restrained by a repugnance +too deep and instinctive to be readily overcome, from +admitting fairly to his mind that conception of order +which I am endeavoring to emphasize. He will in all +probability be one who, cherishing ideals of a better and +fairer system of society, looks forward to a time when an +organized coöperation will be substituted for what he +regards as the existing chaos. Let us suppose that his +visions were fulfilled as completely as he could desire; +and that an immense system of Socialism were in existence, +embracing not one country only, but the whole +world. Suppose all the difficulties of human perversity +<a name="10"> </a>and administrative technique to have been surmounted +and a wise, disinterested executive to be in supreme +control of our business life. Let us suppose all this, and +ask only the question: How would this executive treat +the humdrum case of wool and mutton? How would +it decide the number of sheep it would maintain? +</p> +<p> +Shall we suppose that it is inspired by the ideal "to +each according to his need," and that it resolves accordingly +that the commodities which people require for a +decent standard of life shall be supplied to them as a +matter of course? How, then, would it proceed? It +might estimate the amount of woolen clothing which a +normal family requires, allowing for differences in +climate, and possibly indulging somewhat the caprices +of human taste. On this basis, a certain number of +sheep would be indicated. It might perform a similar +calculation for mutton, and again a certain number of +sheep would be indicated. But it would be an extraordinary +coincidence if the numbers which resulted +from these independent calculations were nearly equal +to one another, or were even of the same order of magnitude; +and, if they differed widely, what number would +our world executive select? Would it decide to waste +an immense quantity of either wool or mutton; or +would it decide that it could not, after all, supply +the full human needs for one or other of the commodities? +</p> +<p> +Of course, if the executive were sensible it could solve +the problem satisfactorily enough. It could retain the +monetary system we know to-day and it could supply +the commodities to the consumers, not as a matter of +right, but by selling them to them <i>at a price</i>. This price +<a name="11"> </a>it could then move upwards or downwards, raising, +say, +the price of mutton and reducing that of wool, until it +found that the consumption of the two things was +adjusted in the required ratio. But if it acted in this +manner, what essentially would it be doing? It would +be seeking by deliberate contrivance to reproduce, in +respect of this particular problem, the very conditions +which occur to-day without aim or effort on the part of +anyone at all. +</p> +<p> +The moral of this illustration must not be misinterpreted. +It does not show the folly of Socialism or the +superiority of Laissez-faire. What it does show is the +existence in the economic world of an order more +profound and more permanent than any of our social +schemes, and equally applicable to them all. +</p> +<p> +§5. <i>Some Reflections upon Capital</i>. Another aspect +of the great cooperation is of even greater significance. +It embraces not only a multitude of living men, but it +links the present together with the future and the past. +The goods and services which we enjoy to-day we owe +only in part to the labors of the week, the month, or +the year, only in part even to the efforts of our contemporaries. +The men, long since dead and forgotten, who +built our railways, or sunk our coal mines, or engaged +in any of a great variety of tasks, are still contributing +to the satisfaction of our daily wants. The expression +is not altogether fanciful; for, had it not been reasonable +to expect that those labors would be of use to us to-day, +many of them in all probability would never have been +undertaken. It was to meet our present wants, and +even our future wants, that many men toiled on monotonous +<a name="12"> </a>tasks ten, twenty, thirty years ago. And yet, +of course, we should deceive ourselves if we supposed +that this was the motive of these men, that our welfare +was the centre of their heart's desire. We in our turn +dedicate to the future, and often to a distant future, +an immense portion of our energies. Let any reader +who doubts this, study the statistics of the occupations +of the people, and reflect on how long a period must +elapse before the labors of this trade or that can fulfil +their ultimate function. How long would the period be +in the case of a man making bricks, which will later be +employed in the erection of a factory, where machinery +will be made, to equip an electrical generating station +designed to supply, over a period of many years, light, +heat, and power to people living in a remote Continent? +A longer time, it may be hazarded, than he is accustomed +to look ahead. +</p> +<p> +Like the daily cooperation of living men, this cooperation +of past, present and future is essential to the +well-being of mankind, and yet it is undesigned and +unorganized. As private individuals, men do, indeed, +deliberately provide for their own future, and for that +of their kith and kin: as the directors of businesses, +they try to forecast the trend of demand. But such +conscious calculations and deliberate acts would avail +little if they stood alone. They are hardly more than +the necessary spokes in the great wheel which regulates +the relations of past, present and future. The hub of the +wheel is an elaborate system of borrowing and lending, +essentially similar to the buying and selling of commodities. +The private individual in order to provide +for his family or for his old age "saves" and "invests." +<a name="13"> </a>But what exactly does this mean? It means that he +transfers so much purchasing power, which he might +have spent on his personal pleasures, to some one else +in return for the expectation of receiving, year by year +in the future, he and his heirs after him, a certain smaller +quantity of purchasing power. The other party to +the transaction will be, we may suppose, a business +man who enters into it because he sees the opportunity +of a promising industrial development, to undertake +which he requires more purchasing power than he himself +possesses. And, because this transaction is entered +into, a smaller number of us will shortly be engaged in making +motorcars, or gramaphones, and a larger number +of us in making factories and machinery, which will +later enhance the world's productive power. +</p> +<p> +Many transactions of the kind take place daily in +modern communities, and their multiplicity gives rise +to a mass of phenomena with which we are all tolerably +familiar. We recognize a short-loan market, a stock +exchange, a number of "markets" where lenders and +borrowers are brought together by the aid of various +intermediaries, such as banks, bill brokers, and stock +jobbers, who correspond to dealers in commodities. +Between these different specialized markets, we are +aware of an interconnection so close and strong that we +speak more generally of a Capital Market, of which the +stock exchange, the short-loan market and so forth, are +the component parts. Now, "market" is a word which +was originally used to denote a place where tangible +commodities were bought and sold; and the more +closely we examine the phenomena of the Capital +Market, the more closely do we perceive the profound +<a name="14"> </a>resemblance between the mechanism of borrowing and +lending, and that of buying and selling. Corresponding +to the price of a commodity is the rate of interest (in +the short-loan market we actually call the rate of Discount +"the price of money," and speak of money being +cheap or dear); and between the rate of interest, the +demand for and the supply of capital there exist relations +precisely similar to those between price, demand, +and supply in commodity markets. Above all there is +the same strong prevailing trend towards an adjustment +of demand and supply. +</p> +<p> +This fundamental resemblance between two such +apparently incommensurable things as the buying of +material commodities and the borrowing of capital is +highly significant; it is another instance of that order +in the economic world, of which the reader may now +be growing weary. But so difficult is it to see clearly +and fully something which one sees, as it were, every +day of one's life, that a few more moments of reflection +on the special case of capital will be time well spent. +Let us revert then to our fantasy of a world socialist +commonwealth; and humbly submit another poser +to its supreme executive. The question this time will be +whether some great constructional work, such, let us +say, as the recently mooted Severn barrage scheme, +should or should not be undertaken. Let us suppose +that the costs and future benefits of the undertaking +can be estimated accurately; and that the problem +reduces itself to one of expending now a sum, let us say, +of $100,000,000, with the prospects of obtaining in the +future an income of power, or whatever it may be, worth +$5,000,000 per annum. I have assumed for the sake of +<a name="15"> </a>simplicity that we shall still be reckoning in terms +of +money, though possibly the executive may have +substituted Marxian labor units; but it is quite immaterial +to the present argument what the measuring +rod may be. The point to be observed is, that it is +impossible to tackle the problem at all without the +conception of a rate of interest. For suppose that you +tried to do without it, and said, "We shall take a long +view. The interests of the future are no less our concern +than those of the present; we shall not discriminate +between them. We shall regard as an enterprise worthy +to be undertaken whatever promises to yield in the +course of time a return larger than the outlay." Where +will this lead you? The particular proposal set out +above would clearly pass the test; for in twenty years +the resultant benefits would have added up to a figure +equivalent to the initial cost. But equally clearly, +the cost might have been more than $100,000,000; it +might have been $250,000,000, $500,000,000, whatever +figure you care to take, and if you extend the period +similarly to fifty or one hundred years, sooner or later +the gains would top the cost. Now there is no limit to +the enterprises which would pay their way on this +basis; and it would be quite impossible to undertake +them all. For they would swallow up all and more than +all your labor and your materials, and would leave +you with no resources with which to meet the recurrent +daily wants of men. Clearly, then, in some way or +other, you must pick and choose, you must reject some +enterprises as <i>insufficiently</i> worth while. But how +would you proceed to choose? Without a clear principle, +a simple criterion to guide you, you would be +<a name="16"> </a>plunged in utter chaos. You could not say, "Let all +proposals involving capital expenditure be submitted +to a central committee, who shall compare them with +one another in a sort of competitive examination and, +after deciding the number of applications they can pass +on the basis of the volume of resources which they can +devote to the future, award the places to those which +head the list." Such a prospect is a nightmare of +officialism and delay. You would be driven to formulate +a simple, intelligible rule or measure, and leave +that rule to be applied by the unfettered judgment of +innumerable men to individual problems, as and when +they arose. And for such a rule or measure, you could +not do better than a rate of interest; you would have to +lay it down that only those projects should be approved +which promised a return of 6 per cent, or whatever +it might be. Even in deciding what it should be, +the limits of your choice would be narrowly confined. +If, for instance, you fixed on 1 or 2 per cent, you would +probably discover that you had not achieved your +object, that the undertakings for distant returns which +passed this test, still consumed far more resources than +you could spare. You would be compelled then to raise +the rate until it had cut these enterprises down within +manageable limits. But, once more, what essentially +would you be doing? You would be using the instrument +of the rate of interest to adjust the demand for +and supply of capital, though indeed the interest might +not be paid away as now to private individuals. You +would be reproducing by the method of deliberate trial +and error, the adjustments which occur automatically +as things are, in the actual world. Once again the most +<a name="17"> </a>perfectly contrived Utopia would be compelled to pay +to the unorganized coöperation of our epoch the sincerest +flattery of imitation. +</p> +<p> +§6. <i>The Fundamental Character of many Economic +Laws.</i> But again perhaps a word of warning may be +desirable. There is much controversy in these days +about something called "Capitalism" or "The capitalist +system." When these words are used with any precision, +they usually refer to the arrangement so prevalent +at present, whereby the ownership and sole +ultimate control of a business rests with those who hold +its stocks and shares. There is much to be said upon +the merits and demerits of this system; something will +perhaps be said upon the matter in the fifth volume of +this series; but I shall not discuss it here. Nothing +that I have said so far has any real bearing on it whatsoever; +to suppose that it has, is indeed to miss the +whole point of this chapter. +</p> +<p> +The order, which I have sought to reveal, pervading +and moving the most diverse phenomena of the +economic world, would be a far less noteworthy and +impressive thing were it merely the peculiar product of +capitalism. Merchant adventurers, companies, and +trusts; Guilds, Governments and Soviets may come and +go. But under them all, and, if need be, in spite of them +all, the profound adjustments of supply and demand will +work themselves out and work themselves out again +for so long as the lot of man is darkened by the curse +of Adam. +</p> +<a name="18"> </a> +<h3 class="chap_head"><a name="Chapter_II"></a>Chapter II</h3> +<h3 class="chap_name">The General Laws of Supply and Demand</h3> +<p> +§1. <i>Preliminary Statement of Three Laws</i>. The recognition +of order in any branch of natural phenomena is +but the prelude to the formulation of a set of laws, +the simpler as the order is more universal, which describe, +and as we say, explain it. Thus the perception +of the even, elliptical courses of the heavenly bodies led +to the statement of the law of gravitation and the laws +of motion. +</p> +<p> +In economics, similar laws have long since been +enunciated, and have proved themselves such valuable +instruments for the understanding of the daily problems +of the workaday world, that they have been woven +into the texture of our ordinary speech and thought. +I have already touched upon them in the preceding +chapter. But it is now desirable to set them out in +order, in the most concise and formal manner possible. +</p> +<div class="law"> +I. When, at the price ruling, demand exceeds +supply, the price tends to rise. Conversely +when supply exceeds demand the price tends +to fall. +</div> +<div class="law"> +II. A rise in price tends, sooner or later, to +decrease demand and to increase supply. +Conversely a fall in price tends, sooner or +<a name="19"> </a>later, to increase +demand and to decrease +supply. +</div> +<div class="law"> +III. Price tends to the level at which demand is +equal to supply. +</div> +These three laws are the cornerstone of economic +theory. They are the framework into which all analysis +of special, detailed problems must be fitted. Their +scope is very wide. I have purposely refrained from +introducing into my statement of them any reference +to commodities; for they extend far beyond commodities. +Subject to an important qualification, they +apply to capital, the price paid for the use of capital +being what we call the rate of interest. They apply +hardly less to "services," to the remuneration of labor +of every kind and grade. People sometimes protest +warmly against the idea of treating labor "like a commodity." +If this indignation expresses no more than a +belief that in matters concerning conditions of work, +and relations between employees and the management, +the sensibilities of human nature should be taken into +due account, it is based on elementary decency and +commonsense. But if, as sometimes appears, it is +directed against the fact that the remuneration of +labor is controlled by the laws of supply and demand, +it is a mere baying at the moon, with singularly little +provocation. For these laws are in no way peculiar to +commodities, and it is no one's fault that they include +commodities too within their scope. +<p>But let us go back to the laws themselves, and probe +them and dissect them, and turn them this way and +that, so that we may perceive their full content, and +<a name="20"> </a>grasp it firmly in our minds. The third law implies +a +prevailing tendency for demand to be equal to supply. +This tendency, as was suggested in Chapter I, can be +verified by anyone from his experience and observation +(provided he is a reasonable person, and not the tiresome +kind who would dispute the law of gravitation +because he sees that a feather falls to the ground more +slowly than a stone). But it can also be deduced as a +corollary from the two preceding laws; and to regard it +in this way will help us to appreciate its significance. +Start, for instance, by supposing that demand is in +excess of supply. Then the price will tend to rise. After +the price has risen, the supply will become larger, while +the demand will fall away. The excess of demand +with which we started will thus clearly be diminished. +But if there remains any portion of this excess, the +same reactions will continue; the price will rise further, +and for the same reason; demand will be further +checked and supply further stimulated. In other words, +these forces must persist until the entire excess of +demand over supply is eliminated. If we start by +supposing supply to exceed demand, the converse chain +of sequences will operate. Now these very simple steps +of reasoning illuminate the nature of the normal equilibrium +of demand and supply. They reveal that the +equilibrium is established and maintained by the +agency of <i>changes in price</i>, and they enable us to lay it +down as perhaps the most important thing that can be +said about the price of anything that it will tend to be +such as will equate demand and supply. But that is not +all that they reveal. They reveal also the extreme +dependence of both demand and supply upon price. +<a name="21"> </a>Now this is a fact which it is most important to +realize +vividly. It is apt to be obscured by customary modes +of speech. In ordinary times the prices of most commodities +and services do not change by very much, +unless indeed over a long period of years; the amounts +demanded and supplied may therefore seem to maintain +a fairly constant level; and we may be tempted to +speak of Great Britain producing so many million tons +of coal, or America consuming so many millions of +motor-cars per annum, almost as though these quantities +were independent of price considerations. But +we should never forget that there is no service or commodity +produced by man, however essential it may +seem, the demand for or the supply of which might not +be reduced to nothing, if the price were sufficiently +raised on the one hand, or lowered on the other. How +easy it is sometimes to forget this simple truth may be +seen from the mistake so commonly made of supposing, +because the peoples of Central Europe were left, on the +cessation of the war, starving and destitute of the +means of life and the materials of work, that they must +necessarily become heavy purchasers of imported +goods; without pausing to consider whether the prices +were such as they could afford to pay. +</p> +<p> +§2. <i>Diagrams and their Uses</i>. It will help to prevent +mistakes like this and more generally to make sharp and +clear the fundamental relations which exist between +demand, supply and price, if we exhibit them pictorially +in the form of a diagram. Such diagrams are of great +service in many parts of economic theory, not because +they can prove anything which could not be proved +<a name="22"> </a>otherwise, but because, being really a simpler +medium +of expression than words, they enable the mind to +grasp more readily and to retain more vividly the essential +facts of complex relations. +</p> +<object type="image/svg" data="files/fig1.svg"> +<img alt="figure 1" height="311" width="354" src="files/fig1.png"></object> +<p>Figure 1</p> +<p> +In Fig. 1 the curve DD' represents the conditions of +demand. It is supposed to be drawn in such a way that +if any point, Q, be taken on the curve, and the perpendicular QN be +drawn to meet the base line, or axis OX, +then ON will represent the amount that will be demanded +at a price represented by QN (or O<i>l</i>). In other +words, distances measured along OY represent prices, +and distances measured along OX represent quantities +of the commodity, or service, or whatever it may be. +Clearly, then, the demand curve, DD', must slope +downwards from left to right, since the lower the +price asked, the greater will be the amount demanded. +Similarly the curve SS' represents the conditions of +<a name="23"> </a>supply. It is supposed to be so drawn that if any +point <i>q</i> be taken upon it, and the perpendicular <i>q</i>N +be drawn to meet OX, then ON will represent the +amount that will be supplied at a price represented by +<i>q</i>N (or O<i>k</i>). Equally clearly this supply curve must +slope upwards from left to right, since the higher the +price obtainable, the greater will be the quantity +offered. Take the point P where the two curves meet, +and draw the perpendicular PM to meet OX. Then +the third law enunciated at the beginning of this +chapter corresponds to the statement that PM or O<i>m</i> +will represent the price at which the commodity or +service will be exchanged. +</p> +<p> +It can readily be seen that no other price could be +maintained. For suppose the price to be less than O<i>m</i>, +suppose it to be O<i>k</i>, then, at this price, ON (or <i>kq</i>) +will +be the amount supplied, and <i>kr</i> the amount demanded. +The demand will thus exceed the supply, and the +price will tend to rise, i.e. to move upwards towards +O<i>m</i>. Similarly if we suppose the price to be O<i>l</i>, which +is larger than O<i>m</i>, the supply (<i>l</i>R) will exceed the +demand (<i>l</i>Q) and the price will fall downwards towards +O<i>m</i>. Thus, again, we have deduced Law III from +Laws I and II with the form and precision of a +proposition in Euclid. Now, when once the eye has +become familiar with this diagram, it ought to be +impossible for the mind to lose even momentarily its +grip on the fact that demand and supply are both +dependent upon price. For these curves do not represent +any particular amounts; they represent a series of +<i>relations</i> between amount and price; if the price is +QN the amount demanded is ON, and so forth. The +<a name="24"> </a>terms demand and supply in the sense, in which I +have been using them, of the respective amounts demanded +and supplied are, indeed, strictly meaningless +without reference to some particular price. The +reference may sometimes be implicit; but, whenever +there is a chance of ambiguity, it should be explicitly +made. +</p> +<p> +§3. <i>Ambiguities of the Expressions, "Increase in Demand," +etc.</i> It is the more important to be precise +upon this point, in that there is a further possible +confusion which we have now to consider. Demand +and supply, as we have seen, are dependent upon +price; but equally clearly they are dependent upon +other things as well. Demand depends upon the needs, +tastes and habits of the people, as well as upon the +length of their purse; supply depends upon such things +as the cost of production in the case of commodities. +None of these things are constant factors, all of them +are liable to change, and it may well happen that we +shall want to consider in some concrete problem the +probable consequences of such a change. Now the +most usual and natural way of describing such changes +in the medium of words is to use the expression "increase" +or "decrease in demand," and "increase" +or "decrease in supply," the same expressions, which +we employed before to describe the consequences of a +change in price. This identity of language conceals +a fundamental distinction between the phenomena +described; and to make this distinction plain we cannot +do better than revert to our diagrammatic presentation +of the laws. +</p> +<a name="25"> </a> +<object type="image/svg" data="files/fig2.svg"><img alt="figure 2" + height="329" width="342" src="files/fig2.png"></object> +<p>Figure 2</p> +<p> +In Fig. 2 we start as before with our demand curve, +and supply curve, cutting one another at the point P. +We then suppose that some alteration takes place in +the conditions of demand; there has been a growth +in the general taste for the commodity or service, and +the demand, as we say, has increased accordingly. +How is this fact to be represented in the diagram? +Plainly not by taking another point on the curve, DD', +at a further distance from OY. For this would merely +indicate the larger amount that would be taken, if the +conditions of demand had remained unaltered but the +sellers had reduced their prices. The correct way of +representing the change we have supposed is to construct +a new demand curve (in the figure, the dotted +<a name="26"> </a>curve <i>dd'</i>), lying at every point above the +old demand +curve. For this indicates that larger quantities will +be purchased at the old prices, which is exactly what +we want to represent. Similiarly if we wish to represent +a change in the conditions of supply, such as might +result, in the case of a commodity, from a tax imposed +on its production, we must draw a new supply curve, +<i>ss'</i>, which in the case supposed, must lie everywhere +above the old supply curve. On the other hand, the +decrease or increase in demand or supply, <i>resulting</i> +from a change in price, is represented simply by a +shifting of the equilibrium from one point to another on +the same curve. The striking pictorial contrast between +a movement from one curve to another, and a +movement along the same curve should help to make +vivid to our minds the fundamental distinction between +a change in the <i>conditions</i> of demand, arising from new +tastes, enhanced purchasing power, etc.; and a mere +change in the amount purchased resulting from an +alteration in the price which the sellers ask. Words, +as this necessarily cumbrous sentence shows, are a +clumsy instrument for the expression of abstract +relations; it is not very easy to see which words in a +sentence are the significant, commanding ones, and +which are performing, as it were, ordinary routine +duties. A diagram is not exposed to similar ambiguities +of emphasis. +</p> +<p> +The particular distinction, to which attention has +been called, is important. The reader who has grasped +it clearly will be able to perceive many instances of the +confusion arising out of its neglect in the ordinary +discussions of economic questions which take place +<a name="27"> </a>in the press and on the platform. It is not +uncommon, +for instance, for an argument to run something like +this: "The effect of a tax on this commodity might +seem at first sight to be an advance in price. But an +advance in price will diminish the demand; and a +reduced demand will send the price down again. It +is not certain, therefore, after all, that the tax will +really raise the price." A glance at the diagram will +keep us out of such a bog of sophistry and muddle. +For if we suppose the amount of the tax per unit of the +commodity to be represented by S<i>s</i>, the curve <i>ss'</i> +(drawn, as it is, roughly parallel to SS') will represent +the new conditions of supply after the tax has been +imposed. The new position of equilibrium will be +given by the point P', where <i>ss'</i> cuts DD', the demand +curve. Now P' lies to the left of P the old point of +equilibrium; hence, since DD' <i>must</i> slope downwards +from left to right, it is clear that, if, as it is fair here to +assume, the <i>conditions</i> of demand have remained unaltered, +the new price P'M', must be greater than the old. +</p> +<p> +§4. <i>Reactions of Changes in Demand and Supply on +Price.</i> Having now made clear the meaning that must +be attached to the terms, let us consider the question +which naturally arises, whether we can lay down any +general propositions or laws as to the effect upon +price, of an increase or decrease in demand or supply. +Another glance at the diagram suggests that we can. +An increase in demand is represented in Fig. 2 by a +movement from DD' to <i>dd'</i>, which cuts the supply +curve, SS', at <i>p</i>, to the right of P. Since the supply +curve (drawn, as it is best to draw it, to represent the +<a name="28"> </a>amount which will be supplied in response to a given +price) must always slope upwards from left to right, +the new price, <i>pm</i>, must be greater than the old, PM. +Conversely a decrease in demand is represented by a +movement from <i>dd'</i> to DD', and the new price is +seen to be less than the old. We have already seen +that a decrease in supply, which is represented by a +movement from SS' to <i>ss'</i> results in a higher price; +and it is the obvious converse that an increase in +supply will have the opposite effect. It would seem +then that we might lay down quite generally that an +increase in demand or a decrease in supply will raise the +price while a decrease in demand or an increase in +supply will lower it. +</p> +<p> +But here it is necessary to be cautious. All conclusions +as to the effects of causes are necessarily based, +implicitly, if not explicitly, upon the assumption +"other things being equal." This method of reasoning, +which some people appear to find so irritating in the +economic sphere, and as they say so "theoretical" +and "unreal," is one which they adopt readily enough +in every other department of life. No one, for instance, +objects to the statement that the sun, when it comes +out, makes a room warmer, although it may very +well happen, if a fire is dying at the same time, that +the room grows colder in point of fact. For in our +general statement we assume implicitly that "other +things" such as fires, are unchanged. But assumptions +of this kind are legitimate only when there is no reason +to suppose that the cause, the effects of which are +being studied, will itself produce a change in the "other +things." If (as I have often been told; I really do not +<a name="29"> </a>know if it is true) the rays of the sun help to put +a +fire out, the statement made above would be the better +for some qualification. +</p> +<p> +Now we can only say that an increase in demand +raises price if we assume the conditions of supply (as +represented by the supply curve) to remain unchanged. +But in practice, an increase in demand may cause a +change in the <i>conditions</i> of supply. An increase, for +instance, in the demand for a commodity may give rise +to a revolution in the methods of production, to the +introduction of labor-saving machinery and so forth, +which will eventually result in the commodity being +produced more cheaply. It will certainly take a considerable +time before reactions of this kind can exert +an appreciable influence; and we can, therefore, feel +reasonably sure that over a short period an increase in +demand will raise the price. But we cannot be sure +what the ultimate effect will be. A similar alteration in +the condition of demand is less likely to result from an +increase or decrease in supply; but it may conceivably +occur. We must, therefore, be careful to qualify any +general propositions which we lay down in this connection, +by explicit reference to a short period of time. +We can add the following to our body of laws:— +</p> +<div class="law"> +IV. An increase in demand, or a decrease in supply +will tend to raise the price for a short period at +least. Conversely a decrease in demand, or an +increase in supply will tend to lower the price +for a short period at least. +</div> +<p> +This law, like the others, applies to commodities, +services, capital, to anything which can be said, literally, +<a name="30"> </a>or by analogy, to have a price. "A short period" +is, however, a vague expression and, since precision is +the hallmark of an important law, we must accord to +this one a status inferior to that which the preceding +three can rightly claim. +</p> +<p>§5. <i>Some paradoxical reactions of price changes on +supply.</i> Let us turn, though, once more to these +earlier laws, and with a heightened critical sense let us +submit them to the test of the whole gamut of our +experience, and see if in any of them we can find the +smallest flaw. The first of them will pass through +the ordeal—let each reader prove it for himself—unscathed. +The second will emerge with a few hairs, +as it were, singed. It tells us, for instance, that a rise +in price will tend to augment the supply. Now there +are some things the supply of which cannot possibly +be augmented; these are the capital resources of nature, +of which land is the most important for our present +purpose. Land is bought and sold, it commands a +price. In a certain sense, it may be said to be possible +to increase the supply of land, in response to a rise in +price, by drainage and reclamation schemes; and it +will certainly happen that a rise in the price which +land can command for any particular purpose will +increase the amount which is devoted to that purpose. +But, speaking broadly, the supply of land available +for purposes of every kind is a fixed unvarying factor, +with an inertia which the cajolery of price-changes is +powerless to disturb. This is a most important fact, +and it gives rise to some peculiar features of the price +and rent of land, which we shall have to consider later +<a name="31"> </a>as a separate problem. It constitutes a limiting +case +rather than an exception to the general law. But we +have not yet done with the reactions of price upon +supply. In the case of capital, the nature of those reactions +has been much discussed as a highly controversial +question. That a rise in the rate of interest will +cause some people to save more than before, is generally +admitted; but it is pointed out that the effect upon +others may be the exact opposite, because it means that +they do not need to save so much to acquire the same +future annual income. It is unwise to say dogmatically +that the former tendency outweighs the latter; though +upon the whole it seems highly probable that it does. +We cannot, therefore, in this case feel confident that a +change in price will react upon supply in the manner +which our law indicates. Similarly it is possible to +argue that a rise in the general level of real wages may +reduce the supply of labor, even, or some might say +particularly, if the term is used to denote not the +number of workpeople, but the quantity of work done. +For there may be a tendency for workpeople, when +more comfortably off, to work less regularly or less +hard. Here again we cannot be sure. In none of +these cases, however, including that of land, is there +any reason to doubt that a rise in price will diminish +<i>demand</i>, or conversely that a fall will increase it. Since, +therefore, in the reasoning by which we deduced the +third law, the conclusion will hold good, even if the +effects of price-changes on supply are of the above +paradoxical kind, provided that they do not continually +outweigh the effects upon demand, there is no +reason to cast doubt on the solidity of Law III, which, +<a name="32"> </a>indeed, as we suggested before, commends itself +directly +to experience. But Law II seems now, perhaps, somewhat +the worse for wear. +</p> +<p> +The damage, however, is not considerable. For in +each case the uncertainty arises only when we are +dealing with one of the factors of production, land, +labor or capital, <i>regarded as a whole</i>. If we are dealing +with the capital available for a particular industry, a +rise in the rate of profit in that industry will certainly +increase the supply of capital available there; for it will +tend to attract savings that might otherwise have been +employed elsewhere. We can even be fairly sure that +an increase in the general rate of interest prevailing in +any particular country will increase the total supply +of capital available for the businesses of that country, +since capital has in modern times acquired a considerable +migratory power. In the case of labor, we cannot +go so far as this; but here, too, there is no doubt that an +increase in the remuneration offered in any particular +occupation will attract an increased labor supply +(always supposing, of course, that "other things are +equal"). No similar difficulty arises for land, labor +or capital, as regards the effect of price-changes on +demand; while for ordinary commodities there is no +such difficulty on the side either of demand or of +supply. Hence the only qualification which the +strictest accuracy would require us in this connection +to attach to our statement of Law II is the +postscript:— +</p> +<p> +<!-- poem -->"Except that, in the case of land, the aggregate supply +is +unalterable; while in the case of capital or labor we cannot be +sure how price-changes will affect the aggregate supply." +<!-- poem --></p> +<a name="33"> </a> +<p>Much significance attaches to these exceptions, as +later will appear. +</p> +<p> +§6. <i>The Disturbances of Monetary Changes</i>. But let +us still keep a critical eye on Law II, and submit it +to another flashlight from our practical experience. +The recent world war made us all acutely aware of a +remarkable rise in the price of almost everything, +which yet did not seem to diminish appreciably the +demand. The explanation of this paradox is not +difficult to find. There was an immense increase in the +volume of nominal purchasing power, due to a complex +set of causes, of which "currency inflation" may be +taken as the symbol. Now perhaps we are entitled to +assume the absence of such currency changes as part of +the "other things being equal" which is always understood +as implied. But it is rash to take this particular +assumption for granted, more especially in these days. +Already people are too apt to speak as though the +trade depression (which as these pages are written +holds us in its grip) cannot pass away until pre-war +prices are restored, ignoring altogether the great and +probably permanent increase in nominal purchasing +power which the war has left behind it. It would be +safer, therefore, to add explicitly to Law II the reservation, +"Assuming that there is no change in the general +volume of purchasing power." +</p> +<p> +Monetary and allied questions will form the subject +of the second volume of this series. It must not be +supposed that our general laws have no bearing on +them. On the contrary, Law I, which all this time has +remained serene and undisturbed by the occasional discomfitures +<a name="34"> </a>of Law II, is the gateway through which all +questions of currency, banking and the foreign exchanges +should be approached. It is well to note, as an +inexorable corollary of Law I, that prices can rise <i>only</i> +if demand exceeds supply, and fall <i>only</i> if supply exceeds +demand; and hence that it is only through the +agency of changes in the demand for and supply of +commodities and services that an inflation or deflation +of the currency can influence the price level. Further, +since a condition of things in which supply generally +exceeds demand spells what we know and fear as a trade +depression, it may be well to note at once that falling +prices and unemployment are inseparable bedfellows. +For we are far too apt to shut our eyes to these unpleasant +truths. But we cannot pursue them further +here; and in the remainder of this volume we shall +not be concerned (except, perhaps, incidentally) with +questions affecting the general level of prices or of purchasing +power; but rather with the relation which the +price of one commodity bears to that of another, with +the rate of interest (which being a rate per cent is not +essentially dependent on the price level), with "real" +wages (as distinct from money wages) and the like. +</p> +<p> +§7. <i>The Trade Cycle</i>. But our reference to trade +depressions suggests a final comment on Law II. One +small qualification was embodied in our original statement +of it, namely the words "sooner or later." A rise +in price may not check the demand immediately (even +if the printing presses are standing idle in the Treasuries); +it may actually stimulate it for a time. For +people may fear that the price will rise further still, and +<a name="35"> </a>hasten to buy what they <i>must</i> buy before very +long. +Sellers may share the same opinion, and be reluctant on +their side to part. When prices are falling the roles are +reversed, and we are likely to see the sellers tumbling +over one another in a frantic eagerness to sell, the +buyers wary and aloof. Sooner or later, indeed, these +tendencies must dissolve and disappear; but they may +persist for a longer period than might seem probable +at first. For the raw material of one trade is, as we say, +the finished product of another. The demand for one +thing gives rise to a demand for other things, for the +labor with which to make them, and so on in an expanding +circle. A sympathy, subtle and intense, +unites the business world, and a wave of depression or +animation arising in any quarter may spread itself far +and wide, heightened by the gusts of human hope and +fear, and continue long before its influence is spent. +</p> +<p> +Here we are upon the threshold of one of the most +striking and formidable of economic facts, the regular +alternation of periods of good and bad trade, each very +widespread, if not world-wide, in its range, each comprising +certain regular phases of acceleration and decay, +and each infallibly yielding sooner or later to the other. +The details of these phenomena are highly complex, +some of them obscure; an immense literature has +already been devoted to the subject, yet its systematic +study is hardly more than begun. The account given +in the preceding paragraph is incomplete and meagre. +It is inserted here in the hope that it will impress the +reader with a sense both of the fact of these alternations +and of the deeply rooted nature of the causes from which +they spring. They take a heavy toll of human happiness +<a name="36"> </a>and wealth; and there is no object that more +urgently calls for concerted human effort than that of +mitigating them, and of alleviating the misery which +they bring in their train. Still better, of eradicating +them if that is possible; but let none suppose that it can +be lightly done. Meanwhile, let us always remember +that they form the atmosphere and medium in which +the enduring tendencies of the business world must +work themselves out. It is often convenient to speak of +"normal conditions" in this trade or that; but hardly +ever can it be truly said of a particular moment that +conditions are normal. The normal is rather a mean +level about which oscillations to and fro, round and +about, are constantly taking place, but which itself is +reached only by accident, if at all. Whenever we say +that some new factor should in the long run lower +the price of this or that commodity or service, the +picture which these words should convey to our mind +is one of the price rising less on times of boom, and +falling more in times of depression than is the case +with other things. And if ever our faith in some +honored economic law is shaken by the apparent ease +with which, perhaps, in times of active trade, sellers are +able to advance their prices to whatever figure (so it +almost seems) they choose to name, let us rally our +sense of economic rhythm, and reserve our judgment +until the trade cycle has run its course. +</p> +<a name="37"> </a> +<h3 class="chap_head"><a name="Chapter_III"></a>Chapter III</h3> +<h3 class="chap_name">Utility and the Margin of Consumption</h3> +<p> +§1. <i>The Forces behind Supply and Demand</i>. The +laws enunciated in the preceding chapter constitute +the framework and skeleton of all economic analysis; +but they do not carry us very far. It is only through +the agency of these laws that any influence can affect +the price of anything: but what influences may so +affect it is a question which we have still to consider. +</p> +<p> +Let us begin with ordinary commodities and ask ourselves, +in the light of experience and common sense, +upon what factors their price seems mainly to depend? +Two factors spring to mind at once; their cost of production +and their usefulness. As regards the former, the +case seems clear enough. We may indeed sometimes +grumble that the price of this or that commodity is +unconscionably high in comparison with its cost; but +this only goes to show that we conceive a relation between +price and cost as the normal, governing rule. If +one commodity cost only a half as much to produce as +another, we should think that something had gone very wrong indeed, if +the former commodity were sold for +the higher price. But, when we turn to the usefulness +of commodities, the case is not so clear. Usefulness has +some connection with price, so much is certain; for an +entirely useless thing, fit only for the dust-bin (and +<a name="38"> </a>known to be such, it may be well to add) will fetch +no +price at all, however costly it may be to produce. But +it is not easy to express the connection in quantitative +terms. It seems reasonable enough to say that the +prices of commodities are roughly proportionate to +their costs of production. But directly we contemplate +saying a similar thing of their usefulness, we are pulled +up short. As we look round the world, and enumerate +the commodities which by common consent are the +most useful, salt, water, bread, and so forth, the striking +paradox presents itself that these are among the +cheapest of all commodities; far cheaper than champagne, +motor-cars or ball-dresses, which we could very +well get on without. As things are, of course, a ball-dress, +or a motor-car costs more to produce than a loaf +of bread or a packet of salt; and the common-sense +explanation of the paradox seems, therefore, to be that +the cost of production is a more weighty influence +than the usefulness, or utility, as we will henceforth call +it (so as to include the satisfaction we derive from not +strictly useful things). We are thus tempted to conclude +that, provided a commodity possesses some utility, +its price will be determined by the cost of production, +the degree of utility being unimportant. This was exactly +how the position was gummed up for many years +in systematic treatises upon Political Economy; and +it was not until fully half a century after the <i>Wealth +of Nations</i> that a discovery was made which threw a +fresh light on the whole matter. +</p> +<p> +First of all, let it be clearly observed how very +unsatisfactory is the above account. In Chapter II +where we were treading surely, with a sense of solid +<a name="39"> </a>ground beneath us, we drew no such invidious +distinction +between supply and demand. They seemed +then to possess an equal status. But cost of production +is the chief factor which, in the case of commodities, +ultimately determines the conditions of supply. Utility, +similarly, is the chief factor which ultimately determines +the conditions of demand. Must not then the +symmetrical relations between demand and supply be +reflected in a corresponding symmetry between the +utility and the costs which underlie them? Demand +springs obviously from utility; the only motive for +buying anything is that it will serve some real or fancied +use. Can we then accord to demand so dignified and +to utility so subordinate a place? There is here an +inconsistency which we must somehow reconcile. It +will not serve as a solution to distinguish between +different periods of time, and to say, as economists used +to say not very long ago, that price is governed over a +short period by demand and supply, but in the long run +by the cost of production. This still leaves our sense of +symmetry unsatisfied. Moreover, the conception of +cost of production, when we consider it as ruling over +a long period, frequently seems to lose any precision, +as an independent factor, which it may otherwise +possess. Motor-cars, we have agreed, are more costly +to produce than loaves of bread; but, as we know well, +the cost of producing motor-cars varies enormously, +accordingly as they are produced on a small or a large +scale. By the methods of mass production they can be +turned out at a relatively low cost per car. But this +requires that they should be purchased in large numbers +and this in turn throws us back to the demand for +<a name="40"> </a>motor-cars, and plainly enough, to people's judgment +as to their utility. In some cases, the opposite phenomenon +occurs. In the case of British coal, for instance, +the average cost of production would be much +lower than it is if the output were reduced to a fraction +of its present volume, and if only the richer seams of the +more fertile mines were worked. Once again, therefore +it is difficult to measure the cost of production until we +know the magnitude of the demand, which in a manner, +which we have still to elucidate, clearly depends upon +the utility. +</p> +<p> +If we take the problem of joint products, the conception +of cost of production fails us still more conspicuously. +For what is the cost of producing wool, +or the cost of producing mutton? We can speak of +the cost of rearing sheep: but it is hardly possible +to allot this cost, except quite arbitrarily, between +the two products. How, then, can we explain the +separate prices of these things by reference to cost +alone? Instances of joint production are becoming so +common in the modern world, or at least, with the +growing attention to the utilization of by-products, are +assuming so much more heightened a significance, that +an explanation of price, which does not apply to them, +is a very feeble one indeed. +</p> +<p> +§2. <i>The Law of Diminishing Utility</i>. Let us turn +back, then, to the factor of utility, and see if we cannot +put on a more satisfactory basis the relation between +utility and price. The clue to the puzzle is to be found +in a brief reflection on the implications of the second +general law propounded in Chapter II. A rise in price, +<a name="41"> </a>it was there stated, will sooner or later diminish +the +demand. This was asserted as a matter of fact, observed +from and confirmed by experience. But what +does it signify? To what causes is this familiar fact +to be attributed? The first stage of the answer is very +ample. The many individuals, whose purchases make +up the demand for the commodity, will buy smaller +quantities now that the price is higher. Possibly some +of them may cease to buy it altogether; but as a rule +it would be reasonable to suppose that most people continue +to buy a certain amount though a smaller amount +than hitherto. Let us turn our attention, then, to the +individual purchaser, and ask ourselves why he (or let +us say she) acts in the manner indicated. The obvious +answer is that the more she already has of anything, +the less urgently does she require a little more of it. +If she buys 6 pounds of sugar every week when the price +is 7 cents a pound, but only 5 pounds when the price is 8 +cents, she shows by her action that she does not consider +that the additional utility she will derive from buying 6 +pounds a week rather then 5 pounds is worth as much as +8 cents. But she shows at the same time that she thinks +it worth 7 cents. For, when the price is 7 cents, no one +compels her to buy that sixth pound. She could stop, if +she chose, at five; and it may serve to make the point +quite plain if we suppose her actually to hesitate before +she buys the sixth. She has hitherto, let us say, been +buying 5 pounds a week at 8 cents. To-day she enters +the shop and finds the price is down to 7 cents. She +asks for her customary 5 pounds; then she pauses, and a +minute later turns her order into six. What are the alternatives +which she has been weighing one against the +<a name="42"> </a>other in that momentary pause? Not the utility of +the +whole 6 pounds of sugar against the total price of 42 +cents. For she has already ordered the first 5 pounds; +and the decision to buy the sixth is taken independently +and subsequently. She has been sizing up the <i>increment</i> +of utility which a sixth pound would yield, and she decides +that this is worth the expenditure of a further 7 +cents. Again, when the price was 8 cents she need not +have bought as many as 5 pounds. She could have +stopped at 4 had she chosen, and the fact that she did +buy 5 pounds shows that the increment of utility derived +from buying a fifth pound, when she might be said +already to have 4, was worth at least 8 cents in her +judgment. +</p> +<p> +This trite illustration enables us to lay down two +important laws relating to utility. To state them +shortly, it is convenient to employ one or two technical +terms, which, unlike every term employed hitherto, +are not very commonly used in their present sense in +everyday life. Their adoption is desirable not merely +for the sake of convenience, but because they help +to stamp clearly on the mind a most illuminating +conception, that of the "margin," which supplies +the clue to many complicated problems. The last +pound of sugar which the housewife purchased, the +fifth pound when the price was 8 cents, or the sixth +pound when the price was 7 cents, we call the "marginal" +pound of sugar. And the increment of utility +which she derives from buying this marginal pound +we call the "marginal utility" of sugar to her. We +are thus able to state the fact that the more a +person has of anything the less urgently does he +<a name="43"> </a>require a little more of it, in the following formal +terms:— +</p> +<div class="law"> +V. The marginal utility of a commodity to anyone +diminishes with every increase in the amount +he has. +</div> +<p> +The total utility will, of course, increase with an increase +in the amount, but at a diminishing rate. This +law is usually called The Law of Diminishing Utility. +</p> +<p> +§3. <i>Relation between Price and Marginal Utility</i> +But this is not all. We are now in a position to perceive +the true relation between utility and price. The +relation is one which exists not between price and total +utility, but between price and marginal utility. If we +know only that a housewife will buy weekly 5 pounds of +sugar at 8 cents per pound, but 6 pounds at 7 cents, we +know nothing of the total utility of sugar to her. We do +not know how much she might be prepared to pay +rather than go without 3 pounds, 2 pounds, or any sugar +at all. But we do know that, when she buys 6 pounds, +the marginal utility of sugar is in her judgment worth +something which does not differ greatly from the price. +We can, therefore, say in general terms that the price of +a commodity measures approximately its marginal +utility to the purchaser. +</p> +<p> +This statement is perfectly consistent with the +paradox noted above that the most useful commodities +such as bread, salt and water are very cheap. For +when we say that these commodities are supremely +useful, we mean only that their total utility is very +great; that, rather than do without them altogether, +we would offer for them a large proportion of our means. +<a name="44"> </a>But we would not value very highly a small addition +to the bread, water or salt that we habitually consume; +nor would most of us feel it as a very serious deprivation +if our consumption of these things were curtailed +by a small percentage. In other words, their <i>marginal</i> +utilities are small, and it is only the <i>marginal</i> utility +that has any relation to price. +</p> +<p> +§4. <i>The Marginal Purchaser</i>. A possible objection +to the preceding argument deserves to be considered. +Some readers may find the picture I have drawn of +the hesitating housewife entirely unconvincing. They +may declare that her mind does not work at all in +the manner I have indicated. She will have formed +certain habits in regard to her weekly purchases of +sugar, which are connected very vaguely, if at all, with +any conscious processes of thought. She will buy so +many pounds of sugar weekly without troubling her +head over the specific utility of the last pound she buys. +When the price falls she may, indeed, buy more; but +it will not be because she separates out and considers +by itself the extra utility of an additional pound. She +may buy more, because she has formed the habit of +spending so much money on sugar; and now that the +price has fallen, the same amount of money will enable +her to buy more pounds. Or, perhaps, she may be +moved by instinctive and irresistible attraction to buy +more of a thing when it is cheaper, similar to that which +inspires so many people to face with ardor the horrors +of a bargain sale. In any case the fine calculations I +have imagined convey a fantastic picture of her state of +mind. And how much more fantastic, the critic may +<a name="45"> </a>continue, of the state of mind in which things of a +different kind are bought by less careful people. When, +for instance, one of us happy-go-lucky males (more +liberally supplied, perhaps, than the housewife with the +necessary cash), decides to buy a motor bicycle, or to +replenish his stock of collars or ties, does the above +analysis bear any resemblance to the actual facts? In +the case of the motor bicycle, the purchaser may, indeed, +weigh the price fairly carefully against the pleasure +and benefit, though contrariwise he may be a rich +enough gentleman hardly to bother about this. But, +one motor bicycle is as much as he is at all likely to buy, +and what becomes, then, of the distinction between +total and marginal utility? In the case of the ties and +collars, the vagueness of many of us about the price will +be extreme. We probably have been uneasily conscious +for some time of an inconvenient shortage of these +troublesome articles and eventually will go off (or +perhaps will be sent off with ignominy) to the nearest +suitable shop to make good the deficiency. How can +we speak here with a straight face of the relation between +marginal utility and price? +</p> +<p> +These are very pertinent criticisms; but they do +not make nearly as much nonsense of the notion of +marginal utility as may seem at first. The last point, +indeed, serves rather to give it a fresh aspect of much +significance. Those of us who do not bother about the +price we pay for our ties and collars owe a debt of gratitude, +of which we are insufficiently conscious, to the +more careful people who do; as well as to the custom +which prevails in shops in Western countries (as distinct +from the bazaars of the East) of charging as a +<a name="46"> </a>rule a uniform price to all customers. If <i>we</i> +were the +only people who bought these things, an enterprising +salesman would be able to charge us very much what +he chose. He could put up his price, and we would +hardly be aware of it. And, as by lowering his price he +could not tempt us to buy any more, price reductions +would be few and far between. But fortunately there +are always some people who do know what the price +is, even when they are buying collars and ties; and who +will adjust the amount they buy in accordance with the +price. It is these worthy people who make the laws +of demand work out as we well know they do. It is +they who will curtail their consumption if the price has +fallen and it is they who constitute the seller's problem, +and help to keep down prices for the rest of us. The +rest of us—it is well to be quite blunt about it—simply +do not count in this connection. We have no cause +then to plume ourselves that we have disproved the +truth of economic laws when we declare that we seldom +weigh the utility of anything against its price. All +that this shows is that our actions are too insignificant +to be described by economic laws since they exert no +appreciable influence on the price of anything. And +this in turn shows the extreme importance of grasping +clearly the conception of the margin. Just as it is +the marginal purchase, so it is the marginal purchaser +who matters. It is the man who, before he buys a +motor bicycle, weighs the matter up very carefully +indeed and only just decides to buy it, whose demand +affects the price of motor bicycles. It is the utility +which <i>he</i> derives that constitutes the marginal utility, +which is roughly measured by the price. +</p> +<a name="47"> </a> +<p>As to the housewife, I am not prepared to concede +that my picture is in essentials very fanciful. She may +be a creature of habits and instincts like the rest of +us, but most habits and instincts affecting household +expenditure are based ultimately on <i>some</i> calculation, +if not one's own, and reason has a way of paying, as +it were, periodic visits of inspection, and pulling our +habits and instincts into line, if they have gone far +astray. I am not satisfied that the housewife does not +envisage the utility of a sixth pound of sugar as something +distinct from the utility of the other five; she +may buy it, for example, with the definite object of +giving the children some sugar on their bread, and she +may have a very clear idea as to the price which sugar +must not exceed before she will do any such thing. +Possibly I may exaggerate. I have the profound +respect of the incorrigibly wasteful male for the care +and skill she displays in laying out her money to the +best advantage. +</p> +<p> +§5. <i>The Business Man as Purchaser.</i> But if the reader +still finds the picture unconvincing, let us shift the +scene from domestic economy to commerce, and substitute +for the careful housewife an enterprising business +man. Now, as anyone who has a business man for his +father will have often heard him say, the vagueness and +caprice which characterize our personal expenditure +would be quite intolerable in business affairs. There +you must weigh and measure with the utmost possible +precision. You must be for ever watching the several +channels of your expenditure, careful to see that in +none does the stream rise higher than the level at which +<a name="48"> </a>further expenditure ceases to be profitable. You +will +not even engage typists or install a telephone in your +office without weighing up fairly carefully the number +of typists or the number of switches that it is worth +your while to have. And in deciding whether to employ +say, five typists, or six, you will not vaguely lump the +services of the whole six typists together, and consider +whether as a whole they are worth to you the wages +you must give them. You will, in the most direct and +literal manner, weigh up the <i>additional</i> benefit you +would derive from a sixth typist, and if that does not +seem to you equivalent to her wage, you will not engage +her, however essential it may be to you to have one or +two typists in your office. If on the other hand, the +utility of having a sixth typist seems to you worth +much more than her pay, the chances are that you will +be well advised to consider the employment of a seventh. +And so, where you stop employing further typists, +the utility to you of the last one, of the "marginal +typist" as it were, is unlikely to differ greatly from her +pay. +</p> +<p> +Now this is not a fancy picture of some remote +abstraction called an "economic man." Allowing for +the over-emphasis which is necessary to drive home the +central point, it is a bald account of the aims and +methods of the actual man of business. To ascertain +the margin of profitable expenditure in each direction, +to go thus and no further, is the very essence of the +business spirit, as the business man himself conceives +it. When he condemns the extravagance of Government +departments, it is their lack of just this marginal +sense that he chiefly has in mind. "The lore of nicely +<a name="49"> </a>calculated less or more" may be rejected by High +Heaven and Whitehall, but no one can afford to despise +it in the business world. +</p> +<p> +The transition from household to business expenditure +involves an extended use of the word utility, which +is worth noting. Commodities like bread, sugar, or +privately owned motor-cars are sometimes called +"consumers' goods" in contrast to "producers' goods," +which comprise things such as raw materials, machinery, +the services of typists and so forth, which are +bought by business men for business purposes. The +line of division between the two classes is not a sharp +one, and we need not trouble with fine-spun questions +as to whether a particular commodity should in certain +circumstances be included under the one head or the +other. But, broadly speaking, things of the former +type yield a direct utility; they contribute directly to +the satisfaction of our pleasures or our wants. Things +of the latter type yield rather an indirect utility. Their +utility to the business man who buys them lies in the +assistance they give him in making something else from +which he will derive a profit. The utility of these +things is therefore said to be <i>derived</i> from that of the +consumers' goods or services to which they ultimately +contribute. This conception of derived utility leads to +certain complications which we shall have to notice +later. +</p> +<p> +§6. <i>The Diminishing Utility of Money</i>. But one +important point must be emphasized in this chapter. +The utility which a business man derives from the +things which he buys for business purposes is the extra +<a name="50"> </a>receipts which he obtains thereby. Derived utility, +in other words, is expressed in terms of money, and the +idea of its relation to price presents no difficulty. But +the utility of things which are bought for personal +consumption means the <i>satisfaction</i> which they yield, +and this is clearly not a thing which is commensurable +with money. When, therefore, it is said that the prices +measure their respective marginal utilities, what exactly +is meant? What was it that the argument of §3 went +to show? That the utility of the marginal pound of +sugar would seem to the housewife just worth the price +that she must pay for it; in other words, that it would +be roughly equal to the utility she could obtain by +spending the money in other ways. The respective +marginal utilities which <i>she</i> obtains from the different +things she buys will thus be proportionate to their +prices. But if she were to receive a legacy which gave +her a much larger income to spend, she might buy +larger quantities of practically every commodity; and, +though she would obtain a greater total utility thereby, +the marginal utility she would obtain in each direction +would be smaller, in accordance with the law of diminishing +utility. The prices might not have changed; +the respective marginal utilities to her of the different +things would again be proportionate to their prices, +but they would constitute a smaller satisfaction than +before. +</p> +<p> +Thus we can only say that the prices of commodities +will be proportionate to their real marginal utilities, +when we are considering the different purchases of +one and the same individual. The amounts of money +which different people are prepared to pay for different +<a name="51"> </a>consumers' goods are no reliable indication +of the real utilities, the amounts of human satisfaction +which they yield. Here we must take account not +only of varying needs and capacities for enjoyment, +but of the very unequal manner in which purchasing +power is distributed among the people. The cigars +which a rich man may buy will yield him an immeasurably +smaller satisfaction than that which a poor family +could obtain by spending the same amount of money +on boots, or clothes or milk. When, therefore, we +compare commodities which are bought by essentially +different consuming publics, their respective prices may +bear no close relation to their <i>real</i> utility, whether +marginal or otherwise. Thus the law of diminishing +utility applies to money or purchasing power, as well +as to particular commodities. The more money a +man has the less is the marginal utility which it yields +him; and, where the marginal utility of money to a +man is small, so also will be the real marginal utility +he derives in each direction of his expenditure. The +extreme inequality of the distribution of wealth gives +immense importance to this consideration. Its practical +implications will be discussed in Chapter V. Meanwhile, +we may express the conclusions of the present +chapter by the statement that the price of a commodity +tends to equal its marginal utility, <i>as measured in terms +of money</i>, i.e. relatively to the marginal utility of money +to its purchaser. +</p> +<a name="52"> </a> +<h3 class="chap_head"><a name="Chapter_IV"></a>Chapter IV</h3> +<h3 class="chap_name">Cost and the Margin of Production</h3> +<p> +§1. <i>An Illustration from Coal</i>. We have already +had occasion to note the symmetry which characterizes +the relations of demand and supply to price. This +symmetry was apparent throughout the argument +of Chapter II, and it was a striking feature of the +diagrams which we employed to illustrate the argument. +We shall do well to cultivate a lively sense of this +symmetry, for it will frequently save us from ignoring +factors which have a vital bearing on the problems +we are considering. We should never leave an important +feature of demand without turning to see whether +it has a counterpart on the supply side, though indeed +we may not always find one. In the last chapter we +examined the relation between utility and price, and +found that the true relation was between the price and +what we termed the marginal utility. Corresponding +to utility on the demand side is cost of production +on the supply side. The question should thus at once +suggest itself—"Can we speak appropriately of the +marginal cost of production, and will this serve to +make clear the relation between cost and price?" To +answer these questions, let us take one of the instances +in which we found that price could not be +explained satisfactorily by the bare phrase "cost of +production." +</p> +<a name="53"> </a> +<p>An important feature of the coal industry, which +recent events have brought into sharp prominence, +is the great diversity of conditions between different +coalfields and different collieries. We speak of rich +seams and poor seams, of fertile and unfertile mines, +and we are aware that the costs of raising coal to the +surface differ very widely in accordance with these +diverse natural conditions. Nor must we confine our +attention to the cost price at the pit-head. If we wish +to speak of cost of production as a factor determining +price, we must use the term in a broad sense to include +the transport and other charges necessary to bring +the coal to market. +</p> +<p> +In this respect also one coalfield differs greatly from +another. Some are well situated close to a large market, +or within easy reach of the seaboard; others must +incur very heavy transport charges to bring their coal +to any considerable centre of consumption. These +varying conditions lead, as we well know, to great +variations in the financial prosperity of different colliery +concerns. In Great Britain, under the abnormal +conditions which prevailed during the war, and subsequently, +these variations were so huge as to constitute +a most formidable embarrassment and to contribute, +more perhaps than any other single factor, to the +unrest and instability by which the industry has been +afflicted. But they are always with us, if usually upon +a more modest scale. +</p> +<p> +What, then, is the normal relation between price and +cost in the case of coal? Should we direct our attention +to the average costs over the whole industry, or the +costs incurred by the richer and better situated mines, +<a name="54"> </a>or, lastly, that of the poorer and worse situated? +Now, as things are, it is clear enough that no concern +will continue indefinitely producing at a loss. It may +do so for a time, rather than close down altogether, +hoping to recoup itself later when the market has +taken a more favorable turn. But, in the long run, +taking good years with bad, it must expect to obtain +receipts sufficient not only to cover its necessary +expenditure, but to provide also a reasonable profit +on the capital employed. Of course, once the capital +has been sunk and embodied in plant and buildings, +which are of little use for any other purpose, a business +may continue for many years, with a rate of profit +far below what it had anticipated. But plant and +buildings gradually wear out, and need to be replaced; +the course of technical improvement calls continually +for fresh capital outlay, which a business in a bad way +is reluctant to undertake. The tendency, therefore, +when profits rule low over a considerable period, is +for the plant to fall gradually into disrepair and +obsolescence, and finally for the business to disappear. +We can thus include an ordinary rate of profit under the +head of cost of production, and say with substantial +accuracy that for no business can this cost for long +exceed the price if the business is to continue to exist. +If then the relatively poor and badly situated mines +are to be worked, the price of coal, taking good years +together with bad, must cover the costs at which these +mines can produce. If the price rules lower than this, +sooner or later they will close down, and we will be left +with a smaller number of mines, among which great +variations of conditions will still prevail. Once more, +<a name="55"> </a>the price must cover the cost incurred by the least +profitable of these remaining mines, unless their number +is still further to be diminished. Thus we can conceive +of a "margin of production" which will shift backwards +to more profitable or forwards to include less profitable +mines, according as the demand for coal contracts +or expands. But, wherever this margin may be, there +is no escaping the conclusion that it is the cost of +production of the "marginal mines," of those that is +to say which it is only just worth while to work, to +which the price of coal will approximate. +</p> +<p> +It follows that there is no real connection between +price and cost of production throughout the industry +as a whole. It follows incidentally that those concerns +which can market their coal at an appreciably lower +cost than the marginal concerns, are likely to reap +more than an ordinary rate of profit, though royalties +may absorb part of the excess. +</p> +<p> +§2. <i>The Various Aspects of Marginal Cost</i>. This +relation cuts much deeper than the particular system +under which the mines are at present owned and worked. +If, for instance, we supposed that the various mines +were amalgamated together in a few giant concerns, +each of which comprised some of the richer and some +of the poorer mines, the preceding argument would +need to be recast in form, but its substance would be +unaffected. For though a great coal trust could in a +sense <i>afford</i> to sell at a price lower than the marginal +cost, setting its losses on the poorer against its gains +on the better pits, is it likely it would do so? Why +should it dissipate its profits in this way? It is clearly +<a name="56"> </a>more reasonable to suppose that it would close down +the poorer pits (unless it could advance the price of +coal), and thereby maintain its profits at a higher figure. +If, indeed, the mines were nationalized the deliberate +policy might be pursued of selling coal at a price which +left the industry no more than self-supporting as a +whole. Some coal might thus be sold at less than its +cost price, and the selling price would conform roughly +to the <i>average</i> cost. But such a policy, though in special +circumstances it might be justified, would represent a +very dangerous principle, which could not be applied +widely without the most serious results. Nothing +could be more fatal to any enterprise, whether it be +in the hands of an individual, a joint-stock company, +a State department, or a Guild, than that the management +should content themselves with results which +in the lump seem satisfactory, and regard losses +here or there with an indifferent eye. That way lies +stagnation, waste, progressive inefficiency and ultimate +disaster. To inquire searchingly into every nook and +cranny of the business, to construct, as it were, for +each part a separate balance-sheet of profit and loss, +to expand in those directions where further development +promises good results, and to curtail activity +where loss is already evident, is the very essence of good +management. Here, it will be observed, we are using +language very similar to that in which we described +the principles which govern a business man's expenditure. +The resemblance is inevitable and significant, for +we are dealing here with what is essentially another +aspect of the same thing. The object is to secure that +nowhere does expenditure fail to yield a commensurate +<a name="57"> </a>return. This we express, when we consider a business +in +its aspect as a consumer, by saying that its consumption +of anything will not be carried beyond the point at +which the marginal utility exceeds the price it will +have to pay. When we consider it as a producer, we +say that its production of anything will not be carried +beyond the point at which the marginal cost exceeds +the price it will obtain. +</p> +<p> +§3. <i>The Dangers of Ignoring the Margin</i>. This at least +is the general rule. A business may decide deliberately +to sell part of its output below cost, because, for instance, +this will serve as an advertisement, bring it connections, +and enable it to obtain a larger profit at a later +date, or immediately on other portions of its sales. In +so acting, it recognizes that the price obtained for a +thing may be an inadequate measure of the real return +it yields. In the same way, though for different reasons, +a nationalized coal industry might conceivably be +justified in selling some coal below cost price, because, +let us say, it held that the price which the +immediate purchasers were willing to pay was an +inadequate measure of the utility of coal to the community +as a whole. But in all such cases it is essential +to be very clear as to what exactly you are doing; so +that you may be at least moderately clear as to whether +the policy is well advised. It may be sound enough to +lose on the swings and make good this loss on the +roundabouts, but only if your loss on the swings <i>helps</i> +you to a larger profit on the roundabouts. If you +would get the same return on the roundabouts in any +case, it would be better to cut the swings out altogether. +<a name="58"> </a>So, if you are directing the policy of a +nationalized coal +industry, and decide to make a loss on a portion of +your sales, you will need to know that the indirect +benefit which the community will derive from this +particular part of your coal output is worth the loss +which you incur. You will certainly come to grief, if +you pursue a vague ideal of lumping all results together, +and regarding a profit somewhere as a sufficient excuse +or a positive reason for making a loss elsewhere. +</p> +<p> +It is quite true that in big undertakings, where there +are large standing charges, and where the organization +possesses some of the characteristics of an integral +whole, it is not easy to measure accurately the specific +costs which should be assigned to any particular +portion of the output. But this difficulty is one of the +most serious weaknesses of large undertakings; precise +detailed measurement is the great prophylactic of +business efficiency, and, where it is lacking the bacilli +of waste will enter in and multiply. So clearly is this +recognized, that the development of large scale business +has led to the evolution of new methods of accountancy, +designed to make detailed mensuration possible. We +have most of us heard of them vaguely under such +names as "comparative costings," but too few of us +appreciate their full significance. It is hardly too +much to say that the issue as to whether the size of the +typical business unit will continue to become larger and +larger, or whether it has already overshot the point of +maximum efficiency will turn largely upon the capacity +of accountancy to supply large and complex undertakings +with more accurate instruments of detailed +financial measurement. +</p> +<a name="59"> </a> +<p>§4. <i>A Misinterpretation</i>. The price, then, of a +commodity +tends roughly to equal its marginal cost of +production; and this marginal cost (in perfect symmetry +with what we observed as regards marginal +utility), may be conceived as applying either to the +marginal producer or to the marginal output of any +producer. In the former aspect it is open to a misinterpretation, +against which it will be well to guard. +Some advocates of socialism have argued, as one of the +counts in their indictment of the present industrial +system, that the price of a commodity is determined by +the cost at which the least efficient concern in the +industry can produce. They say, in effect, "Under +the present competitive regime, you have to pay for +everything you buy a price which far exceeds the +necessary cost to a concern which is managed with +ordinary ability. For, as economic theory has shown, +it is the cost of the <i>marginal</i> concern, i.e. the concern +managed by the most incompetent, and half-witted +fellow in the trade; it is the cost incurred by him, +together with a profit on his capital, that the price has +got to cover. The producer of no more than average +capacity is therefore making out of you a surplus profit, +which would be quite unnecessary in any well-arranged +society." Such an argument is a gross caricature of +the marginal conception. The half-witted incompetent +will, as we know well enough, speedily disappear under +the stress of competition, and his place will be taken +by more efficient men. There is an essential difference +between him and the "marginal coal mine" of which +we spoke above. For the probabilities are that of the +coal resources, whose existence is clearly known, the +<a name="60"> </a>more fertile and better situated parts will already +be in +process of exploitation; and there is not likely, therefore, +to be a supply of substantially better seams which +can be substituted for the worst of those in actual use. +There <i>is</i> likely, on the other hand, to be available a +supply of decent business capacity which can be substituted +for the most inefficient of existing business men. +The marginal concern, in other words, must be conceived +as that working under the least advantageous +conditions in respect of the assistance it derives from +the strictly limited resources of nature, but under +average conditions as regards managerial capacity and +human qualities in general. Thus in agriculture we can +speak of a marginal farm, which we should conceive as +the least fertile and worst situated farm which it is just +worth while to cultivate (of which more will be said +when we come to the phenomenon of rent), but we +must assume it to be cultivated by a farmer of average +ability. +</p> +<p> +§5. <i>Some Consequences of a Higher Price Level</i>. The +foregoing controversy will be of service to us, if it +makes clear the manner and the spirit in which the +marginal conception should be handled. It should be +regarded not as a rigid formula which we can apply +to diverse problems without considering the special +features they present, but rather as a signpost which +will enable us to find our way, a compass by which we +may steer between the shoals of triviality and sophistry +to the crux of any problem with which we have to deal. +Let us illustrate its practical uses by an example which +is of great interest and far-reaching practical importance +<a name="61"> </a>at the present day. As has been already observed, +the +war has left behind it in all countries a great and almost +certainly permanent increase in nominal purchasing +power. Since the armistice prices have moved upwards +and downwards with unprecedented violence; and it +would be very rash to prophesy the precise level at +which they will ultimately settle (using that word with +considerable relativity). But, for reasons for which the +reader is referred to Volume II in this series, it is safe +enough to say that the general level of post-war will +greatly exceed that of pre-war prices. Now this will +apply not only to consumers' goods like milk and +clothes, or to raw materials like pig-iron and cotton, +but in very much the same degree to things like +factories and machinery. Things of this last type are +sometimes called "capital goods," because it is in them +that a large part of the capital of a business is embodied. +Now the fact that it will cost much more than it did +before the war to construct fresh capital goods, has a +significance which very few people appreciate. An +existing factory cost, let us say, $500,000 to build and +equip with machinery before the war. To construct a +similar factory to-day would cost, let us assume (it +is probably a moderate assumption) $1,000,000. Suppose +10 per cent to be the gross profit that is necessary +to attract capital to the particular industry. Then it +will not pay to construct this new factory unless the +trade prospects point to the probability of a profit of +about $100,000 per annum. But if the old factory is +equally well managed, it too should be able to earn this +$100,000, which upon the capital actually sunk would +represent a rate of 20 per cent. The particular figures +<a name="62"> </a>given are, of course, purely illustrative; the +conclusion +to which they point is that, if new enterprises +are to be undertaken, pre-war enterprises are likely to +yield a rate of profit, on their fixed capital at least, +increased in rough proportion to the price-level. Of +course, in years when trade is bad, the factory which +dates from pre-war times will not earn a profit of this +kind, it may very likely make an actual loss. At those +times it is very certain that few new factories will be +erected. But it is difficult to reconcile a condition of +trade activity, in which the constructional industries +are busily employed, with a rate of profit to pre-war +businesses on the fixed part of their capital of a lesser +order of magnitude than has been indicated. It makes +no difference, it should be observed, whether we suppose +the new enterprises to take the form of starting of +new concerns or extending old ones; in neither case +will they be undertaken, unless there is reason to +expect an adequate return on the capital which they +require at post-war constructional prices. High profits +(taking always good years together with bad) on capital +sunk before the war in buildings and machinery are +thus a likely consequence of an increase in the price-level. +</p> +<p> +This fact is, indeed, the counterpart or complement +of another phenomenon with which we are more +familiar. While prices are actually rising, profits, as we +have come to recognize, necessarily rule high, because +every trader or manufacturer is constantly in the +position of selling at a higher price-level, stock which +he purchased, or goods made from materials which he +purchased at a lower level. He thus acquires an abnormal +<a name="63"> </a>profit on his circulating capital, which is +essentially similar to the profit on fixed capital, which +we have just examined. The difference is that the +former profit is crowded into the years when prices are +actually on the increase, and thus is very noticeable +indeed; while the latter profit continues to accrue in +smaller instalments after prices have settled down, as +it were, at the higher level, and is not exhausted until +the buildings and machinery have become obsolete. +But the two profits are essentially similar, and in the +long run should be commensurate. In the one case, +stock can be sold for a large profit, because it cannot +be replaced except at a higher price; in the other case, +plant and buildings yield a higher income because <i>they</i> +cannot be replaced except at a higher price. Indeed, +if the owners choose, the plant and building can, like +the stock, be sold at their appreciated value, as has been +widely done by the owners of cotton mills in Great +Britain since the armistice. +</p> +<p> +There is nothing in these considerations that should +surprise us, or even shock our moral sense. For what +they have indicated is an increase of money profits in +rough proportion to the price-level, so that the aggregate +profits will represent about as much real income as +before.[<a href="#63f1">1</a>] The conclusion therefore amounts to no +more +than this, that you cannot alter fundamentally the +distribution of wealth between labor and capital by +merely inflating the currency, or otherwise juggling +<a name="64"> </a>with the price-level. And this is only what we +should +expect, if there are any laws of distribution of sufficient +importance and permanence to justify the many volumes +which have been devoted to them. +</p> +<p class="footnote"> +<a name="63f1">[1]</a> Assuming that the rate of interest has remained +unaltered. +In fact it has greatly increased since pre-war days, and this points +to a still further increase of money profits, and an increase in the +real income which they represent. See Chapter VIII, p. <a href="#138">138</a>. +</p> +<p> +But this somewhat tame conclusion does not make +it any less important to grasp clearly the significance +of the appreciation in the value of capital goods. A +failure to realize it lies at the root of our bewildered +muddling of many crucial problems of the day. In +the matter of housing, for instance, we know we cannot +build houses at less than two or three times their prewar +cost, and yet we cannot endure to see the owners +of pre-war houses obtaining a commensurate increase +of rent. And so, in Great Britain, we pass Rent Restriction +Acts, and Housing Acts, and then, in a fit of +economy we suspend the latter, and let the former +stand, while the housing shortage becomes steadily more +acute. When we hand the railways back from State +control to private hands, our horror at the idea of the +companies receiving larger money profits than they did +before the war leads us to lay down principles for the +fixing of fares and freight charges, which take no +account of post-war construction costs; and then, in +alarm lest we may have thereby made it unprofitable +for the companies to spend a single penny of fresh +capital upon further development, we seek to provide +for capital expenditure by cumbrous and dubious +expedients. Doubtless we shall muddle through somehow +with such policies: and, public opinion being what +it is, they may perhaps have been about the best +policies that were practicable. But the problems would +have been easier to handle, if the public generally were +<a name="65"> </a>a little less disposed to think in terms of +averages, and +a little more in terms of margins, if we all of us instinctively +realized that the cost that really matters is the +cost at which additional production is profitable under +the conditions ruling at the time, or in the immediate +future. +</p> +<p> +§6. <i>General Relation between Price, Utility and Cost</i>. +Let us conclude this chapter by summing up the conclusions +which have emerged as to the relations of +utility and cost to price. +</p> +<p> +The price of a commodity is determined by the conditions +of both supply and demand; and neither can +logically be said to be the superior influence, though +it may sometimes be convenient to concentrate our +attention on one or other of them. The chief factor on +which the conditions of demand depend is the utility +(as measured in terms of money). The chief factor +on which the conditions of supply depend is the cost +of production (again as measured in terms of money). +The prevailing trend towards an equilibrium of demand +and supply can thus be expressed as follows:— +</p> +<div class="law"> +VI. A commodity tends to be produced on a scale +at which its marginal cost of production is +equal to its marginal utility, as measured in +terms of money, and both are equal to its +price. +</div> +<a name="66"> </a> +<a name="Chapter_V"></a> +<h3 class="chap_head">Chapter V</h3> +<h3 class="chap_name">Joint Demand and Supply</h3> +<p> +§1. <i>Marginal Cost under Joint Supply</i>. Several references +have been made above to joint products, a relation +which it will be convenient now to describe as that +of Joint Supply. Our sense of symmetry should make +us look for a parallel relation on the side of demand; and +it is not far to seek. There is a "joint demand" for +carriages and horses, for golf clubs and golf balls, for +pens and ink, for the many groups of things which we +use together in ordinary life. But the most important +instances of Joint Demand are to be found when we pass +from consumers' to producers' goods. There, indeed, +Joint Demand is the universal rule. Iron ore, coal and +the services of many grades of operatives are all jointly +demanded for the production of steel; wool, textile +machinery and again the services of many operatives +are jointly demanded for the production of woollen +goods (to mention in each case only a few things out +of a very extensive list). Now we have already noted +that, when commodities are jointly supplied, there is +an obvious difficulty in allocating to each of them its +proper share of the joint cost of production. There is +a similar difficulty in estimating the utility of a commodity +which is demanded jointly with others. Thus, +the utility of wool is derived from that of the woollen +goods which it helps to make. But the utility of the +factories, the machinery and the operatives employed in +the woollen and worsted industries is derived from precisely +<a name="67"> </a>the same source. How much, then, of the utility of +woollen goods should be attributed to the wool and how +much to the textile machinery? Can we make any sense +of the notion of utility as applying to one of these things, +taken by itself? And, if not, how can we explain the +price of a thing like wool in terms of utility and cost, +since we cannot disentangle its cost from that of mutton, +nor its utility from that of a great variety of other things? +</p> +<p> +Here the conception of the margin enables us to +grapple with a problem which would otherwise be +insoluble. For, while it is impossible to separate out +the total utility and cost of wool, it is not impossible +to disentangle its marginal utility and its marginal cost. +The proportion in which wool and mutton are supplied +cannot be radically transformed; but it can be varied +within certain limits, by rearing, for instance, a different +breed of sheep. Variations of this kind have been an +important feature of the economic history of Australasia, +where sheep farming is the leading industry. Before +the days of cold storage, Australia and New Zealand +could not export their mutton to European markets, +though they could export their wool. Wool was accordingly +much the most valuable product; the mutton was +sold in the home markets, where, the supply being very +plentiful, the price was very low. In the circumstances, +the Australasian farmers naturally concentrated on +breeding a variety of sheep whose wool-yielding were +superior to their mutton-yielding qualities. The +development of the arts of refrigeration led in the +eighties to an important change. It became possible to +obtain relatively high prices for frozen mutton in overseas +markets. There was, therefore, a marked tendency, +<a name="68"> </a>especially in New Zealand, to substitute, for the +merino, +the crossbred sheep which yields a larger quantity of +mutton and a smaller quantity of wool of poorer quality. +Now if we calculate the cost of maintaining the number +of merino sheep which will yield a given quantity of +wool, and calculate the cost of maintaining the larger +number of crossbred sheep which will be required to +yield the <i>same</i> quantity of wool (allowing for differences +of quality) the extra cost which would be incurred in the +latter case must be attributed entirely to the extra +mutton that would be obtained. This extra cost we can +regard as constituting the marginal cost of mutton. +So long as this marginal cost falls short of the price +of mutton, it will be profitable to extend further the +substitution of crossbred for merino sheep. The process +of substitution will in fact be continued until we reach +the point at which the marginal cost is about equal to +the price. Similarly by starting with the numbers of +merino and crossbred sheep which would yield the same +quantity of mutton, we can calculate the marginal cost +of wool; and again the tendency will be for this marginal +cost to be equal to the price.[<a href="#68f1">1</a>] +</p> +<div class="footnote"> +<p><a name="68f1">[1]</a> It may be found difficult to grasp this point +when stated +in +general terms. The following arithmetical example may make it +plainer:— +</p> +<p> +Suppose a merino sheep yields 9 units of mutton and 10 units of +wool. +</p> +<p> +Suppose a crossbred sheep yields 10 units of mutton and 8 units +of wool. +</p> +<p> +Suppose, further, that a merino sheep and a crossbred sheep +each cost the same sum, say, for convenience, £10, to rear and +maintain; and that there are no special costs assignable to the +wool and the mutton respectively, as, of course, in fact there are. +</p> +<p> +Then 10 merino sheep, yielding 90 units of mutton + 100 units<a + name="69"> </a>of wool, cost £100; while 9 crossbred sheep, +yielding 90 units of +mutton + 72 units of wool, cost £90. +</p> +<p> +Hence you could obtain an extra 28 units of wool for an extra +cost of £10, by maintaining 10 merino sheep rather than 9 +crossbred +sheep. The marginal cost of wool is thus £ 10/28 per unit. +</p> +<p> +Similarly 8 merino sheep, yielding 72 units of mutton + 80 units +of wool, cost £80; while 10 crossbred sheep, yielding 100 units +of +mutton + 80 units of wool, cost £100. +</p> +<p> +Hence you could obtain an extra 28 units of mutton for an extra +cost of £20, by maintaining 10 crossbred sheep in place of 8 +merinos. +The marginal cost of mutton is thus £ 20/28 per unit. +</p> +<p> +So long as the price obtainable for wool exceeds £ 10/28, and +that +obtainable for mutton does not exceed £ 20/28 per unit, it will +pay to +substitute merino for crossbred; and conversely. If the price of +wool exceeds £ 10/28 and the price of mutton also exceeds £ +20/28, it will +be profitable to expand the supply of both breeds, until as the +result of the increased supply, one of the above conditions ceases +to obtain. Conversely, if the prices of both products are less than +the figures indicated, sheep farming of both kinds will be restricted. +The resultant of the processes of expansion or restriction, +and substitution, will be that, unless one of the breeds is +eliminated, the prices of mutton and wool will equal their respective +marginal costs. These marginal costs may, of course, alter +as the process of substitution extends. For the relative cost of +maintaining merinos and crossbreds will not be the same for +every farmer. Here again it is the costs at the "margin of +substitution" +that matter. +</p> +</div> +<p> +§2. <i>Marginal Utility under Joint Demand</i>. On the side +of demand there exist as a rule similar possibilities of +variation. <i>Some</i> machinery, <i>some</i> labor, <i>some</i> +materials +of various kinds, are all indispensable in the production +of any manufactured commodity. But the proportions +in which these factors are combined together can +be varied, and are frequently varied in practice as the +result of the ceaseless pursuit of economy by business +men. To produce pig-iron, you need both coal and +iron ore; but, if coal becomes more costly, it is possible +to economize its use. Machinery and labor must be +<a name="70"> </a>used together, in some cases in proportions which +are +absolutely fixed. But there is in nearly every industry +a debated question as to whether the introduction of +some further labor-saving machine would be worth +while, or some improved machine which would represent +the substitution of more capital plus less labor for less +capital plus more labor. A farmer can cultivate his +land, to use a common expression, more intensively or +less intensively; in other words, he can apply larger +or smaller quantities of capital and labor (the proportion +between which he can also vary) to the same +amount of land. The problem is essentially the same as +that of the substitution of the crossbred for the merino. +We can take the various possible combinations of the +factors of production, and contrast two cases in which +different quantities of one factor are employed, together +with equal quantities of the others. The extra product +which will be yielded in the case in which the larger +quantity of the varying factor is employed can then be +regarded as the marginal product (or marginal utility) +of the extra quantity of that factor; and we can say +that the employment of this factor will be pushed +forward to the point where this marginal product +will be roughly equal to the price that must be paid +for it. We can thus lay down the most important +proposition that the relation between marginal utility +and price holds good generally of the ultimate agents +of production; that the rent of land, the wages of +labor, and, we can even add, the profits of capital tend +to equal their (derived) marginal utilities, or, as it is +sometimes expressed, their marginal net products. +</p> +<p> +Whenever, therefore, the proportions in which two or +<a name="71"> </a>more things are produced or used together can be +varied, the relations of joint supply and joint demand +are perfectly consistent with a specific marginal cost +and marginal utility for each commodity. +</p> +<p> +§3. <i>A contrast between Cotton and Cotton-seed, and +Wool and Mutton</i>. But it sometimes happens that such +variations cannot be made. Thus, it has not been +found possible (so far as I am aware) to alter the +proportions in which cotton lint and cotton-seed are +yielded by the cotton plant. Roughly speaking, you +get about 2 pounds of cotton-seed for every 1 pound of +cotton lint (or raw cotton), and though this proportion +may vary somewhat from plantation to plantation, it is +upon the knees of the gods, and not upon the will of the +planter that the variation depends. We cannot, therefore, +speak with accuracy of the separate marginal costs +of raw cotton and cotton-seed. It is true that some +plantations are so far distant from any seed-crushing +mill that it is not worth while to sell the seed as a +commercial product; and it might seem, therefore, +as though we might regard the entire costs of cotton +growing on <i>such</i> plantations as constituting the marginal +costs of raw cotton. But planters, so situated, +derive a considerable value from their cotton-seed by +using it as fodder for their live stock or as a manure. +You can, of course, argue that proper allowance is +automatically made for this factor, as a deduction from +the costs of raw cotton, when you add up the expenses +of the plantation. In the same way you can deduct the +price which a planter who sells his cotton-seed obtains +for it, from the total costs of the plantation, and call the +<a name="72"> </a>remainder the costs of the raw cotton. But this is +really to reason in a circle. For in either case the +magnitude of the deduction depends on the marginal +utility of the cotton-seed. And the notion of the cost +of anything becomes blurred and blunted if we so use +it that it must be deduced from the utility of something +else, which is not an agent in the production of the +thing in question. +</p> +<p> +This point is not merely an academic one. It means +that we cannot explain the <i>relative</i> prices of cotton +lint and cotton-seed in terms of cost at all, whether +marginal or otherwise. The influence of cost will be +confined to the <i>sum</i> of the prices of the two things. +Upon this sum it will exert precisely the same influence +as it exerts upon price in general, by affecting the total +quantities of the two things that will be supplied. But +upon the distribution of this sum between lint and +seed, cost will exert no influence whatever, because it +cannot affect the proportions in which they are supplied. +It may assist some readers if I state the matter in more +concrete terms. Cost of production will be one of the +factors which will result in the production of an annual +cotton crop in the United States of, let us say, 10 million +tons of seed cotton. This crop will yield roughly 6-2/3 +million tons of cotton-seed, and 3-1/3 million tons (or +rather more than 13 million bales) of lint. The combined +price received by the planter of (let us say) 14.4 +cents for 1 pound of lint plus 2 pounds of seed should +correspond roughly to the marginal joint costs of production. +But the factor of cost has no influence at all +in determining that this combined price is made up of +a price of 12 cents per pound for lint, and only 1.2 cents +<a name="73"> </a>per pound (or $24 per ton) for cotton-seed. To +account +for this we must rely entirely upon demand. We can +say, shortly, that the respective prices must be such as +will enable the demand to carry off 6-2/3 million tons +of seed, and 3-1/3 million tons of raw cotton. Or we +can go further and say that the marginal utility of a +pound of raw cotton, when 3-1/3 million tons are supplied, +is ten times as great as that of a pound of seed +when 6-2/3 million tons are supplied. +</p> +<p> +If accordingly the demand for cotton-seed were to +expand considerably owing, say, to the discovery of +some new use for the oil, which is its most valuable constituent; +the effect would be first a rise in the price of +cotton-seed, and, subsequently, by stimulating cotton +growing, a more plentiful supply and a lower price for +raw cotton. And so far at least as the increased supply +is concerned, this must necessarily be the effect, "other +things being equal"; though, to be sure, it might be +outweighed and obscured by other influences such as the +boll-weevil. But it is <i>not</i> the case that an increased +demand for mutton must necessarily increase the supply +or lower the price of wool; and it is most unlikely +to do so in any similar degree. For, here, the separate +marginal costs of the two things exert their influence. +An increased demand for mutton will stimulate sheep +farming, but it will also stimulate the substitution of +crossbred for merino breeds; and the resultant of these +two opposite tendencies upon the supply of wool is +logically indeterminate. As a matter of history we know +that the development of cold storage in the eighties +(which we may regard for the present purpose as equivalent +to an increased demand for Australian mutton) +<a name="74"> </a>caused considerable perturbation in the woollen and +worsted industries of Yorkshire. They were faced with +a dwindling supply and a soaring price of merino wool; +and the adaptability with which they met the situation, +and won prestige for the crossbred tops, and yarns and +fabrics, to which they largely turned is a matter of +just pride in the trade to-day. The fact, however, that +this alteration in the supply of wool was a matter not +only of quantity but of quality, while it takes nothing +from the substance of the preceding argument, makes +it difficult to draw a clear moral, bearing on the present +issue, from this incursion into history. +</p> +<p> +§4. <i>The Importance of being Unimportant</i>. The above +contrast between cases in which variation is possible, +and those in which it is not possible, is reproduced with +a heightened significance when we turn back to joint +demand. The cases are perhaps less common in which +it is <i>impossible</i> to alter the proportions in which different +commodities are jointly demanded, but there are many +cases in which it is not nearly worth while to do so +(and this amounts to very much the same thing). +Cases of this sort are especially likely to occur when we +are dealing with a commodity which accounts for only +a tiny fraction of the costs of the industry which is its +chief consumer. Sewing cotton, for example, is jointly +demanded, with many other things, by the tailoring +and other clothing trades; but the money which these +trades spend on sewing cotton is so small a part of +their total expenditure, that no ordinary variation in +its price is likely to make it worth while to study the +ways and means of using it in smaller quantities. When +<a name="75"> </a>sewing cotton is bought by the domestic consumer, +considerations which are fundamentally the same, +though somewhat different in form, point to a similar +conclusion. It is thus very difficult to assign to sewing +cotton a specific marginal utility. This difficulty is of +great importance in connection with the possibilities +of monopolistic exploitation. For it means that the +demand blade of the scissors upon which we rely to cut +off excrescences of price is blunted, and if accordingly +the producers constitute a strong enough combination +to control the supply blade, they will possess an unusual +power of advancing their selling prices as they choose. +I am far from suggesting that Messrs. J. & P. Coats +are to be condemned as an extortionate monopoly. +On the contrary, during 1919, when the profits in highly +competitive industries like the main branches of the +cotton and woollen trades, soared exuberantly, the +record of this concern seems to me one of distinct +moderation. But the present point is that they possess +an exceptional <i>power</i> to fix the price of sewing cotton +as they choose, and that this is attributable in no small +degree to the fact that sewing cotton constitutes an +essential but relatively trifling item in the expenses of +the processes in which it is employed. +</p> +<p> +Perhaps the point will be made clearer if we turn +from the selling prices of commercial products, in regard +to which there is a strong and not ineffective public +sentiment against "profiteering," to the remuneration +of different classes of labor. With an instinctive disposition +towards megalomania, it is often claimed in +Great Britain that the miners, being a very numerous +and well-organized body of workpeople, were in a +<a name="76"> </a>stronger strategic position than most workpeople +for exacting the remuneration they desire. It is +quite true that a stoppage of work in the coal industry +causes us a high degree of inconvenience, +and temporary concessions may thereby be obtained +which might otherwise have been refused. But this +is a dubious advantage, and we grossly exaggerate +its real importance. The truth is that the strategic +position of the miners in regard to wages questions is +by no means strong. For their wages constitute a very +large percentage of the cost of coal; and the price of coal +in its turn is a most important element in the costs of +many of the industries which are its principal consumers. +Great Britain, moreover, is far from possessing +a monopoly of coal. If, accordingly, the wages of the +miners are temporarily pushed up to a high point, the +result will certainly be a diminished demand for British +coal, which will lead before long to their fighting a losing +battle to maintain the concessions they have won. +Contrast their position with that of the steel smelters, +whose wages (high though the wage rates are) constitute +a very small percentage of the costs of steel production, +and we must agree I think that we have in this distinction +the main reason why the steel smelters, though +they hardly ever go on strike, have as a rule been +able to do so much better for themselves than the +miners. +</p> +<p> +When a commodity or service is such that an appreciable +alteration in its price has only a slight effect upon +the quantity demanded, the demand is said to be +<i>inelastic</i>. Conversely, when a small change in price +greatly alters the quantity demanded, we call the +<a name="77"> </a>demand <i>elastic</i>. In the former case, it is +worth nothing, +a larger aggregate sum of money will be spent upon the +thing when its price is high than when it is low, while +the opposite is true in the latter case. This distinction +is of considerable importance in connection with many +problems (e.g. of taxation); and the terms, elastic +demand and inelastic demand, are worth remembering. +We may thus express the above conclusions by saying +that the demand for sewing-cotton is highly inelastic, +and that the demand for coal miners is more elastic than +that for steel smelters. +</p> +<p> +§5. <i>Capital and Labor</i>. Cases in which it is impracticable +to make any variation in the proportions in +which different things are used together are, however, +the exception rather than the rule. Where variation +is possible, we are confronted with an uncertainty as to +the way in which an increased supply of one thing will +react on the demand for another, similar to our uncertainty +as to whether an increased demand for mutton +would augment or diminish the supply of wool. It is, +for instance, of the highest importance to give a clear +answer, if we can, to the question whether an increased +supply of capital will increase the demand for labor. +The chief effect of an increased supply of capital is to +facilitate the extended use of expensive machines: to +some extent these machines will increase the demand +for labor; to some extent they will be substituted for +it. Which of these two tendencies will outweigh the +other we cannot be absolutely sure. But fortunately +we can be far more nearly sure than was possible in the +analogous case of wool and mutton. An increase in the +<a name="78"> </a>supply of capital increases the demand for the +commodities, +from which the demand for labor is derived, +in both the senses discussed in Chapter II. First it +makes them cheaper to buy, and thus increases the +quantity that will be bought. It is this that is parallel +to the effect of an increased demand for mutton in +making it more profitable to breed sheep. But it also +serves to increase the purchasing power with which to +buy commodities, because it increases the aggregate +real wealth of the community, and it thus serves to +raise the whole demand curve. This last consideration +is so important as to make it overwhelmingly probable, +apart from the evidence of history, that an increase in +the supply of capital (and the same may be said of an +increase in the supply of the other agents of production) +will on balance increase the demand for labor. The +evidence of history points to the same conclusion. The +history of the last hundred years displays an unprecedented +accumulation of capital, and an unprecedented +extension of machinery, associated with an unprecedented +improvement in the standard of living throughout +the whole community. This is powerful testimony +in favor of the view that an increase in the supply of +capital and the use of machinery will usually enhance on +balance the demand for labor. Moreover, though this +is not conclusive, there is little room for doubt that an +obstructive attitude towards the extension of machinery +in a particular country, or a particular district, is misguided. +For its effect must be to make production +more costly there than it is elsewhere, and to lead, +slowly perhaps, but very surely, to the transference of +the industry to other regions. +</p> +<a name="79"> </a> +<p>§6. <i>Conclusions as to Joint Supply and Joint Demand</i>. +Here, however, we are beginning to digress. Let us +sum up in a general form our conclusions as to the way +in which changes in the supply or demand of a commodity +react upon the demand or supply of the other things +with which it is jointly demanded or supplied. Everything +turns, as we have seen, on the possibility of +variation in the proportions in which the things are +used or produced together; and this, it is also clear, +is a matter of degree. Our conclusions, therefore, had +best take the following form:— +</p> +<div class="law"> +VII. When two or more things are jointly demanded, +in proportions which cannot easily be varied, the +tendency will be for an increase (or decrease) in the supply of +one of them to increase (or decrease) the demand for the others. +These results will be more certain, and more marked, the more +difficult it is to vary the proportions in which the things are used. +<br> +<br> +Similarly, when two or more things are jointly +supplied, in proportions which cannot easily be varied, the +tendency will be for an increase (or decrease) in the demand +for one of them to increase (or decrease) the supply of +the others. These results again will be more certain and more +marked, the more difficult it is to vary the proportions in +which the things are supplied. +</div> +<p> +§7. <i>Composite Supply and Composite Demand</i>. Joint +Demand and Joint Supply do not complete the list of +<a name="80"> </a>relations between the demand and supply of different +things. Between tea and coffee, or beef and mutton +there is a relation of a different kind. These things are +in large measure what we call "substitutes" for one +another. An increased supply, and a lower price of +mutton, will probably induce us to consume less beef. +This relation it is convenient to describe as Composite +Supply. Beef and mutton make up a composite supply +of meat; tea and coffee a composite supply of a certain +type of beverage. For any group of things, between +which the relation of Composite Supply exists, we can +say, with complete generality, that an increased supply +of one of them will tend to diminish the demand for +the others. Parallel to the relation of Composite +Supply is that of Composite Demand. There are frequently +several alternative uses in which a commodity +or service can be employed; and these alternative uses +make up a composite demand for the thing in question. +Thus railways, gasworks, private households and a +great variety of industries contribute to a Composite +Demand for coal. It is worth noting that there is frequently +an association in practice between Joint Demand +and Composite Supply on the one hand; and between +Joint Supply and Composite Demand on the +other. Wool and mutton, for instance, we have described +as an instance of Joint Supply; but, in so far as +the proportions of wool and mutton can be varied, we +can regard these things as constituting a Composite +Demand for sheep. And this conception may help us +to retain a clearer and more orderly picture of the problems +we have discussed above. We can regard the fact +that wool and mutton are produced together as their +<a name="81"> </a>Joint Supply aspect, and the fact that these +proportions +can be varied as their Composite Demand aspect; and +the question as to whether an increased demand for +mutton will increase the supply of wool turns upon +whether the former aspect is more important than +the latter. Similarly labor and machinery, employed +together for the same purpose, form an instance of +Joint Demand; but in so far as they can be substituted +for one another, they constitute a Composite Supply of +alternative agents of production. +</p> +<p> +These four relations of Joint Demand, Joint Supply, +Composite Demand and Composite Supply are well +worth remembering and distinguishing from one +another. They are of immense importance in every +branch of economic affairs. There are hardly any +economic problems upon which we are fitted to express +an opinion, unless we have a lively sense of the far-reaching +ramifications of cause and consequence, of the +subtle and often unexpected interconnections between +different industries and different markets. To gape at +these complexities in a confused stupor is as foolish as +it is to ignore them. But confusion and stupor are only +too likely to represent our final state of mind, if we +attempt to deal with these complications, one by one +as they occur to us, in a piecemeal and haphazard +fashion. We need a clear method, a systematic plan +by which we may search them out, and fit them into +place. The four relations which we have enumerated +supply us with such a plan and method. For they +represent something more than a series of pompous +names for familiar notions. They constitute a classification +of the various ways in which the demand and +<a name="82"> </a>supply of one thing can affect the demand and supply +of +others; a classification which is exhaustive when we +add the relation of derived demand, and an analogous +relation on the supply side which we must now notice. +</p> +<p> +§8. <i>Ultimate Real Costs</i>. Just as the utility of +"producers' +goods" is derived from that of the "consumers' +goods" which they help to make; so the +cost of any commodity is derived from the cost of the +things which help to make it. Moreover, just as we +recognize that the utility of "consumers' goods" lies +at the back of all demand, and constitutes the ultimate +end of all production; so we cannot but feel, however +obscurely, that behind the phenomena of money costs, +there must lie certain ultimate costs, of which all money +costs are but the measure. But when we try to explain +what the nature of these real costs may be, we are +plunged in difficulty. Wages, it may indeed seem at +first sight, present no trouble. There is the effort +and the fatigue, the unpleasantness of human labor, to +represent real costs. But can we suppose that these +things are measured with any approach to accuracy by +the wages which are paid in actual fact? Is it true, +even as a broad general rule, that the services which are +most arduous and most disagreeable command the +highest price? And wages are not the only ingredient +of money costs. There are profits: to what real costs +do profits correspond? More difficult still, to what +does rent correspond? These plainly are not questions +upon which he who runs may read. It will be necessary +to devote the next four chapters to their elucidation. +</p> +<a name="83"> </a> +<h3 class="chap_head"><a name="Chapter_VI"></a>Chapter VI</h3> +<h3 class="chap_name">Land</h3> +<p> +§1. <i>The Special Characteristics of Land</i>. In the great +process of co-operation by which the wants of mankind +are supplied, Nature is an indispensable participant. +She renders her assistance in an infinite variety +of ways, of which the properties of the soil which +man cultivates form only one; but the sunshine and +rain which enable the farmer to grow his crops; the +coal and iron ore beneath the surface of the earth, can +be regarded for our present purpose as forming part of +the land with which they are associated. We can +thus concentrate upon land as the representative +of the free gifts of nature, which are of economic +significance. Land in modern communities is for the +most part privately owned. It can be bought and sold +for a price, and acquired by inheritance. Moreover, it +is a common practice, particularly in the United +Kingdom, for an owner who does not wish himself to +cultivate or otherwise use the land, not to sell it to the +man who does, but to lease it to him for a term of years +for an annual payment which we term rent. It is therefore +natural and convenient to envisage the problems, +which we shall consider in this chapter, as problems +concerning the price and rent of land. But, once again, +the laws and principles which we shall state and +illustrate in terms of the current systems of ownership +<a name="84"> </a>and tenure, possess a much deeper significance than +this terminology might suggest. +</p> +<p> +The fact that land is a free gift of Nature distinguishes +it in various ways from commodities which +are produced by man. The peculiarities which are most +important from the economic standpoint are (1) that +the supply of land is, broadly speaking, fixed and +unalterable, and (2) that its quality and value vary, +from piece to piece, with a variation which is immense +in its range, but fairly continuous in its gradation. +These are thus two aspects from which the phenomena +of price and rent can be regarded; aspects which it is +usual to call, (1) the scarcity aspect, (2) the differential +aspect. +</p> +<p> +§2. <i>The Scarcity Aspect</i>. The fact that the supply of +land is fixed has the following significance. If the +demand for land increases, the price will tend to rise. +This is also true, for a short period at least, of an +ordinary commodity. But, in the latter case, there +would ensue an increase in supply which would serve to +check the rise in price, and possibly, if production on a +larger scale led to improved methods of production, +bring the price down eventually below its original level. +In the case of land, no such reaction is possible. There +is nothing, therefore, to restrain the price (and the rent) +of land from rising indefinitely, and without limit, +if the demand for it should continue to increase. Conversely, +if the demand for land falls off, there is nothing +to check the consequent fall in price and rent. In the +case of ordinary commodities, the supply would be +diminished, because most things are either consumed +<a name="85"> </a>by being used, or wear out in the course of time, +and +a regular annual production is therefore necessary to +sustain their supply at the existing level. But land +remains, whether it is used or not; and its supply is, +broadly speaking, just as incapable of being diminished, +as it is of being increased. Changes in the demand for +land in either direction are thus likely to affect its price +in a much greater degree than that in which the price of +an ordinary commodity will be affected by a corresponding +change in its demand. +</p> +<p> +For most purposes, however, it is of more interest +to compare land with other agents of production, +especially with capital and labor, rather than with +ordinary commodities. Now, as we have already +noted, there is some doubt as to the manner in which +the supply of capital or labor is likely to be affected +by alterations in demand price. But the supply of +capital and the supply of labor, even if we suppose +them to be as entirely unresponsive to price changes as +is the supply of land, are at any rate not fixed. Not +only <i>may</i> they vary for many reasons, but they are in +fact likely to vary in direct proportion to the population. +An increase in population implies an increase in the +supply of labor; and it is likely to be accompanied +by an increase in the supply of capital; in other words, +the supply of these agents will expand, as the demand +for them expands. But the supply of land will remain +what it was. This fact is enormously important in +connection with the broad problem of population, which +will form the theme of Volume VI. +</p> +<p> +But it is important also in other connections. It has +been the dominating factor in many absorbing controversies +<a name="86"> </a>upon high policy regarding the ownership of +land, or the taxation of land values, upon which we +can touch but lightly here. It has seemed to many +writers a reasonable proposition to lay down, that the +ordinary course of the progress of society, the increase +of population and industry, must mean, as a broad +general rule, a constant increase in the demand for land. +And, if that be granted, it seems to follow that the +price and rent of land will tend constantly to increase. +John Stuart Mill, accordingly, in the middle of the last +century, asserted that "the ordinary progress of a +society, which increases in wealth, is at all times tending +to augment the incomes of landlords; to give them +both a greater amount and a greater proportion of the +wealth of the community, independently of any trouble +or outlay, incurred by themselves,"[<a href="#86f1">1</a>] and upon the +strength of this assertion, he justified the policy +of imposing a special tax upon what we have come +to call the "unearned increment" of land. But how +far does actual experience bear his assertion out? +In Great Britain we have seen in the last half-century +an undoubted increase in urban rents; but over long +periods at least, there was a marked fall in both the +prices and rents of agricultural land, despite the +fact that the country was "increasing in wealth" +as rapidly as ever before. This was due, of course, in +the main to the increased supplies of wheat and other +foodstuffs coming from the New World: and if, accordingly, +we choose to lump together not only our own +urban and agricultural land, but the land of other +countries as well, and to speak vaguely of the demand +<a name="87"> </a>for land as a whole, it might seem as though we +could +argue that Mill's generalization still holds good. But +even this is by no means certain and in any case such +a generalization is of very little service: what the +illustration should rather suggest to us, is the danger +of speaking of land vaguely as a whole, and the importance +of turning our attention to the variations in value +between different kinds and different pieces. +</p> +<p class="footnote"> +<a name="86f1">[1]</a><i>Principles of Political Economy</i>, by John +Stuart +Mill. +</p> +<p> +§3. <i>The Differential Aspect</i>. Most ordinary commodities +are not produced on a single, uniform pattern. As a +rule there are many variations of grade and quality, +and consequently of price. But these variations are +usually designed to meet the differences of taste among +the purchasers, and we do not expect to find that any +variety of an ordinary commodity will be produced, +which is so poor in quality as to be entirely valueless. +But since it is nature which has produced the land, +without any assistance or guidance from man, there are +many pieces of land which are so unfertile, or are otherwise +so unsuitable for productive purposes, as to be +quite valueless from the economic standpoint. Even +in a densely populated country like Great Britain, there +are considerable tracts of land which it is unprofitable +to employ for any economic purpose whatsoever, and +which possess no further value than what the mere +pride of ownership may give them. This fact makes it +possible to apply the conception of the margin to the +case of land with particularly illuminating results. +</p> +<p> +In the first place, however, it should be observed +that the value of any piece of land does not depend +solely on the intrinsic fertility of the soil. The fact that +<a name="88"> </a>land is an immobile thing makes its <i>situation</i> +a factor of +great importance. In the case of urban land, situation +is, of course, the only thing that counts. The value of +a site in Bond Street or the City is entirely unaffected +by its capacity or incapacity for potato-growing +purposes. But even for agricultural land, situation is a +most important matter. A farm, which is so remote +that considerable transport charges must be incurred +to bring its produce to market, will be less sought after, +and less valuable, than one which is much better +situated though somewhat less fertile. In what follows, +therefore, we must speak of the "quality" of a piece +of land in a broad sense to include advantages of +situation, as well as of fertility. Let us now, imagine +the different pieces of land in Great Britain to be +arranged in order of quality, so that we have a long +series, with land of the best quality at one end, and of +the poorest quality at the other. At the latter end, we +will have such land as is found near the top of Snowden +or Ben Nevis, which it clearly does not pay to cultivate +at all. Somewhere, then, between these two extremes, +we shall come to a point where the land is just, but only +just, worth cultivating, or where, to revert to a form +of words we previously employed, it is a matter of <i>doubt</i>, +whether the land is really worth using for a productive +purpose. Such land we can regard as the "marginal +land"; and since the variety of nature is at once +infinite and fairly minutely graduated we shall probably +find that on one side of this margin there is much land +which is only slightly superior, and on the other, much +which is only slightly inferior, to the marginal land +itself. What, then, is likely to be the value and the +<a name="89"> </a>rent of this marginal land, this land which is just +on the +"margin of cultivation"? Some readers may find the +answer startling. The rent of the marginal land will +be nil, because it will not pay to cultivate it, if any +appreciable rent is charged. A piece of land for which +it is worth a tenant's while to pay an appreciable rent, +will not be the marginal land, because there will be land +just slightly inferior to it which it will also pay to +cultivate if a somewhat lower rent is charged. And so +we can pass to poorer and poorer qualities of land, +with an ever diminishing rent, until at the margin of +cultivation the derived utility of the land is negligible +and the rent vanishes. +</p> +<p> +This certainly is a somewhat abstract conception; +but it is by no means so remote from reality as may at +first sight appear. The reader may protest that in the +course of an extensive and varied acquaintance with +landowners, he has not yet run across this peculiar +marginal type, who lets his land for no rent at all. But +there, if his experience is really extensive, I think he +is mistaken. It so happens that the ordinary agricultural +landowner leases out his land, not by itself, but +together with a variety of other things such as farm +buildings, which it costs him a considerable sum of +money to provide. He will not as a rule be willing to +go to this expense, unless he sees his way to obtain for +the farm an annual payment, which represents at least +a fair return on this capital outlay, as big a return as +he could have got, for instance, by investing the +same amount of money in some gilt-edged security. +This annual payment will, it is true, be called rent; +but the significance of this is that what we term rent +<a name="90"> </a>in ordinary life is usually a complex thing, made up +of +two essentially distinct elements, viz. the normal return +on the capital goods supplied together with the land, +and what we may call the "net rent," or the "pure +rent" attributable to the land itself. Now will any +reader make so bold as to say that there is no land under +cultivation, in respect of which this net rent is either nil +or negligible? The landowners will not agree with him. +It is not a question, it should be observed, as to whether +the rent obtained represents more than a fair return on +the purchase price paid for the land; that is quite another +matter. The question is whether the rent obtained +exceeds a fair return on the capital sum spent on the +buildings, etc.; with which every farm must be equipped +to let at all. In fact there are not a few farms where +there is no such excess, and where accordingly there +is no "net rent" or "pure rent" which can be attributed +to the land. +</p> +<p> +The question whether it would be profitable to cultivate +any piece of land, turns upon whether the receipts +which would be obtained by selling the produce +would exceed the costs of cultivation: and under these +costs of cultivation we must include, of course, the +remuneration of the farmer's services. Farmers, like +other people, have to live; and they would not take +on the troublesome job of farming, unless there seemed +a prospect of making a living out of it. The remuneration +of the farmer takes, of course, the form not +of a salary, but of profits: and these profits vary very +much from year to year, and from place to place, and +from man to man. But they are essentially payment +for work done, and an ordinary profit must be regarded +<a name="91"> </a>therefore as part of the necessary costs of farming. +Thus it will not be worth while to cultivate a piece +of land, and the land will in fact lie unused, upon +which a careful farmer might obtain a profit in the +ordinary sense, of no more than $50 or $100 a year. +The marginal land will be land which yields a decent +profit to a decent farmer, as well as a gross rent to the +landowner, sufficient to compensate him for his capital +outlay, but nothing further. +</p> +<p> +What, then, will be the rent of a fertile and well-situated +farm, about which there is no doubt that it is +well worth cultivating? Part of the gross rent which +the landowner receives must again be regarded as +merely a return for the capital expended in equipping +the farm for use; but in this case, there will be a residue +left over, which constitutes the net rent of the land. +The net rent will measure the derived utility of the +land to its occupier, and will in general represent +(very roughly, of course, in practice) the differential +advantage of cultivating the land in question rather +than land on the "margin of cultivation." This differential +advantage may take either, or both, of the forms, +of a larger produce per acre, or a lower cost of production +and marketing. But, in any case, the extra profit, +which, if no rent were charged, a decent farmer could +obtain by cultivating the farm in question, rather than +a marginal farm, will be roughly equal to the net rent +which his landlord can exact from him, if his landlord +so chooses. The landlord may, of course, not choose +to exact a rent as high as this; and as a matter of fact, +in a country like Great Britain landlords often content +themselves with less. The traditions associated +<a name="92"> </a>with the ownership of agricultural land, and with +the +relations between landlord and tenant serve to soften +the edge of economic law, and to subject the rents +which are actually fixed to the control in no small +measure of the general sense of what is fair or customary. +In such cases the landlord makes the farmer +a present, for the time being, of part of the economic +rent. On the other hand, as Irish agrarian history +well illustrates, the landlord may sometimes expropriate +under the name of rent, permanent improvements +which are due to the labors or the expenditure of the +tenant. This is, of course, particularly likely to happen, +whenever it is the custom to leave to the tenant the +obligation of providing the capital equipment of the +farm, which in Great Britain is, for the most part, the +recognized duty of the owner. Again, in the case of +urban land in the South of England, expropriations +of this kind are an essential and well-understood feature +of the leasehold system. The owner grants a +lease for a long period of time, usually ninety-nine +years, for a ground rent, which is notoriously below +the true economic rent of the land, subject to the +condition that the leaseholder must erect upon the +land and keep in good repair certain buildings, which +on expiry of the lease will become the property of the +ground owner. Here the nominal ground rent is only +part of the total rent which is really paid; the ultimate +transference of the buildings representing often the +more important part. There is, in fact, a great variety +of systems of land tenure, some of which are highly +complex, the respective merits of which vary greatly, +and which constitute a most important problem for +<a name="93"> </a>statesmen and legislators. Considerations of this +kind +in no way diminish the importance of the general +analysis of rent, which we are pursuing in the present +chapter. Rather they make it the more important, +because we cannot properly weigh the merits of any +system of land tenure, until we have grasped clearly +the principles governing the rent of land in the purest +form. But certainly we must never forget that the rent +we are discussing may differ very greatly from, though +it will vitally influence, the money payments which +are called rent in actual life. It is the pure economic +rent, the rent which represents the <i>full</i> annual payment +which it would be worth paying to obtain the use +of the land alone, which will measure, as we have said, +the differential advantage of the land in question +over land on the margin of cultivation. +</p> +<p> +A clear grasp of this relation helps us to perceive +that an increase in the prosperity of the community may +sometimes influence rents in an unexpected way. It +all depends on the causes which have given rise to +the increased prosperity. An advance, for instance, +in agricultural science will facilitate a more abundant +supply of foodstuffs; but it will not necessarily increase +the aggregate rents of agricultural land. For if +it takes the form, say, of the discovery of some new +artificial manure, it will very likely facilitate production +on the less fertile soils far more than it will on the more +fertile soils where artificial manures are not so necessary. +It will thus tend to diminish the differential +advantages of working on the more fertile farms, and +their rents will accordingly fall, possibly by much more +in the aggregate than any increase in the rents of the +<a name="94"> </a>farms near the margin of cultivation. The point may, +perhaps, be better understood if we pass from agricultural +to urban land, and ask what would be the effect +on site values of a great improvement in the facilities +of internal transport. Push the case to an extreme, and +suppose passenger transport to become so cheap and +so quick that there ceases to be any advantage in +living in a town so as to be near your place of work. +Urban landlords would no longer be able to obtain the +high rents they now receive for the sites of houses +in or near a town. For most people would prefer to +move out into the country where sites can be obtained +at little more than an agricultural rent. The country +covers so large an area relatively to the towns that +the supply of rural sites would be still very plentiful as +compared with the demand. Their rents would not, +therefore, rise by very much, although the rents of the +housing sites in towns would fall heavily. Of course, +there are other factors to be taken into account before +we could pronounce upon the effect on aggregate rents. +Central sites for shops might, for instance, fetch a +higher rental than before. The purpose of this discussion +is not to generalize but to show the danger of generalizing +about rents in the aggregate, or land as a whole. +</p> +<p> +§4. <i>The Margin of Transference</i>. The last illustration +may serve, however, to remind us of an obvious fact +which we must now take into account. The same +piece of land may be used for a variety of purposes. +It may have been used for growing corn, and later it +may be devoted to the building of houses, or, as at +Slough, to a repair depot for motor vehicles. It need +<a name="95"> </a>hardly be said that the land will, as a general +rule, +be put to the use in which its value is greatest; or to +speak more strictly, in which the biggest rent, or the +biggest selling price can be obtained. But the notion +of the differential advantages which a piece of land +possesses over the marginal land becomes decidedly +more complicated when we take account of this variety +of uses. Let us turn our attention, for instance, to the +sites used for shop and office purposes, and consider +what we can regard as the marginal site in this connection. +Clearly it will not be the marginal land of which +we spoke above, which it only just paid to cultivate, +and which yielded no rent at all. For this will probably +be agricultural land in an out-of-the-way district, +where no one would dream of setting up an office +or a shop. Any site upon which a sane man would contemplate +setting up a shop will certainly possess value +for other purposes, such as house-building. Hence the +marginal site for shopkeeping purposes will not be like +our marginal farm, a site which yields no rent. +</p> +<p> +As regards many pieces of land, there is no doubt +as to the purposes for which they can most profitably +be used. This piece will command a much higher rent +as a shop site than in any other capacity; for that piece +house-building is the obvious employment; for another, +agriculture. But in quite a number of instances there +is considerable uncertainty. It is not clear whether +upon this site it will be better to erect a house or a shop, +or if the latter, what kind of a shop. It is not clear +whether it will pay to use that farm land for a building +scheme; and, within the domain of agriculture, which +of course comprises an immense variety of really different +<a name="96"> </a>*ferent industries, it is often a very moot point +indeed +whether a certain field should be left under grass, or +brought under the plow. Cases of this sort are not phantoms +of the imagination; they emerge on every side as +concrete problems with which some one or other is dealing +every day, and it is these cases which constitute the +marginal land for the purposes of a particular occupation. +The marginal sites for shops are the sites for which +it is only just worth while to pay rents sufficient to entice +them away from houses. And the rent for a site in Bond +Street, or elsewhere, which is so much more suitable for +shop purposes that no alternative use would be worth +considering, will exceed the rent paid for one of these +marginal sites by, roughly speaking, the extra advantage +it possesses for shop purposes. Or will fall short of +it, it may be well to add, to the extent of its comparative +disadvantage. For there may be many such marginal +sites, some of which will fetch low rents, and others +very high rents indeed; the same site being often of +great potential utility for a large variety of occupations. +Between any two occupations there will thus +usually be a <i>margin of transference</i>, which we must conceive +not as a point, but as an irregular line, upon or +near to which there will be many pieces of land, differing +greatly in the rents which they fetch. These variations +of rent will correspond to the differences between +the advantages or derived utilities which the sites +possess for <i>both</i> the occupations in question. The +position of such margins of transference will of course +alter as industrial conditions change, and, when they +alter, the rents of sites which are not near any margin +of transference will be affected also. Thus an increased +<a name="97"> </a>demand for the products of any particular industry +will make it profitable for that industry to offer higher +rents, and thus draw land away from other occupations. +This will have the effect of raising, though +possibly to a very slight extent, the rents of sites which +still remain in other uses; for there will be fewer of +them available; and their derived utilities will consequently +be increased. +</p> +<p> +But here, as everywhere, it is upon the margin that +our attention should be focussed, because it is round +about the margin (wherever it is found) that the +changes are taking place which really matter for society. +When Mr. Mallaby-Deeley buys an estate in Covent +Garden from the Duke of Bedford, the transaction +hardly deserves the degree of public interest it excites. +Nothing has happened which is of material consequence +to anyone except the two gentlemen concerned; the +various sites are still used for the various purposes for +which they were used before; nothing has occurred +that really matters. But when houses are pulled down +for the erection of a cinema, or when a field is diverted +from tillage to pasture, something has happened which +affects for good or ill the interests of the whole community. +Conversion from tillage to pasture represents, +indeed, a tendency which has been very marked in +Great Britain during the last generation, and has +aroused misgivings in many public-spirited observers. +Possibly for a variety of reasons, these misgivings may +be justified; certainly the problem is well worthy of +attention. But when in this way the issue is raised of +tillage versus pasture, it is essential, if we are to discuss +it rationally, that we should envisage it clearly +<a name="98"> </a>as applying only to a limited portion of +agricultural +land, to the portion which lies somewhere near the +margin of transference, as things are now, between +the two forms of agriculture. It might be socially +desirable to bring under the plow a field which the +farmer finds it only <i>slightly</i> more profitable to lease +under grass; but this would be highly improbable +in the case of a field where the balance of argument +to the farmer in favor of pasture is overwhelming. +The position of the margin of transference between +different uses may, in other words, be somewhat out of +place from the social point of view, and it may be +desirable by appeals and propaganda, even conceivably +by the devices of State subsidy and compulsion, +to push it forwards or backwards in greater or less +degree. But it will be necessarily a matter of degree, +and nothing could be more foolish than to speak as +though there was, or could be, some ideal method of +cultivation equally applicable to all lands, without +regard to their climatic and other conditions. Needless +to say, none of the agricultural experts who sometimes +deplore the decline of arable farming are guilty of such +foolishness. But the sense of the diversity of nature +which is very vivid to them may sometimes be lacking in +people who live in towns, and a firm grasp of the marginal +notion may serve best to keep the latter from +forgetting it. +</p> +<p> +§5. <i>The Necessity of Rent</i>. Behind all such detailed +applications there lies a more general consideration +which deserves attention. The way in which the land +of a country is used, the way in which it is apportioned +<a name="99"> </a>between the countless alternative employments that +are +possible, is a most important matter, more important +perhaps than any questions as to the size of the incomes +which particular landowners receive by virtue of their +rights of ownership. How is this apportionment +effected as things are now? The answer is clear: mainly +by the agency of either rent or price. The business +which finds it worth while to offer the highest rent or the +highest price for any piece of land will, as a rule, be +able to command its use. And, with this as the governing +principle, an apportionment is secured between +shops, offices, factories, agriculture, between the immense +variety of different employments covered by +each of these broad headings; not a rigid unvarying +apportionment, but one which constantly changes as +economic circumstances change, and as the margin of +transference between different occupations moves hither +and thither. This apportionment takes place at present +as the result of the independent decisions and bargains +of many private individuals, who are thinking mainly of +their own interests, and not of those of the community. +But this state of affairs might be altered. The land +might be nationalized and allocated to its various uses +by the co-ordinated labors of a great State department, +or some other agency of the collective will. However +improbable such a change, it is perfectly conceivable. +But what is not conceivable is that any State department +should handle the job with a success even approaching +that of the present system, unless it continued +to use, as its main instrument, the criterion of +either rent or price. That a piece of land would yield a +higher rent in one occupation than in any other is not +<a name="100"> </a>conclusive evidence that it is best to devote it to +the +former purpose, but it is very good evidence, and it +should be allowed to prevail unless it is demonstrably +outweighed, as it possibly might often be, by considerations +of a different kind. That it would not be well for +the community to employ land in the city of London for +corn-growing purposes, however desirable might be a +revival of home agriculture, is so obvious that it +may seem to have no bearing on the present issue. +But it is only an extreme indication of the absurd +and wasteful use of our natural resources, which would +grow up slowly but surely, if we dispensed with ideas of +rent and price as sordid irrelevancies, and allocated +our land on the basis of a balancing of the loftiest +arguments of a vague and sentimental character. If +you are prepared for the distribution of land to become +stereotyped, for each piece to continue indefinitely +in its present use, then indeed you might dispense with +rent, as primitive societies very largely do. That would +mean stagnation and, for an industrial country, decay. +But if changes are ever to be contemplated, a simple +quantitative measure is the only safeguard against utter +chaos. Thus rent, like interest, will be found indispensable +as a measure under any efficient system of society, +even if it might not always represent the payment of +sums of money to private individuals. And that is why +the principles governing rent possess, as I indicated at +the outset of this chapter, an importance more fundamental +than our present system of ownership and tenure. +</p> +<p> +§6. <i>The Question of Real Costs</i>. But we must not +forget the preliminary question that started us upon +<a name="101"> </a>our analysis of the agents of production. The rent +which a manufacturer or farmer has to pay for his land +he naturally includes in his cost of production. But +does this money cost to the individual correspond +to, and measure, any real cost to the community as a +whole? Here let us note in the first place that if only +we could disregard the variety of uses to which land is +put, if we could suppose that all industry was agriculture, +and that agriculture was a single industry with a +single product, we could argue that rent does not enter +into marginal costs at all. For we could regard the +marginal producer as the one working on a marginal +farm, whereas we have seen there is no pure rent. The +rent which other producers have to pay would thus +represent merely the destination of the surplus profits +which arise wherever actual costs fall short of marginal +costs. This way of looking at the matter has proved +attractive to some thinkers, not in the least because of a +desire to palliate the effects of landlordism, but because +it fits in so well with our general sense of rent as a +"surplus," and a surplus as something distinct from a +necessary price. But it is clearly illegitimate in an +economic theory which professes "to describe the +facts." The marginal land for many purposes fetches, +as we have seen, a considerable rent; and this rent is +certainly part of the marginal costs and of the necessary +price of the products of the particular industry. The +answer to our question is, however, not now very difficult +to see. Land, greatly as it differs in many respects +from the other agents of production, resembles them in +the very important respect that, being used for one +purpose, it is not available for other purposes, and that +<a name="102"> </a>the productive powers of the community in other +directions +are thereby diminished. This is the real cost to +the community, which attaches to the products of any +industry, in virtue of the land which it occupies; +not any human labors or sacrifices required to produce +the land itself, but the curtailment of the natural +resources available for productive use elsewhere. This +is the real cost of which rent is the money measure, +and generally speaking an accurate measure at the +margin of transference between one occupation and +another. A somewhat fanciful use of the term cost, +this may seem perhaps, one not quite in accordance +with our instinctive sense of what real costs should be. +But possibly the real costs represented by wages and +profits may turn out to be not so very different, and +we had best leave the matter there, until we have +examined the nature of these other costs. +</p> +<p> +§7. <i>Rent and Selling Price</i>. In this chapter we have +spoken mainly of the rent rather than the price of land: +the relation between the two things is fairly obvious +and well understood, but it will be well not to close +the chapter without a brief account of it. The price of +any piece of land is affected by all the considerations on +which its rent depends, but it is also affected by another +factor which has no influence whatever upon rent. +This factor is the rate of interest. The higher the rate +of interest, the higher the return which a man could +obtain by buying gilt-edged securities, the lower will +be the price that he will pay for a piece of land which +yields a given rent. We can express the relation more +precisely by the formula Price = (Rent × 100)/(Rate of Interest), +though +<a name="103"> </a>we must be careful, in applying this formula in +practice +to allow for the possible deviations between the nominal +and the true rent, and similar complications. The +price, it must be observed, is derived in this way from +the rent, not the rent from the price.[<a href="#103f1">1</a>] Rent is +thus +logically the simpler, price the more complex thing. +It is well, therefore, to analyze in the first instance the +principles of rent, if we live in a country where the +practice of leasing land for annual rent is less common +than it is in Great Britain, even if, for whatever reason, +it is the price of land with which we are concerned in +practice. The problem of price contains two distinct +elements which it is not easy to handle when mixed up +together. For the rate of interest represents in itself +an important branch of economics, which will require +a separate chapter to itself. +</p> +<p class="footnote"> +<a name="103f1">[1]</a> In this the rent of land differs fundamentally +from that +of +other things, such as houses. For the price of a house is largely +influenced by the costs of construction of new houses, and should +correspond closely to them in the long run. The same relation +between rent, price and rate of interest will hold good; but the +rents will be affected by changes in the rate of interest, owing to +the reactions of such changes on the supply of houses. +</p> +<a name="104"> </a> +<h3 class="chap_head"><a name="Chapter_VII"></a>Chapter VII</h3> +<h3 class="chap_name">Risk-Bearing and Enterprise</h3> +<p> +§1. <i>Profits and Earnings of Management</i>. The profits +of a business, as they are ordinarily reckoned, whether +for the purposes of income tax or of a balance sheet, +comprise several elements which are fundamentally +distinct. The relative importance of these various +elements varies greatly from one type of business to +another. The profits of a private business include, for +instance, the remuneration of the work of management, +which in the case of a Joint Stock Company is mostly +paid for by salaries or directors' fees. It is to their profit +that farmers, small shopkeepers, and the partners of +a private firm look not merely for a return upon their +capital, but for the reward of their own labors. "Earnings +of Management," as they are usually termed +(though in truth they often cover other and humbler +forms of labor) are thus frequently one of the ingredients +of profits. +</p> +<p> +§2. <i>The Payment for Risk-bearing.</i> There is another +element of great importance about which our ordinary +ideas are apt to be so vague that it will be well to devote +a chapter to its examination. This is the element of +payment for risk, or rather the reward of risk-bearing. +Risk is inherent in all business, as it is inherent in all +life. The vagaries of nature and the vagaries of man +<a name="105"> </a>are alike responsible. The farmer may find his +harvest +ruined by a drought or by a deluge; the coal or the gold, +for the extraction of which you have perhaps set up +an extensive mining plant, may come to an end which +is unexpectedly abrupt. You may put your money +into roller-skating rinks and find that cinemas have +become the rage with the fickle public; sometimes +"the market" may decline for causes which remain +obscure but with consequences which are disagreeably +plain. But while risk is always present in some degree, +the degree varies enormously from one industry to +another. Now, it is obvious enough that in an exceptionally +risky industry, where there is a considerable +possibility that the capital invested will yield no return +at all, the profits of those concerns which succeed +are likely to exceed the rate of interest on gilt-edged +securities. But what is likely to be the magnitude of +this excess? Is risk-taking rewarded if there is any such +excess, however small? Or will it suffice that the gains +and losses should average out to a fair rate of interest +over the whole industry? To enable us to think closely +let us suppose for a moment that we can measure +accurately what the chances are. +</p> +<p> +Suppose, then, that there were a precisely equal +chance of success on the one hand and failure on the +other in any enterprise, failure involving a complete +loss of all the capital invested. Suppose, further, +6 per cent to be at the time a fair return on a perfectly +secure investment. What would be the return which +must be expected from the risky enterprise, in the +event of its succeeding, before it will be undertaken? +The reader may be tempted to answer, 12 per cent. +<a name="106"> </a>But 12 per cent would not suffice. An equal chance +of 12 per cent or nothing, as compared with a certainty +of 6 per cent, does not mean that the risk in the former +case is paid for to the tune of 6 per cent. It means +that it is not paid for at all. In each case what a +mathematician would call the <i>expectation</i> is a return +of 6 per cent. The odds are evenly balanced; in the +long run, over a large number of cases, if the law of +averages works as we assume it does, you would get +just as much from the one type of investment as the +other. Now, risky enterprises will not, as a rule, be +undertaken on terms like these; investors and business +men will not take risks with the odds precisely equal; +they must have them, or believe that they have them, +in their favor. +</p> +<p> +§3. <i>Monte Carlo and Insurance</i>. To assert this is not +to ignore the strength of the appeal which the gambling +instinct makes to many, if not to most of us. The +taste for gambling is, indeed, so deep and widespread +that it would be foolish to leave it out of account in this +connection. It is clear enough that at places like Monte +Carlo people are prepared to have the odds unmistakably +against them, apparently for the sheer pleasure +and exhilaration of taking risks. Moreover, though for +most people play at Monte Carlo represents a mere +holiday indulgence, it would be unsafe to assume that +what appeals to them there will not also appeal to them +in their business affairs. But what exactly is the secret +of the charm of Monte Carlo? It is the great attractive +force of a small chance of a large gain, as compared +with the deterrent force of a large chance of a small loss. +<a name="107"> </a>People will readily pay $5 for one chance in a +hundred +of making no more, perhaps, than $400 or $450. And it +is very likely that this holds good in the world of business. +If, for example, we were to suppose that the promoters +of a new enterprise were confronted with one +chance in fifty of a profit of 50 per cent per annum on +their capital, as against forty-nine chances of a profit of +5 per cent, this might well prove a more attractive prospect +than a certain return of 6 per cent, although the +strict <i>expectation</i> of profit would be smaller in the former +case. But the risks of business enterprise are not +often of this type. They conform more usually to +the opposite type of a large chance of a relatively +small gain, balanced by a small chance of serious +loss or entire failure. Now for almost everyone the +possibility of a great loss will count as a deterrent +(just as the possibility of a great gain may count as +an attraction) for much more than its strict actuarial +value. +</p> +<p> +The truth of this proposition is demonstrated by the +existence of institutions more impressive than Monte +Carlo—the Insurance Companies, which play so large +a part in the economic life of modern times. Every +year, and upon an ever-growing scale, both private +individuals and business concerns pay sums of money, +which reach in the aggregate a colossal sum, as premiums +to insure themselves against loss by Fire, +Shipwreck, Burglary, Death, Death Duties, against +every risk which Insurance Companies will cover. +Now Insurance Companies are not, as we say, in +business for their health. They find their business +profitable, and pay good dividends to their shareholders. +<a name="108"> </a>Moreover, they incur a considerable expenditure on +offices, on clerical staff, on agents, and the like. All +these payments must be defrayed out of the premiums +they receive; so that it is plain that the premiums +greatly exceed the <i>expectation</i> of the risks insured. +The odds are heavily in favor of the Insurance Company—of +that the stupidest person can have no shadow +of doubt. Yet we continue to insure, as private individuals +and as business men, and so far from being +ashamed of our proceedings as a weak and nerveless +folly, which somehow we are unable to resist, we blazon +them forth in the strong accents of conscious pride. +We preach insurance to our neighbors as the core of +self-regarding duty, and, if ever we feel a twinge of +uneasiness, it is lest we, too, may have omitted in some +particular to practice what we preach. +</p> +<p> +The significance of this is unmistakable. Be our +psychology what it may, however deep and irrepressible +our taste for derring-do, however inadequate +the scope which the dull routine of modern life affords +for our adventurous impulses, we are most of us anxious +to avoid the risk of great financial loss. We are very +glad to find someone to take it off our shoulders if we +can; so glad that we are prepared to pay him for the +service, to pay him a sum which covers not only the +actuarial equivalent of the risk, but something substantial +over and above. In this we are entirely rational. +Our conduct is justified by the law of the diminishing +utility of money, which was noted at the end of +Chapter III. It would be plainly foolish, for instance, +to substitute for the certainty of an income of $2500 +per annum an even chance of $5000 or nothing, since +<a name="109"> </a>the utility to us of $5000 is not twice as great as +that +of $2500. +</p> +<p> +The majority of business risks are not of a kind +against which it is possible to insure. Insurance companies +confine themselves to risks which are mainly a +matter of what we call objective rather than subjective +chance, i.e. risks in respect of which knowledge of detailed +facts peculiar to the individual case is of minor +importance. But such knowledge is of paramount importance +in the case of ordinary business risks. If, for +example, a new enterprise is to be undertaken, the special +knowledge and experience which its promoters +possess is a vital factor in determining their estimate of +the risk involved. An outsider with no special knowledge +would necessarily require to estimate the risk far +more highly if we were to form a rational opinion on the +basis of <i>his</i> knowledge. So great, indeed, would be the +risk to him, that we can lay it down as a sound maxim +that people are extremely rash who invest their money +in risky undertakings about which they know very +little. This subjective aspect of business risk has a +significance to which it will be necessary to revert. +</p> +<p> +But, though most business risks are not and cannot +be a matter for premiums and policies, the principle, +which the practice of insurance illustrates, applies none +the less. In the light of their knowledge and experience, +the promoters of a new undertaking must weigh up +the chances of failure and success, though they will not +do so by the precise methods of an actuary. They will +require that any chances of serious loss should be +balanced by such chances of exceptional gain, as would +raise the <i>expectation</i> of profit well above the normal +<a name="110"> </a>return on secure investments. The more risky the +project seems the greater, generally speaking, must +be the <i>expectation</i> of profit required to induce people +to undertake it. +</p> +<p> +If we suppose business men to calculate reasonably, +it follows that the average profits in any industry over +a long period of years, reckoning in the losses of the +concerns which disappear altogether, are likely to be +higher, the more risky is the industry. Such a result +will not, of course, occur in every case. Even when the +calculations are reasonable, they may be entirely falsified +by the event. Moreover, business men may not +calculate reasonably on the information which they +have. But, unless we suppose their judgment to be subject +to a prevailing bias in one direction, i.e. to be unduly +optimistic as a general rule, <i>we</i> should expect, and +in any case <i>they</i> must expect, profits above the ordinary +in a risky industry. +</p> +<p> +This conclusion is sufficiently important. Far too +many people, though they admit it when it is expressly +stated and dismiss it even as a tiresome commonplace, +are apt to neglect it when the occasion for applying +it arises. For example, the great importance to any +industry of good management is generally recognized, +and the consequent desirability of paying adequate +salaries to the managerial staff. The importance +of securing a supply of capital is very widely recognized, +and the practical necessity of paying a fair rate +of interest is thus, however grudgingly, conceded. +But the "residuary profits," as they are called, which +accrue at present to the owners of a business, are denounced +in some quarters in a sweeping fashion, +<a name="111"> </a>which seems to ignore altogether the all-pervading +element of risk. People speak as though you might +appropriately limit profits in every industry to some +uniform percentage on the capital employed, without +making it clear whether you would even be allowed +to make up in good years for the losses incurred in +bad. The effect of introducing any such crude device +into our present industrial system could only be to +paralyze enterprises of an unusually risky kind, which, +so far from being pushed to an excess at present, +are more probably curtailed unduly from the standpoint +of what is socially desirable. Like the fixing of a +low maximum price for a commodity it would cause the +supply to wither up and disappear. +</p> +<p> +§4. <i>Risk under Large-scale Organization</i>. While this +is true of the present economic system, the question +is worth considering whether it represents a fundamental +necessity, whether, for instance, under our world +socialist commonwealth the factor of risk-bearing need +play so important a part as it does in the actual business +world. This question cannot be answered with a +conclusive simplicity; opposing considerations present +themselves, between which it is not easy to strike a +balance. On the one hand, in accordance with the law +of averages gains and losses tend to cancel out over a +large series of transactions, <i>when reasonable calculations +have been made</i>. Thus Insurance Companies, while +they take heavy risks off the shoulders of policy-holders, +incur relatively trifling risks themselves; they can +predict the aggregate sums which they will be called +upon to pay within a small margin of error. In the +<a name="112"> </a>same way it might seem that every enlargement of +the +scale of business would make for an automatic insurance +and a consequent economy of risk; and thus that if all +businesses were comprised in a single financial unit, +gains and losses would cancel out over so wide a range +that the degree of risk remaining would be almost +negligible. +</p> +<p> +This might indeed happen, if business risks were +mainly of that objective kind in which the insurance +companies specialize; for then we could assume that the +chances of success or failure would be estimated reasonably. +But, in fact, most business risks, not being of this +kind, must be estimated by processes of human judgment, +which are very fallible. And here we must take +account of the law of averages in another aspect, +with a different bearing on the argument. When an +industry comprises a large number of separate concerns, +and the decisions accordingly are taken by many men, +acting independently of one another, the errors of +calculation will tend to some extent to cancel one +another out. The undue optimism of one man will be +balanced by the undue pessimism of another; and, if +there is no prevailing bias in either direction, the errors +of judgment will not affect the results for the industry as +a whole. But where the effective decisions are taken +by very few men, the chances are far greater of a preponderating +balance of error in one direction. The +risks dependent on the factor of human judgment tend +therefore to increase. +</p> +<p> +This truth can be illustrated by a phenomenon which +is fairly familiar. It is recognized by intelligent persons +that the risks of speculation in a particular commodity +<a name="113"> </a>market or stock market increase more than +proportionately +to the scale of operations. A man who sets +out as a "bull" upon a small scale can buy without +sending up the price against him in the process, and, if +he decides later that his judgment is mistaken, he can +at any time cut his losses and sell out without much +difficulty. But a "bull" on a very large scale cannot +complete his purchases except at a price which has been +raised in consequence of his own action, and he cannot +count on being able to "unload" at or near the market +price, should he decide to do so. If, accordingly, he +miscalculates, he cannot save himself from serious loss +as a smaller man might do by a prompt discovery of +his error. His difficulties spring from the fundamental +fact that the effects of his calculations are too great to +be offset by those of the different, and often opposite, +calculations of other men. +</p> +<p> +Upon the issue whether a growth in the size of the +business unit is likely to diminish risk, the law of +averages thus cuts both ways. The risks arising from +the element of pure chance are more likely, those arising +from miscalculation are less likely, to cancel out. +Upon these grounds alone, it would be unsafe to conclude +that there would be on balance an economy of risk +under any system of national or world socialism. +</p> +<p> +§5. <i>The Entrepreneur</i>. There remains, however, an aspect +of the problem which is perhaps more important +than those discussed above. It is probable that risks +would be estimated and undertaken more wisely or +less wisely under a different system of society or of +industrial organization? Upon this issue, methods of +<a name="114"> </a>precise analysis are out of place, but we may have +something to learn from the emphatic testimony of +tradition. It has become an axiom of business men +that, while Governments can manage with more or +less competence a safe and routine business like a +Postal Service, their success would be unlikely to prove +conspicuous in undertakings where the element of +risk is great. There, it is said, we owe everything in +the past to the enterprise of individual men (for even +joint-stock companies have not been notable as pioneers) +adventuring their own fortunes in accordance +with their own unfettered judgment. This contention, +however much we may desire to qualify it, has unquestionably +a large measure of truth, and the explanation +is not difficult to discover. For the wise taking +of risks in industrial development of an experimental +character, peculiar conditions and special qualities +are required. First, it is necessary to envisage distinctly +the promising though risky opportunity, and this +calls not infrequently for imagination of a none too +common order. Then it must be studied with insight +and expert knowledge and weighed by processes which +are as much intuitive as intellectual. The reasons for or +against taking a particular business risk are seldom such +as can adequately be expressed in terms of arithmetic, +or even by clear arguments the soundness of which is +proportioned to their logical cogency. The mysterious +faculty of judgment enters in; and from mental processes +which defy analysis there emerge ultimately conviction +and the will to act. But it is precisely here +that Government Departments are apt to fail. It is +here that the individual, who need consult no one but +<a name="115"> </a>himself, has a pull over any form of organization, +where decisions are reached by the method of debate +and agreement among a heterogeneous committee. +Hence it is that we have come to regard exceptional +risk-taking as the peculiar province of individual +enterprise. It is probable that these deficiencies of +corporate organization are tending to diminish, and it +is an interesting question how far it may be found +possible to eliminate them in the future. +</p> +<p> +Meanwhile the above considerations have an important +bearing on the rewards which can often be obtained +from risky enterprises. The number of individuals +who are in a position to envisage a business +opportunity, and to assess with some confidence the +chances of success and failure is very limited. Not only +must they possess special knowledge, ability, imagination, +confidence in their own judgment, and the capacity +to act on it; they must also have at their disposal +considerable financial resources. To combine all these +advantages represents a union of circumstances which +is distinctly rare. The fortunate few, who do combine +them, are thus generally able to extract in the form of +profits a high price for their services, a price which +covers not only the strict reward of risk-bearing, and the +necessary remuneration of their own service, but a +handsome payment for the special qualities and advantages +which have been indicated. Profits, moreover, +may vary between one industry and another, not only +in accordance with the real risk which is entailed, but +with the degree to which the supply of special knowledge, +etc., is scarce or abundant. +</p> +<p> +This consideration goes a long way to explain the +<a name="116"> </a>large fortunes which enterprising business men are +often able to amass. It also throws some much-needed +light upon the functions which such men discharge. +They perform to a large extent the work of management; +they supply capital on what may be a considerable +scale; but it is the taking of business risk which is +perhaps their most characteristic function. It is the +union of these functions which distinguishes them as +an essentially different type from the salaried manager +who has invested his savings in rubber or in oil. In +other languages there is a specific name for the man +who combines all these three functions; in French he +is called an "entrepreneur," in German an "Unternehmer." +It is much to be regretted that in English +we have no clear corresponding word. The word +"capitalist" is not uncommonly employed to do duty +in this connection, but this is a source of much confusion. +For the word is also used, and more appropriately, +to include all investors, whether or not they +are active business men. +</p> +<p> +§6. <i>Risk-taking and Control</i>. But there is an allied +confusion of more importance. We commonly suppose +it to be a leading feature of our present "capitalist +system" that the control of industry rests in the hands +of those who supply the capital. Nor, as a general +statement, is this untrue. But it conceals the essential +point. Strictly speaking, it is risk-taking with +which control is associated. The mere lending of +money carries with it no title to control. Governments +and municipalities concede no such title to the subscribers +to their loans; nor does a company to its debenture +<a name="117"> </a>holders. The shareholders' ultimate control +is based upon the fact that they bear the financial +risks of the concern. Nor is this a matter of mere +legal form. It is not uncommon for ordinary shares to +carry with them a greater voting power than the preference +shares of a corresponding value. The principle +which such arrangements endeavor to express is clear: +control should rest with him who bears the risk. It +is with this principle rather than with a mulish insistence +on the rights of property, that advocates of +"workers' control" and the like have got to reckon. +It is upon this ground that (as they may quite conceivably +do) they must make good their case. +</p> +<p> +§7. <i>General Analysis of Profits.</i> Let us conclude this +chapter by clearing the ground for the next. Earnings +of management, payments for risk-taking and for the +special knowledge and advantages associated with it, +are ingredients of the gross profits of a business. The +chief element that remains is that of interest on capital. +Frequently, indeed, it is not the only one. As we saw in +the last chapter, a farmer may not be required by his +landlord to pay the full economic rent for his farm; +and he may therefore make profits above the normal +level, above the ordinary return for his own services, +his own capital expenditure, and the risks to which +he is necessarily exposed. In such a case the farmer is +really the recipient, as we have already suggested, of +part of the economic rent of the land; and an element +of rent accordingly enters into his gross profits. But +profits may include a surplus element which may arise +in a great variety of other ways. A business may +<a name="118"> </a>possess some decided advantage which is not open to +competitors; and it may reap high profits accordingly. +You can, for instance, if you choose, regard the high +money profits, which, as was suggested in Chapter IV, +are likely to accrue in future to the owners of pre-war +factories, as a surplus profit of this kind. But while, as +this illustration indicates, the phenomenon of surplus +profits becomes of very great importance when we +seek to study the distribution of wealth, it need not +detain us here. For the surplus element arises only +in so far as the costs of a business are lower than the +marginal costs; and it is the marginal costs, which, +with good reason, we are now endeavoring to analyze. +The marginal costs must include a normal profit, i.e. a +profit which will cover earnings of management, the +reward of risk and enterprise, interest on capital, but +nothing further. It remains, then, only to consider +this last element of interest. +</p> +<a name="119"> </a> +<h3 class="chap_head"><a name="Chapter_VIII"></a>Chapter VIII</h3> +<h3 class="chap_name">Capital</h3> +<p> +§1. <i>A Reference to Marx.</i>. Interest is the price paid +simply for the use of capital. But what is capital, and +in what does its use consist? What claim has it to be +regarded as an independent factor of production? Our +very familiarity with the term, our habit of employing +it with the rich looseness of every-day life is an obstacle +to the clearness of thought, which is again +essential. We recognize, most of us, clearly enough +that capital, although we reckon it in terms of money, +consists, like income, of real things; factories, machinery, +materials and the like. It is quite obvious that these +things are of use, are, indeed, indispensable for production; +what more natural than that capital should +command a price? It almost seems as though we might +pass, without further ado, to a detailed discussion of +the forces which determine the amount of this price. +</p> +<p> +But this account does not bring out the essential +point as brief reference to a very famous controversy +will show. Some ingenious writers in the last century, +the most notable of whom was Karl Marx, set out to +prove that, in our modern society, workpeople are +"exploited," robbed of the "whole produce of their +labor," to the full extent of the return which accrues +to capital. The argument was exceedingly complex +in detail; but it boils down to this: The factories and +<a name="120"> </a>machinery which are admittedly essential to +production +were themselves produced in exactly the same way +as consumable goods. They were produced by labor, +working with the assistance of nature, and, again, if +you choose, of capital in the form of further factories, +machinery, etc. But these further capital goods can +in their turn be regarded as the product of labor, +nature and capital; and so we can proceed until it +seems as though the element of capital must disappear +in the last analysis, as though labor and nature were +the sole ultimate agents of production, and the reward +of capital represented no more than the exercise of the +exploiter's power. In one form or another this argument +still dominates the minds of a large proportion of +the so-called "rebels" against the existing social order. +</p> +<p> +If we are to meet this argument, if, which is perhaps +more important, we are to understand the true nature +of capital, we cannot rest content with saying that it +consists of factories and machinery, and that these are +essential to the worker. Just as it was well to get +behind the money terms, in which we often think of +capital, to the real goods; so we have now to get behind +the real goods to something else. What this something +else is, the first chapter may have already done something +to reveal. +</p> +<p> +§2. <i>Waiting for Production.</i> Between production +and consumption there is an interval of time. All +productive processes take time to accomplish. The +farmer must plow the soil and sow the seed months +before he can reap the harvest which will reward him +for his efforts. Meanwhile, he must live, and in order +<a name="121"> </a>that he may live he must consume. If he employs +laborers he must pay them wages, that they too may +consume and live. For both purposes he requires +purchasing power, which represents of course command +over real things; and if he has not sufficient purchasing +power of his own, he must borrow from someone +else who has. In either case it is not enough that the +farmer and his laborers should work; no less essential +is it that someone should <i>wait</i>. The farmer must +wait till he has sold his crops, both for the reward of +his own labor and for the repayment of the wages he +advances in the meantime to his laborers. Or, if he +cannot afford to wait, and borrows in anticipation of +the harvest, then the lender must wait, until the farmer, +having sold his crop, is able to repay him. Thus the +period of time involved in all production gives rise to +a demand for <i>waiting</i>, which someone or other must +supply, if the production is to take place. It is this +waiting which is the essential reality underlying the +phenomena of capital and interest. It is really this +which constitutes an independent factor of production, +distinct from labor and nature, and equally necessary. +</p> +<p> +§3. <i>Waiting for Consumption.</i> But let us carry the +argument a step further. After the farmer has sold +his crops, there are many stages through which they +must pass, at each of which more waiting is required, +before they reach the ultimate consumer. But then the +waiting is at an end. +</p> +<p> +This, however, is by no means the case with a great +number of commodities. Let us take the case of a +speculative builder. While he is building a house he, +<a name="122"> </a>like the farmer, must wait (or find someone to wait +on his behalf), for his own reward, and for the repayment +of his expenditure on wages and materials. But, after +the house is built, if he lets it to a tenant for an annual +rent, his waiting is far from over. Not until many years +have passed will the rent payments add up to a sum +which equals or exceeds his outlay. He may, of course, +sell the house, and thus bring his waiting to an end. +But then the purchaser must wait, no matter whether +or not he is the occupier. For no one would consider +the use of a house for a day, a month, or a year as an +adequate return for the price it cost to buy. The +occupier-owner pays for the prospect of its use for a long +and perhaps indefinite number of years ahead, and he +must wait to enjoy the benefits for which he pays +now in full. Waiting is as inherent in the consumption +of durable things as it is in all production. +</p> +<p> +Now most industries are consumers of durable things +of a very expensive kind. Here we come back to the +factories and machinery which ordinarily spring to our +mind at the mention of the word capital. Not merely +does the construction of these things involve waiting; +their consumption involves waiting on a vastly larger +scale. Just as with a house, many years must elapse +before their derived utility can even approximate to +their purchase price. It is mainly to supply the waiting +involved in the consumption of such durable goods, +that a typical joint-stock company issues shares for +public subscription. The waiting required to cover the +period of time, which its own productive process requires, +is largely supplied by means of bank overdrafts +or other forms of short-period borrowing. More +<a name="123"> </a>strictly, fixed capital represents the waiting +involved in +the consumption of durable things; circulating capital +the waiting involved in current production. +</p> +<p> +This distinction loses its sharpness when we consider +not the affairs of a particular business, but the industrial +system as a whole. Then the period of time involved +in the consumption of durable instruments falls into +place as part of the time required for the production +of the ultimate consumers' goods. We can even, perhaps, +conceive of an "average period of production" for +industry and commerce as a whole; and this conception +is not without its uses. For it serves to bring out the +fact that the period of consumption, and the period of +production in the narrower sense, are only two aspects +of the same fundamental thing, the interval of time +which elapses between work and the utility, which is +its ultimate purpose. It serves, moreover, to make clear +that anything which lengthens this interval of time +increases the demand for waiting, or in other words, +the demand for capital; and, conversely, that anything +which shortens this interval diminishes the demand +for capital. +</p> +<p> +§4. <i>Capital not a Stock of Consumable Goods.</i> But +the distinction between the two forms of waiting, +though not fundamental, is none the less worth noting. +It enables us to keep our theory in conformity with +fact, to look at the phenomenon of capital the right +way up; and it is easy, if we are not careful, to slip +into the habit of looking at it upside down. People +sometimes speak as though the commodities which +constitute our capital, instead of being mainly, as our +<a name="124"> </a>plain sense tells us that they are, factories, +machinery +and other durable instruments, were rather a <i>store</i> or +<i>stock</i> of immediately consumable goods. The argument +takes the following form. It is consumers' goods, +things like food and clothes, which the farmer, the +builder and their workpeople consume while they are +working. To enable them to work, therefore, it is vital +that such things should not in the past have been consumed +as soon as they were made; part of them must +have been saved, and carried forward for future use. +Furthermore, the longer the time that the work on +which people are now engaged takes to yield its product, +the larger must be this store of consumers' goods. For +these products, when they are completed, will serve +(taking society as a whole) to replace the store which in +the meantime is being used up, so that the longer this +replacement takes, the larger must be the initial store. +Conversely, the larger the store of consumers' goods +available, the more distant is the future for which we +can afford to work. It is thus the store or stock of +consumers' goods which represents our real capital; +for it is the magnitude of this store which determines +how far we can devote our energies to purposes which +are remote in time. +</p> +<p> +Now this is pure mysticism. Regarded literally, +it is in direct conflict with the facts. The processes +of industry are fairly regular and continuous. At any +moment, large quantities of consumers' goods of almost +every kind are on the point of completion; at the same +moment equally large quantities are consumed. The +things which we buy were finished, very likely, only +recently; or, if in fact they have lain idle for some +<a name="125"> </a>time in stock, there is nothing essential or at all +helpful +in that fact. It represents rather a defect—a maladjustment +which should be rectified. Even many kinds +of agricultural produce do not need to be carried forward +from one year to another, for they are produced in +many parts of the world, where the seasons come at +different periods of the year. It is conceivable, therefore, +that we might consume all non-durable things +the moment they were ready, and the degree to which +we approximate to this ideal is a mark of the efficiency +of our economic system. A large store of consumable +goods is thus <i>not</i> a fundamental necessity of a prosperous +society. +</p> +<p> +What <i>is</i> necessary is plainly the power to produce +these things in large quantities as they are required. +And this power is furnished by the durable instruments +of production, which we thus rightly regard as the true +representatives of modern capital. If it is argued that +this power to produce consumable goods may be regarded +as being <i>in effect</i> a store of consumable goods, it +must be sternly replied that this is the language of +symbolism, not of science, and that symbolism is highly +dangerous in this connection. The false conception of +capital as essentially a store of consumers' goods has +led and still leads to many serious fallacies. It was +this that gave rise to the notorious doctrine of the +Wages Fund; the notion that the sum which can at any +time be paid in wages is equal to the quantity of capital, +<i>alias</i> consumable goods, which happens to exist. To +this day it blocks, with an undergrowth of obscurantist +controversies, the way to a straightforward account +of the problem of trade cycles. +</p> +<a name="126"> </a> +<p>§5. <i>The Essence of Waiting.</i> But it is with positive +conclusions that we must here concern ourselves. +What is the essence of this waiting, as we have called +it? What are its results from the point of view of the +community? The individual, who saves and lends, +waits in the obvious sense that he postpones consumption. +He foregoes his right to purchase now a quantity +of consumers' goods in consideration of the prospect +of purchasing a larger quantity of such things in the +future. From the standpoint of the whole community, +there is a similar postponement of consumption, though +it need not commence so soon. The store of consumable +goods is what it is: the quantity of goods in <i>process</i> +of manufacture, which will shortly be coming forward, +is also what it is. For some time, therefore, a sudden +access of saving cannot affect the quantity of goods +available for consumption; and if, in fact, they should +be consumed less rapidly, that will represent an unfortunate +defect, not an essential condition of a smoothly +working system. The <i>necessary</i> consequence comes +later. The increased saving will cause labor, materials, +land, agents of production generally, to be devoted +to distant purposes. Men will be set to work producing +durable goods, largely durable instruments of production +like ships or railways or factories or plant. If the +increased saving is considerable, the labor, materials, +etc., required for these purposes will be withdrawn +even under our present system, as under a smoothly +working system they clearly must be, from the production +of other and more immediately consumable +things. Hence, some time later, the supplies of consumable +things will be diminished, while at a later +<a name="127"> </a>period still they will be more than correspondingly +increased as the result of the assistance of the new +durable instruments. That is the essence of saving +from the social standpoint. An early future is sacrificed +to a more remote future. The aggregate consumable +income of the present is unaffected; the aggregate consumable +income of the near future is actually diminished; +it is not until at least some years later that the +aggregate consumable income is increased. +</p> +<p> +§6. <i>Individual and Social Saving.</i> This conclusion +is important: but there is an obvious misinterpretation +against which it will be well to guard. It is +customary for social moralists to preach thrift and +saving as a public duty, and to impart to their appeals +a special note of urgency in times like the present, +when, as the result of the havoc of the war, destitution +is widespread over Europe. Now obviously these advisers +do not mean to recommend something which +will impoverish the world next year and the year after +and the benefit of which will accrue only in a distant +future: it is the immediate urgency of the world's +needs which is rather the substance of their case. Nor +would it be right to conclude that these wise men are +the victims of a delusion, and advocate a course, the +consequence of which they do not understand. The +explanation of the paradox is simple. The more the +community as a whole saves now, the less in the near +future will be the aggregate consumable income of the +whole community: but not of the <i>remainder</i> of the +community, exclusive of the savers. It is the saver +who must wait, whose consumption must be postponed +<a name="128"> </a>to perhaps a distant future; but <i>at no time</i> +does +his saving result in a smaller income of consumable +goods for other people. The aggregate consumable +income of the near future will be diminished, but it +may be better distributed, and it may consist of things +of a different <i>kind</i>. For consumers' goods, we must +remember, comprise champagne and motor cars as +well as food and clothes; and, if a rich man saves, it +may be purely articles of luxury, the production of +which will shortly be diminished. Moreover, if his +saving has the effect of transferring purchasing power +to impoverished people, like those in Central Europe, +it will not be devoted to a distant future; it will very +likely be devoted to quite immediate ends. In other +words, it may not result in any "creation of capital"; +it may not represent any saving on the part of the +community as a whole. A relatively rich man waits, +and a relatively poor man <i>anticipates</i> his income to a +corresponding extent; and it is precisely this that is so +urgently desirable in a time of widespread poverty and +chaos. +</p> +<p> +This is no matter of hair-splitting, and making +plain things obscure. While it is always better for the +<i>rest</i> of us that an individual, who can afford to save, +should save rather than spend (though it might be +better for us still if we could have his money to spend +ourselves) and while this is the more important the +greater is the poverty which generally prevails; yet, +as a community we cannot save so much, we <i>ought</i> +not to save so much, when we are impoverished as +when we are prosperous. It is vital to appreciate this +truth, because, as we shall see, by no means all the +<a name="129"> </a>saving of the world is done by individuals. There +are +many forms of "collective saving," which take place +in actual fact; still more which we are often urged to +undertake. And it is of practical importance to realize +that the very considerations, which call most urgently +for individual thrift, forbid a great indulgence in such +projects. A time of national poverty is not a time +when it is suitable for the State to embark on large +schemes of capital development: we require our resources +for more immediate ends. Faced with such +problems, our practical sense may no doubt suffice to +keep us straight; but it is apt to do so at the expense +of a complete inversion of the real issues. If, for instance, +we call for Governmental retrenchment on +what we deem extravagant policies of housing and +education, we usually speak as though they represented +the profligacy of a spendthrift as contrasted with +the saving that is indispensable. The truth is rather +that these policies represent a saving, an investment for +future purposes, which may conceivably be greater +(this must not be taken as representing my personal +opinion) than the community can properly afford. +This is another instance of what I mean by looking +at the problem of capital the right way up. +</p> +<p> +§7. <i>The Necessity of Interest.</i> It is only now that +we are in a position to appreciate the true functions +of a rate of interest, and the nature of its claims to be +regarded as a "real cost." Interest, it is sometimes +said, is necessary to provide for the future. It is far +more certain that interest is necessary to provide for +the present. It is a matter of legitimate doubt how far +<a name="130"> </a>it is necessary to <i>pay</i> interest to secure a +supply of +capital; there is no doubt at all that it is necessary to +<i>charge</i> interest to limit the demand for it. As we saw in +Chapter I, a world socialist commonwealth would +require to retain a rate of interest, if only as a matter +of bookkeeping, in order to choose between the various +capital undertakings that were technically possible. +And this is the primary function which the fate of +interest fulfils in our present-day society. It separates +the sheep from the goats. It serves as a screen, by +means of which capital projects are sifted, and through +which only those are allowed to pass which will benefit +the future in a high degree. For this essential purpose +it is hard to imagine how a better instrument could be +devised. +</p> +<p> +§8. <i>The Supply of Capital.</i> Let us dwell for a moment +on this image of a screen, or sieve. One condition of a +good sieve is that its meshes should all be of the same +size. This condition the rate of interest almost perfectly +fulfils. But it is also important that the meshes should +be of the <i>right</i> size. Whether this is true of the actual +rate of interest is a far more doubtful matter. It is, +indeed, plain that it is not altogether devoid of merit in +this respect. In times of general world poverty, like +those which follow upon a great war, it is desirable, as +has been argued, that more of our productive resources +should be devoted to immediately useful purposes, and +a smaller portion dedicated to a distant future. This +readjustment the rate of interest helps to bring about. +For it rises to a higher level, and there is accordingly +a strong inducement to all manufacturers and traders +<a name="131"> </a>to economize their use of capital, and thus to set +free +productive resources for more urgent needs. But, +while the meshes of the sieve, as it were, contract in +times when it is desirable that they should contract, +we have no reason for supposing that they will contract +in just the degree that is desired, neither more nor less; +or, indeed, that at any time they approximate to the +right size. We in the twentieth century owe much +of the material wealth that we enjoy to the fact that +over the last century men saved as largely as they +did. But our natural gratitude should not restrain +us from doubting whether they were really well advised +to do so. If we ask the question <i>how</i> they managed to +do so, our doubts are deepened. For first place among +the explanations must be assigned to the inequality +in the then distribution of wealth. It was because +many men in England were rich enough to save that our +railways were built, and the resources of new Continents +were opened up. But England, a century or even half a +century ago, was not really a rich community. And if +the national income in those days had been distributed +more evenly among the people, can we doubt that they +would have spent a far larger proportion of it on +immediate needs; can we doubt that they would have +been right to do so? We may rather doubt, in view +of the reactions of poverty on physical and mental +efficiency, on social harmony, even possibly on population, +whether we to-day would have been really injured +as much as might appear. How, then, can we suppose +that the sum of the amounts which it suits individuals +to save will bear any close relation to the resources +which the community can properly devote to future +<a name="132"> </a>ends? Are we to regard an unjust distribution of +wealth +as a mysterious dispensation of Providence for securing +perfect harmony between the future and the present? +The point need not be labored further. There are no +grounds for assuming that we save, as a community, +even roughly what we ought to save. If we wish to +believe we do, we must turn for support from economics +to theology. +</p> +<p> +It is important to be clear upon this issue in order to +distinguish it from another, with which it sometimes +seems to be confused. This is the question, briefly +outlined in Chapter II, of the effect of changes in the +rate of interest on the supply of capital. As was there +indicated, there are good reasons for supposing that a +fall in the rate of interest would induce some people +to save more, and conversely. But the balance of probability +is in favor of the conclusion that the <i>net</i> effect +of changes in the rate of interest, though perhaps slight, +is usually of the more ordinary kind. The decisive argument +in this connection is the fact, upon which we have +just touched, that savings are supplied largely by people +who are relatively rich, and who become richer when the +rate of interest rises. For at this point it is necessary to +be careful. It is easy to slide from the above conclusion +into an argument of the following kind. A higher +rate of interest leads to more saving; it is thus necessary +to <i>evoke</i> more saving; it is thus required as an <i>incentive</i> +to induce people to incur the <i>sacrifice</i> of waiting; this +sacrifice represents the "real cost" for which interest +is paid. +</p> +<p> +This terminology of incentive, inducement and +sacrifice is of very dubious validity. A rich man, who +<a name="133"> </a>is made richer by a rise in the rate of interest, +will +probably save more, but it will be rather because he +has become richer than because he is tempted by +the higher rate: and the less we talk about his sacrifice +the better. Nor is it clear that the attraction of a high +rate of interest is an operative factor on the mind of a +man to whom saving means a real sacrifice of immediate +comfort or enjoyment. Certainly it is only one among +many factors, and seldom an important one. A really +poor man will think not so much of the annual income +which will accrue from his savings, as of the capital +sum upon which he or his family can fall back if a +rainy day should come. And for this purpose he might +save as much as he saves now, even if there were no +interest to be obtained thereby. He might even be +prepared to lend what he had saved, at least to banks +(a deposit with a bank is in effect a loan), for the mere +advantage of safe custody. The people who save rather +for the sake of the capital sum that can be realized than +for that of the annual interest are very numerous, and +probably include many men in receipt of quite considerable +earned incomes. Moreover, those who consider +mainly the future annual income which their savings +will yield them, are usually more concerned with its +absolute amount than with the ratio it bears to the +amount they must save in order to acquire it. For this +reason, as has been often recognized, they may save +less when the rate of interest rises, since a smaller +quantity of savings will insure to them the future annual +income they desire to obtain. There is no need to +be dogmatic upon any of these points. The psychology +of saving is both complex and obscure. Our conclusion +<a name="134"> </a>must be the negative one that we have insufficient +evidence to warrant the assertion that the particular +rate of interest which happens to prevail is a measure of +the sacrifice involved in saving, even in the case of what +we might regard as the "marginal saving." And, if +we cannot assert this, we must be careful not to assume +it as the basis of other arguments, or as part of a general +analysis of price or exchange value. +</p> +<p> +It is of some interest to observe that the difficulties +which our world socialist commonwealth would encounter +if it attempted to dispense with the rate of +interest, would not necessarily include that of obtaining +a supply of capital. It might, indeed, not find it easy +to determine the proportions in which it should allocate +its productive resources between immediate and distant +ends. Our present system cannot be said to have evolved +satisfactory principles for the solution of this question; +and the socialist commonwealth would have to work +out its own solution. But when it directed that labor +and materials should be devoted to purposes of long-period +utility, there would be an automatic collective +saving, of which no one would be conscious as an +individual sacrifice. Even at the present time, our +capital is not supplied entirely by the savings of individuals, +but to an extent, which though quite incalculable +is yet certainly considerable, by involuntary saving +of an essentially similar type to the above. +</p> +<p> +§9. <i>Involuntary Saving.</i> When a municipality embarks +on a municipal tramways scheme or any other industrial +enterprise, and pays off by means of a sinking-fund +the capital which it borrows in the first instance, the +<a name="135"> </a>proceeding amounts, as the defenders of municipal +trading have rightly claimed, to a compulsory and +unconscious saving on the part of the citizens. Their +consumption has been postponed willy-nilly as the +result of the increased rates or the high charges which +they have had to pay; and, when the subscribers to +the original loan have been paid off, the capital of the +community is enhanced to the extent of that loan. +Central governments might similarly increase the supply +of capital by devoting annual revenue to capital purposes; +though their actual record, as it happens, is +mainly of a different kind. But what is chiefly a possibility +in the case of Governments has actually been +carried out on an enormous scale by other institutions. +The development of the joint-stock company system has +introduced a new factor into the problem of the supply +of capital, which is of immense though but dimly +perceived importance. The directors of a company +are technically no more than the servants of the shareholders. +It is the profit of the shareholders that it +is the directors' duty to promote with a single mind, +and the whole capital of the concern, including its +reserves both open and concealed, is the shareholders' +exclusive property. But realities have a way of differing +from forms, and just as in political affairs it is common +to regard the State as a very different thing to the +people who compose it, as a sublime entity with a separate +existence of its own, so directors are apt to distinguish +between the company and the shareholders. It is +the company to which they owe allegiance. To pay +away in dividends to shareholders money which they +could employ in extending the business or strengthening +<a name="136"> </a>the position of the company appears to some +directors +a necessity hardly less unpleasant than an increased +wages bill, or an Excess Profits Duty. Concessions must +indeed be made to the shareholders' rapacity: but +when something has been done in this direction, dust +can easily be thrown in their not very observant eyes. +Reserves, which within limits are a necessity of sound +finance, can be accumulated beyond those limits, and, +when the further limits of an extreme but just arguable +conservatism have been passed, there remain the +innumerable devices, known to every resourceful +Board, of hidden reserves, the secret of which is unmenaced +by the meager information of a balance-sheet. +In all this the shareholder, as the directors occasionally +assure themselves, has no real grievance, for he will +gain in the long run, from the appreciation in the capital +value of his shares, all and perhaps more than all that +he foregoes in the meantime in the way of dividends. +</p> +<p> +In the long run the shareholder is not injured; but +in the meantime he is in effect compelled, without +any consciousness of the proceeding, to save and to +reinvest in the company a portion of the dividends, +which he might otherwise have spent. The reserves +which are accumulated are not allowed to lie idle: +they are employed either in what are really capital +extensions of the business, or in the purchase of outside +securities, and in either case they represent an increase +in the total supply of capital. The principal which +these proceedings represent is capable of indefinite +extension. +</p> +<p> +But however possible it might be to secure a supply +of capital without the inducement of a rate of interest, +<a name="137"> </a>that rate is indispensable for dealing with the +demand. +It is no good saying, "Three per cent seems a fair rate +of interest; let us try and limit it to that." Given +the amount of savings which are supplied, the rate of +interest must be allowed to reach whatever figure +is necessary to confine the demand to that amount. +Given the quantity of resources which you have available +for future needs, the meshes of the sieve must be +made as narrow as is necessary to confine the projects +that pass through within those limits. And so, indeed, +it becomes necessary for any particular business to pay +for its capital interest at the market rate, not so much +to secure the saving of it as to secure its allocation from +the common pool. +</p> +<p> +§10. <i>Interest and Distribution.</i> It is unavoidable that +this interest should accrue to whoever it is that supplies +the capital. If the capital were supplied, as it +might conceivably be, collectively by the community, +the interest would accrue to the community, and all +would be well. But as things are, the capital is supplied +mainly by the savings of individuals, and largely by +individuals confined to a relatively narrow class. The +profits of Capital have thus a vital influence on the +very serious matter of the distribution of wealth between +social classes. Now, as experience shows, there +is no element in profits which is capable of such radical +change in so short a space of time, as is the rate of +interest. Even before the war it had become hard for +people in Great Britain to realize that 3 per cent Consols +had stood at 114 as late as 1896. "How blest," wrote +two cynical satirists of society in the same period: +</p> +<a name="138"> </a> +<p><!-- poem -->"How blest the prudent man, the maiden pure,<br> +Whose income is both ample and secure,<br> +Arising from Consolidated Three<br> +Per cent Annuities, paid quarterly."[<a href="#138f1">1</a>]<br> +<!-- poem --></p> +<p> +It is impossible to read those lines now without a +sense of irony, different from that which they were +intended to convey. +</p> +<p> +Not only is the rate of interest now double what it +was a generation ago; we have no good reason to suppose +that the present high level will quickly be reduced. +The havoc of the war, of which the widespread poverty +of Europe and the huge debts of Governments are but +two different aspects, makes it almost inevitable that +the rate should rule high in the present decade. This +cannot but exercise a profound influence, of a most +disquieting character on the general level of profits, +and to a lesser extent (for here we must allow for the +effects of high taxation) on the distribution of real wealth +between social classes. Here we are on the threshold +of tremendous issues. We almost feel the earth quake +beneath our feet. We hear the muffled roar of far-reaching +social controversy: +</p> +<p> +<!-- poem -->"And 'mid this tumult Kubla heard from far<br> +Ancestral voices prophesying war."<br> +<!-- poem --></p> +<p class="footnote"> +<a name="138f1">[1]</a> <i>Narcissus</i>, by Samuel Butler and Henry +Festing +Jones. +</p> +<a name="139"> </a> +<h3 class="chap_head"><a name="Chapter_IX"></a>Chapter IX</h3> +<h3 class="chap_name">Labor</h3> +<p> +§1. <i>A Retrospect on Laissez-faire.</i> When, a century +and a half ago, the foundations were being laid in the +Western world of systematic economic theory, the +public attention was much occupied with a subject, +which indeed has not ceased to hold it: that of the +failings of Governments. The general interest in that +topic was shared by the pioneers of economic thought, +of whom, in Great Britain, Adam Smith was the most +notable. It was indeed their practical concern with the +concrete economic issues of the day which very naturally +gave the impetus to their scientific quest. It was +hardly less natural that they should have expressed +their opinions on these concrete issues with considerable +emphasis. +</p> +<p> +Now the keynote of their practical conclusions was +that Governments were doing immense mischief by +meddling with a great many matters, which they would +have done better to leave alone. In this they were in +general agreement with one another; incidentally—let +there be no mistake about it—they were right. But, +as invariably happens in public controversy, their +opinions became crystallized in a compact formula, or +cry, with unduly sweeping implications. This was the +cry of "<i>laissez-faire</i>." Let Governments preserve law +and order; and leave the economic sphere alone. The +<a name="140"> </a>economists picked no quarrel with this formula; it +served well enough for workaday purposes to indicate +the lines of policy which they rightly thought essential +in their day. +</p> +<p> +The history of this cry is the history of every cry +which has won a wide acceptance from mankind. It did +good work for perhaps half a century; but then many +crimes were committed in its name. The instrument +which had been forged to clear away a noxious tariff +jungle and the monstrous laws of Settlement, was +turned against Lord Shaftesbury and the Factory Acts. +Not only was inaction recommended to Governments +as the highest wisdom; other institutions, like trade +unions, were warned off the economic grass. An ideal +of perfect competition became an idol to which much +human flesh and blood were sacrificed. +</p> +<p> +But, what is more to our present purpose, the idea +took root of an intimate association between the laws +of economics and the policy of <i>laissez-faire</i>. People +who opposed some long-overdue measure of State +regulation believed themselves to be justified by the +eternal verities of economic law, and this claim even +the advocates of the measure seldom ventured to +dispute. They took refuge rather in a conception of +economic law as a dangerous monster, whose claws +must be clipped in the interests of the higher good. +This notion that all interference with so-called "free +competition," is a violation (though very likely fully +justified) of economic laws has sunk deep into our +common thought. So that to this day, whenever we +see at work the hand of a State department, a trust or +a trade union, we are apt to say "Demand and supply +<a name="141"> </a>are here in abeyance," and possibly we add "A good +thing too." Since in the matter of wages, the hand of +the trade union is very generally evident, it is impossible +to discuss the subject-matter of this chapter, until we +have rid our minds of this quite baseless prepossession. +To sweep away this cobweb, I urge the reader to +recall here the general tenor of the analysis of the +preceding chapters. Whether we were dealing with the +price of an ordinary commodity, with joint products, +land or capital, we came across relationships which +seemed altogether more fundamental than our present +industrial system; nor, we may incidentally observe, +were we ever required to suppose that the present +system was one of "perfect competition." These +relationships were almost invariably such that even a +world socialist commonwealth would find it necessary +to maintain them. It was not suggested, and most +certainly it must not be thought, that a world socialist +commonwealth, or even a more modest remodeling of +the social order would not effect great changes, possibly +for good, and possibly for ill. The same economic laws +might be made to bear very different fruits, but they +themselves would remain unchanged. What is true in +all these other fields—this should be our predisposition—is +not likely to be quite untrue in the field of +labor. +</p> +<p> +§2. <i>Ideas and Institutions</i>. Another point is worth +noting here. We are sometimes advised to distinguish +sharply between "What should be" and "What is"; +often two very different things. The advice is pertinent +and useful, particularly in the sphere of sociology. +<a name="142"> </a>But our incorrigible habit of confusing the two +things +together is not without justification, or at least excuse. +For, in fact, they gravitate towards one another with a +force which is just as strong as the capacity of man for +understanding and controlling his environment. When +we have a system which is clearly bad, <i>and</i> when we see +our way to make it better, we generally make the change +however tardily. Our sense of "What should be" thus +reacts upon "What is." Meanwhile, until we can make +the system better, our appreciation of "What is" +affects our sense of "What should be." And the more +so, as we are sensible. For "What should be" is +pre-eminently an affair of relativity. A man may +hold very strongly that equal pay to every individual +is desirable, as he puts it, as an ideal. But this will not +prevent him, in a world in which managers are paid far +more than manual workers, from maintaining hotly +(at any rate, if he is sensible) that to pay the manager of +a particular concern a manual worker's wage would +be monstrously unfair. He would also argue that it +would be highly inexpedient. Equity and expediency +are, in fact, intricately intertwined in our sense of +"What should be"; and our sense of "What should +be" in the particular is governed by our knowledge of +"What is" in the general. +</p> +<p> +These may seem unnecessary commonplaces. But +they have a vital bearing on the <i>modus operandi</i> of economic +laws. These laws do not work <i>in vacuo</i>. They +work through the medium of the acts of men. The acts +of men are greatly influenced by their institutions, and +by their ideas of right and wrong. Both institutions and +ideas may serve to smooth rather than obstruct the +<a name="143"> </a>path of economic laws; because the laws may +represent +either "what should be" in the general, or "what is" in +the general, and therefore "what should be" in the +particular. This may hold true even of a trade union +or a sense of "fair wages." The business of economic +theory is not to justify a regime of <i>laissez-faire</i>, still less +to show the folly of bringing morals into business. Its +value is rather that it may help us, by improving our +understanding, to shape our institutions, and to adopt +our moral sentiments so as to promote the public welfare. +With these general notions in our minds, let us +turn to see how stands the case with Labor. +</p> +<p> +§3. <i>The General Wage Level</i>. The term Labor may be +used in a broad or in a narrow sense. It may be confined +to weekly wage-earners: it may be extended to include +all those who work, as the phrase goes, "with either +hand or brain." It is with all classes of Labor, in the +broadest sense of the term, that we must here concern +ourselves. It will be convenient, however, in the first +instance to ignore the differences between them, and to +consider the forces which determine what we may +regard as the general wage-level. +</p> +<p> +The general laws of supply and demand hold good. +The wages of labor tend to a level at which the demand +is equal to the supply. For, if the demand exceeds the +supply, if, in other words, labor is scarce, wages tend to +rise, sooner or later in any case, and the more promptly +in proportion as the workpeople are organized. Conversely, +if the supply exceeds the demand, if in other +Words there is general unemployment, wages tend to fall, +and the strongest trade unions cannot resist the tendency, +<a name="144"> </a>though they may delay it. Moreover, the higher +the wages that must be paid, the smaller, other things +being equal, is the demand for labor. For, even if +we leave foreign competition out of account, and consider, +as it were, labor throughout the world as a whole, +the demand for labor is by no means inelastic. It is +derived along with the demand for the other agents of +production in the manner described in Chapter V. +As was there shown, the greater the supply of the other +agents of production, the greater is likely to be the +demand for labor; but these other agents can be substituted +for labor in a great variety of ways, and an +increase in wages (unless accompanied by increased +efficiency) will make it profitable for employers to effect +such a substitution, where it was not profitable before. +Thus, higher wages for the same labor efficiency must +stimulate the tendency for capital to act as a substitute +for labor at the expense necessarily (since the aggregate +supply of capital will not be increased thereby) of its +tendency to serve as a complement; and this must mean +a decrease in the volume of employment. Hence the +power of labor to secure a general advance of wages +by concerted or simultaneous trade union action, applied +if you will, not merely to every industry, but to +every country, is necessarily very limited. Beyond +a certain point, such a policy must result in general +unemployment; and, if pushed sufficiently far, in unemployment +so extensive that it would continue even +in periods of active trade. Such a policy could neither +be maintained in practice nor would it be a wise policy +from the workers' point of view. +</p> +<p> +In other words, given on the one hand the conditions +<a name="145"> </a>of the demand for labor (i.e. the supply of +capital, +natural resources, business ability, risk-bearing and +knowledge of technical processes, etc., which happens +to exist), and given on the other hand the supply of +labor (i.e. both the numbers of workpeople and their +efficiency), the wage-level in the long run is fairly rigidly +determined. The introduction of the phrase "in the +long run" in this connection is apt to provoke comment +which may be pertinent, but may be misconceived. +The worker, it is pointed out, is deeply concerned +with "the short run" in which he has to live. It +is very true; and it is this that supplies one of the many +justifications of trade unionism. To secure for the +workers advances of wages, which economic conditions +justify, sooner than would otherwise have been obtained, +is certainly no trivial or contemptible function. But +it is none the less an illusion to suppose that the general +wage-level can be appreciably and permanently raised +by trade union action, except in so far as it increases +the efficiency of the workers or incidentally stimulates +the efficiency of the employers. +</p> +<p> +§4. <i>The Supply of Labor in General</i>. The efficiency +of labor may be regarded as affecting either the demand +for labor on the one hand or the supply of it on the +other, according as we look at the matter from the +worker's or the employer's standpoint. The employer +is concerned with the labor costs per unit of his output, +the worker is concerned with the wages he receives. +An increase in the efficiency of labor may, and usually +will, mean both a decrease in labor costs to the employer +and an increase in the earnings of the worker. It is +<a name="146"> </a>thus wholly to the good. But the effects of an +increase +in the supply of labor in the sense of a growth in the +numbers of the population are far more dubious. Unaccompanied +by an increase in the <i>demand</i> for labor, +it <i>must</i> result in a diminished remuneration for the individual +worker. To some extent indeed the demand +for labor would almost certainly be increased. The +supply of Capital may expand, perhaps proportionately, +perhaps more than proportionately to the increase +in population. But one factor of production, as +we have seen, is not capable of such expansion. This +is the factor of Land, or Natural Resources. It is the +limitation of this factor which gives rise to what we +have most of us heard of as The Law of Diminishing +Returns. It is this that is the essence of the problem +of Population, portrayed in somber hues more than a +hundred years ago by Malthus. +</p> +<p> +This problem will form the subject of the sixth volume +of the present series. In the meantime it may be +suggested that we are easily credulous if we suppose +that the problem has been finally disposed of by the +peculiar progress of an abnormal century. But that +experience has at least destroyed the view that there +<i>need be</i>, or even is in fact in Western countries, a relation +between real wages and the numbers of the people so +close and direct that an improved standard of living +must be temporary only, doomed to destroy itself by the +increased population it engenders. One may perhaps +go further and say that it is doubtful even in what direction +changes in remuneration will influence the +aggregate supply of labor. When we pass to "what +should be," it is plain that there is nothing whatever +<a name="147"> </a>to be said for the sort of relation indicated +above. The +view once widely held that the principle of population +must inevitably keep the mass of people close to the +verge of the bare means of subsistence was no statement +of a desirable ideal. It was a nightmare; a nightmare +none the less though it may haunt us yet. It is far from +fanciful to suggest that it is because this relation is so +obviously <i>not</i> "what should be" that it may be ceasing +to hold true in fact. But it would be very fanciful +indeed to maintain that as yet "what should be" is +represented by the actual population. Thus, just as +with capital, so with labor, there is no reason to suppose +that the aggregate supply is determined by any +fundamental economic law, or corresponds in practice +to what is socially desirable. +</p> +<p> +§5. <i>The Apportionment of Labor among Places.</i> Again, +as with capital, it is when we turn to the <i>apportionment</i> +of labor between different employments that both +economic law and social ideal make their appearance. +It will be well, however, to consider briefly in the first +instance the different question of its apportionment +between places. This was hardly necessary in the case +of capital, because the possibilities of foreign investment +are very numerous and easy: the mobility of +capital is thus sufficiently strong (once again it is only +<i>marginal</i> adjustment that is necessary) to establish +over at least a large part of the world something near to +a uniform rate of interest. But this is not the case with +labor. People do indeed move from place to place +within a country, and from one country to another, in +response to economic opportunities. That even the +<a name="148"> </a>latter movement may be a considerable thing, the +present population of the United States is a striking +testimony. But obviously the mobility is very incomplete. +Here, then, we have what we might <i>loosely</i> +call an economic law that labor tends to "flow" (as +it is sometimes unhappily phrased) to those places +where it can command the highest reward; we have this +tendency in evidence, but it is far too weak to enable us +to lay down what would deserve more strictly the title +of an economic law, that in the long run the reward of +the same kind of labor is roughly equal in all places. +Perhaps we can say this for many districts in a single +country; but for few countries is this true as between +all their districts. As between countries, it is not remotely +true. +</p> +<p> +Here, however, the imperfection of economic law is +balanced by an extreme uncertainty as to the ideal. +Perfect mobility of labor may be <i>economically</i> desirable +in a very narrow sense of the term; but it opens out a +vista of racial, national and cultural problems, into +which it will be better for us not to enter here. We +must take for granted the population of a country, +like that of the world, as a given fact. +</p> +<p> +When we do this, the question of its remuneration +is on all fours with the more general question discussed +above. That the remuneration of the labor of a country +is mainly governed by the relations between demand +and supply is an inexorable fact. In view of the international +mobility of capital, the main distinctive factor in +the demand for the labor of a particular country is the +supply of natural resources, which it knows how to use. +Where the natural resources are great relatively to the +<a name="149"> </a>population, there wages will rule high; where the +converse +is true, wages will rule low. This result of economic +analysis is abundantly confirmed by experience. +The relatively high wages in the new world, the low +standard of living in the densely populated East; the +economic history of Ireland are so many object-lessons +of its truth. +</p> +<p> +§6. <i>The Apportionment of Labor among Social Grades.</i> +The question of the apportionment of the labor of a +country among different employments falls under two +heads. Some differences of occupation are associated +particularly in Great Britain with differences of what +we know as class. The movement of labor between +different social grades is clearly a very different thing +from its movement between different occupations in the +same grade. The grades themselves are not easy to +define: not a little ingenuity has been expended on the +attempt, and perhaps the best brief classification that +has been put forward is one which divides labor into the +following four grades:— +</p> +<ol> +<!-- poem --><li>Automatic manual labor.</li> + <li>Responsible manual labor.</li> + <li>Automatic brain workers.</li> + <li>Responsible brain workers.</li> +<!-- poem --> +</ol> +<p> +But the matter is one perhaps for the satirist of manners +rather than the economist. It suffices for our purpose +that the distinctions, however vague, are very real. +</p> +<p> +It is obvious the mobility of labor between the occupations +of a platelayer and a barrister is not very +great. It may seem perhaps to be even smaller than it +<a name="150"> </a>is. For here it is important to bear in mind a +general +consideration which is equally applicable to horizontal +movements within any social grade. There may be a +considerable movement of labor between different employments +without any individual worker having to +change his occupation. The personnel of any industry +is constantly changing. At one end, men die, retire, or +are pensioned off; at the other end, young recruits are +taken on. By a diversion of the new recruits from one +employment to another, a radical change can be made +in the occupational census in a comparatively short +space of time. It is in this manner that such movement +as takes place is largely effected at the present +time. Within the ranks of the professional classes, a +man does not commonly leave the profession to which +he has been trained. But his <i>choice</i> of profession is determined +by him or his parents not solely on pecuniary +grounds but usually with an anxious scanning of the +general prospects, which include pecuniary advantages +together with many other things. The same thing is +true in no small measure of manual wage-earners. This +general consideration must be borne in mind throughout +the remainder of this chapter. +</p> +<p> +But even the sons of platelayers do not commonly +practise at the bar. The obstacles in the way are various +and subtle. Many of them are ideas, inherited +from a bygone epoch, about keeping other people "in +their proper stations," which the whole drift of circumstance, +and the spirit of the age are rapidly wearing +down. In the new world such obstacles are rare. But +an obstacle of a more tangible and formidable kind +arises from the fact that the liberal professions and +<a name="151"> </a>many business careers require a long and expensive +education and training, which the platelayer is quite +unable to afford to give his son. +</p> +<p> +Now this expense of training is highly relevant not +only to "what is," but to "what should be." It includes, +it should be observed, a negative as well as a +positive element; a long period of waiting before income +begins, as well as the actual outlay on educational and +other charges. When the burden both of the waiting +and the positive costs must be borne either by the individual +or the family, there are few people who would +seriously dispute that this goes to justify, on grounds +of fairness as well as of expediency, a higher level of annual +remuneration later on; though many people would +doubtless argue that the amenities and dignities of the +professions should be taken into account on the other +side. But the same consideration makes it a matter of +legitimate doubt whether it would be desirable, even as +an ideal, that the community should provide so completely +the costs of training and of maintenance in the +waiting period, as to make it no longer "fair" that the +individual should be remunerated more highly than +workers in less expensive occupations. For this would +mean that more labor would be absorbed in the former +employments than in principle would be socially desirable, +for reasons which the argument of the next chapter +will make plain. But the most desirable number of +doctors, barristers, teachers, etc., is not a thing which +can be settled on purely economic grounds, and it is +unprofitable to carry further this particular line of +thought. Few people would advocate, as an ultimate +ideal, that the remuneration of the professional grades +<a name="152"> </a>of labor should exceed that of lower grades by <i>more</i> +than +the extra expense of training and waiting they involve. +That the excess is usually greater than this at the +present time seems very probable: though it is a matter +on which it is very hard to generalize. But it would +certainly be far greater than it is if the principle of +<i>laissez-faire</i> ruled supreme in these affairs. Fortunately +it does not, and has never done so. Even before +the days of free elementary education, the endowment +of education was not unknown. The ancient public +schools and universities, which have come down to us +from the Middle Ages, are a standing witness to what +in this field a far poorer community thought fit to do. +Their systems of scholarships and exhibitions, no less +than their courts and towers, deserve our notice. For +these were designed to form what we now call "a ladder" +by which talent could climb from the humblest +origins to the callings which then seemed the summit +either of spiritual or of worldly ambition. +</p> +<p> +This reference to "talent" makes it well to consider +here a factor which necessarily complicates, though it +does not substantially affect, the whole argument of +the present chapter. There are differences of natural +ability, which no education or training can obliterate, +which it should rather be their business to excite. +These differences are associated to a great extent with +differences of occupation; they <i>should be</i> so associated +far more closely than in fact they are. They are also +associated with differences of remuneration even within +the same occupation; "what should be" here is a question +which we may excuse ourselves from discussing. +The principle which, however vague, is sufficient for +<a name="153"> </a>our present purpose is that the same <i>natural +ability</i> +should command the same reward in all occupations, +subject to differences which should not exceed the differences +of educational cost and initial waiting they +involve. We cannot assert, as an economic law, that +this is generally true in fact. If ever it becomes true, +it will be due not to "<i>laissez-faire</i>," or "free competition," +but to social arrangements, which express a +sense of what is right. +</p> +<p> +§7. <i>The Apportionment of Labor among Occupations.</i> +When we pass to the apportionment of labor among +different occupations in the same social grade, the same +principle as to "what should be" applies in a simpler +form. Equal natural ability should command an equal +reward in all occupations; assuming that differences +in cost of training can be ignored. The reward must, +of course, be interpreted not in terms of money only +but of "real wages," with allowance for the varying +amenities of different tasks. Now it was here that the +extreme advocates of <i>laissez-faire</i> made one of their +cardinal mistakes. They assumed that this ideal would +be best secured by "perfect competition." The employer +would choose the worker who would come for +the lowest wage; the worker would choose the employer +who would pay him the highest wage; and so, by a process +similar to the higgling of a commodity market, the +desirable uniform wage-level would become established. +But in fact the conditions of the labor market differ +greatly from those of a commodity market. People +are ignorant, do not look ahead, cannot afford to risk +the loss of a job, however wretched, which they happen +<a name="154"> </a>to have got. For reasons such as these, a +considerable +departure from <i>laissez-faire</i> is necessary in order to +realize the theoretical results of <i>laissez-faire</i>. To prevent +the putting of boys in large numbers into "blind +alley" occupations, you must supplement the foresight +of parents with Juvenile Employment Exchanges and +After-Care Committees. To secure a proper uniformity +of wages within the same occupation, you must have +trade unions. To secure a proper uniformity between +different occupations, you must have again trade unions, +or, failing them, Trade Boards. +</p> +<p> +That the actions of trade unions are very largely of +this type is a fact insufficiently appreciated by the +middle-class public. The elaborate system of piece-rate +lists which has been evolved in the Lancashire cotton +industry is primarily designed to secure the same wage +for workers of equal efficiency in all mills, irrespective +of the degree to which the machinery is antiquated or +up to date. This result is wholly to the good: not only +does it secure "fairness" for the worker, it stimulates +the employer wonderfully to efficiency. The same result +could never be secured so effectively by the free +play of competition. But this tendency, which is easily +the predominant element in the trade union regulations +of the cotton trade, is at least an important element +in the policy of "The Common Rule" of all trade +unions, though it may often be mixed up with the more +questionable tendency to eliminate differences of pay +for differences of natural ability, and the unquestionably +bad tendency to discourage output. As between different +occupations, the insistence of a trade union that +wages must be leveled up towards the wages obtaining +<a name="155"> </a>in similar trades acts again as a far more powerful +force +than competition. +</p> +<p> +But the actions of trade unions are by no means +wholly of this type. They often serve rather to secure +still higher wages for workers who, comparatively +speaking, are already highly paid. It makes little +difference whether this effect is secured directly by +wage demands, or indirectly by restricting the right +of the entry to the trade. In either case the consequences +are the same, and there should be no ambiguity +as to their nature. They are certainly bad for the community, +certainly bad for the <i>other</i> workers of the +grade, almost certainly bad for the workers of the +grade regarded as a whole. The higher wages must +raise the money costs of production, and result, sooner +or later, in fewer workpeople being employed in that +occupation; larger numbers must accordingly seek +employment elsewhere; and this cannot but depress +the wage rates of less strongly organized trades. Thus +the effect is twofold: a larger proportion of workpeople +will be employed in badly paid occupations; and the +wages there will be lessened. +</p> +<p> +The power of a strong trade union to secure wage +advances of this type is considerable, but it must not +be exaggerated. Trade unions employ as a matter +of course devices which, in the case of trusts, we regard +as the extremest weapons of monopoly. To say, "If +you buy from anyone except us, you must not buy at +a lower price than ours," which Messrs. J. & P. Coats +are represented as having done, is analogous to insisting +that if non-unionists are employed, it shall be at the +trade union rate, as every trade union very properly +<a name="156"> </a>insists. To say, "You must buy <i>only</i> from +us," the +method of the boycott, as it is called, is analogous to +the very common refusal to work with non-unionists +at all. But in one important respect the tactical position +of a trade union is weaker than that of an ordinary +combination. It has usually got a buyers' combination +up against it, in the shape of an association of employers. +The latter will be governed in their attitude towards +the workpeople's demands, not only by immediate +expediency, but also by their own sense of "what should +be"; and they will usually resist demands for wages +greatly in excess of those obtaining in comparable +trades. In this way, the tendency for workers of the +same efficiency to receive the same real wages in all +employments is far stronger than might at first sight +appear. +</p> +<p> +If we had to rely for this result upon trade unions +alone, it would be highly problematical. For here a +psychological curiosity emerges, which, familiar and +intelligible as it is, is none the less a curiosity. So +far from still higher wages for well-paid workpeople +being regarded in the world of manual labor as detrimental +to the interests of other workpeople, it has become +almost a point of honor to believe the contrary. +A wage dispute in a particular trade is conceived as +an engagement in a far-flung battle between Capital +and Labor, in which success at any part of the line +will facilitate the victory of the whole army. This +conception contains a measure of truth, as regards +immediate and purely temporary effects; though, +even here, it is made to seem unduly plausible by the +recurrence of trade cycles, which cause wages at any +<a name="157"> </a>time to move in the same direction all along the +line. +But, if the foregoing analysis has been appreciated, +the essential falsity of this notion should be evident. +It is an illusion, which should receive no endorsement, +either tacit or express, in any work on economics. +The general wage level of a country cannot be regarded +(except temporarily, and within narrow limits) as a +function of the efficiency of labor organization; it +depends on the far deeper economic facts set out in +§3 above. +</p> +<p> +Let us now try to summarize the conclusions of this +section. There <i>is</i> a tendency towards a uniformity +of real wages for workers of the same grade and of the +same efficiency. This tendency is not due to competition +alone. It is helped by many acts of a collective +kind, arising from a sense of "what should be"; it is +obstructed by other acts of a like kind, where the sense +of "what should be" is based on imperfect understanding. +The more people act in accordance with +"what should be," and the better their understanding, +the more will this tendency approximate to an accurate +economic law. +</p> +<p> +§8. <i>Women's Wages.</i> The wages of women represent +a problem of great public interest, upon which the +principles laid down in this chapter have a most important +bearing, and which in its turn serves to illustrate +these principles further. It has been suggested that +male and female labor can be regarded as a strong case +of Joint Supply, and the suggestion is not merely facetious. +The essential point, that the proportions of +available male and female labor are fairly constant (not +<a name="158"> </a>that they may not alter with time and +circumstances, +but that they are essentially independent of the conditions +of demand) holds true not only of a country as a +whole, but hardly less of a particular district. If men +and women are to be regarded as separate grades, they +are grades between which immobility is complete. +Now men and women differ in many ways which affect +both the demand for and the supply of their services. +On the one hand, far fewer women wish to enter business +employments of any kind, as women have plenty of +work that must be done at home. On the other hand, +though women can do many kinds of work as well as +or better than men, it so happens that for much the +greater number of services, which are in large demand +in the business world, men are the more efficient. +Incidentally, it happens that many occupations which +women <i>might</i> do as well as men are closed to them by +exclusive regulations. The resultant of these forces +is that men and women are for the most part employed +in different occupations, and the scale of payment +in women's occupations is far lower than that in men's. +Of this last fact singularly small complaint is made. +</p> +<p> +It is otherwise, however, when we come to occupations +where men are either wholly or partially employed, +where women are at least approximately as efficient +as men, and where the barriers to their entry are at +least formally removed. There a ferocious controversy +rages over what is known as the principle of "equal +pay for equal work." It is easy to understand why +the male trade unionists in, let us say, the engineering +trades, should support this claim. It is also, indeed, +<i>intelligible</i> why the enthusiasts for Women's Rights +<a name="159"> </a>should urge it; but it is much more doubtful +whether +they are wise. Possibly they are wise enough in their +generation, since it might not serve them on this matter +to get across the men. But it is clearly not prudential +considerations of this kind by which they are mainly +actuated. They make the demand, with extreme +intensity of feeling, as a demand for fundamental +justice. They are also very obviously inspired with the +belief (similar to the illusion which is a point of honor +with the male trade unionist) that high wages for +women in well-paid occupations will help to raise the +wages of sweated women workers in other trades. +</p> +<p> +Now, here again, any lack of candor would be inexcusable. +The effect of this policy on the wages in +women's trades is certainly to reduce them. The policy +serves, as powerfully as any trade union custom, +to restrict the entry of women into the men's employments, +and often spells virtual exclusion. For the +"equal efficiency" may be approximate only, and there +may be advantages in male labor from the employer's +standpoint which are none the less important, because +they are not easy to define. Moreover, from the employer's +standpoint, the efficacy of female labor will +be largely a matter for <i>experiment</i>, and "equal pay" +will give him no inducement to experiment at all. +The diminished number of women in these occupations +(as compared with what might have been) increases +the number who must fall back on the purely women's +trades; and it <i>must</i> serve to reduce the wages there, +where organization is by no means strong. I am far +from asserting that this consideration is conclusive +against the principle of "equal pay for equal work" +<a name="160"> </a>(though I think it conclusive against a rigid +interpretation +of it); for other matters, such as the standpoint of +the male trade unionist must be taken into account. +But the reactions on the wages in women's trades permit +of no ambiguity. +</p> +<p> +In occupations of another type, the issue takes a +somewhat different form. In the teaching profession, +"equal pay" would not exclude the women; it would +be far more likely to exclude the men. For, though the +advocates of the principle would declare that their +intention is that the salaries of women should be leveled +up to those of men, it is more probable that the ultimate +outcome would be a leveling down. Educational +authorities have the ratepayer and the taxpayer to +consider; and, apart from this, they have their own +interpretation of "what should be." To pay a woman +less than a man for the same work may seem glaringly +unfair; but it is not very clear why a woman, who is +an elementary school teacher, should be paid much +more than, say, a hospital nurse, merely because in the +former case a number of men happen also to be employed. +In fact, there is a clashing of equities in this +connection; and there is little doubt which of them +the educational authorities would prefer. A leveling +down of the men's salaries would make it all but impossible +to attract men of the desired type into the +profession, and would thus lead to the virtual extinction +of the male elementary school teacher. This might +seem in a narrow sense to be economically desirable. +Why should not men take their services to the tasks +for which they can command a higher reward, and which +women cannot do as well? But whether this would +<a name="161"> </a>be desirable in the true interests of education is +a far +more doubtful matter. And this is the real problem +of "equal pay for equal work" for male and female +school teachers. The reader will notice that I have +refrained from alluding to the controversy as to whether +men should receive more on the grounds that they have +wives and families to maintain. That, although a most +absorbing issue, is not the real issue in practice at the +present time. The real issue is a clashing between a +sense of "what should be" on obvious general grounds +and a sense of "what should be " in the particular, derived +from the very patent and general "what is" that +men receive as a rule far higher pay than women. +</p> +<a name="162"> </a> +<h3 class="chap_head"><a name="Chapter_X"></a>Chapter X</h3> +<h3 class="chap_name">The Real Costs of Production</h3> +<p> +§1. <i>Comparative Costs</i>. Beneath the great diversity +of the considerations which are applicable to the different +agents of production, certain general conclusions +emerge from the analysis of the last four chapters. +In no case did we find that the aggregate supply of the +agent was determined by clear and certain economic +laws, possessing any fundamental significance. The +supply of natural resources is a fixed thing, quite independent +of the efforts or the desires of man. However +the supply of capital and the supply of labor +may react under present conditions towards economic +stimuli, these reactions possess no quality of inevitability +and bear no clear relation to "what should be." +The supply of risk-bearing responds perhaps more +decidedly to the prospects of increased reward; but +it is so intimately associated with special knowledge +and the qualities of business enterprise, as to leave +some uncertainty attaching even to this conclusion. +When, on the other hand, we turn to the apportionment +of these factors among different uses, we find +relations which are both clear and fundamental. Laws +emerge which state at once not only "what is" or at +least "what tends to be," but also "what should be"; +and it is the fact that they taste "what should be" +that gives them their fundamental character. +</p> +<a name="163"> </a> +<p>These conclusions enable us to give a general answer +to the question which was raised at the end of Chapter +V: What are the ultimate real costs to which the +money cost of production correspond? The attempt +has often been made to relate money costs to such +things as the effort of working and the sacrifice of waiting. +The existence of such costs is beyond dispute. +Much saving does mean a sacrifice of immediate enjoyment +to the man who saves. Most labor is irksome and +disagreeable in itself, and involves strain and wear and +tear; while all labor means a deprivation of the utility +of leisure. Workpeople, moreover, do not grow on +gooseberry bushes, but must be fed and clothed from +the cradle; and their rearing and maintenance represents +a real cost which someone must incur. +</p> +<p> +But the existence (or the importance) of such costs +is one thing, their relation to money costs is another. +In Chapter VIII we saw how difficult it was to establish +any clear relation between the rate of interest and the +sacrifice of saving. The costs of labor present similar +difficulties. The relative irksomeness of two occupations +may affect the relative wages which will rule in the +two cases; so, certainly, will the differences in the cost +of education and training which they require. But +these are matters which concern the <i>apportionment</i> +of labor between different employments. There is +no good reason to suppose that the general wage-level +would be reduced, merely because work as a whole +became less irksome, or involved a smaller physical or +mental strain. The supply of people is not determined +by the same kind of influences as is the supply of a +commodity. Parents do not produce children for the +<a name="164"> </a>sake of the wages which the children will receive +when +they go out to work; or, if this happens, we rightly +regard it as a horrible anomaly. In so far as parents +are affected by economic conditions it is by their own +economic conditions; the question is rather one of +how many children they can afford to have, than of a +balancing of the cost to them against the incomes +which their children may subsequently acquire. But +other considerations enter in; and, in fact, it is doubtful +how the aggregate supply of labor will react to changes +in prosperity. Finally, the supply of land involves +neither effort nor sacrifice; and, among our money +costs, we have to account for the item of the rent of land. +To dispose of this difficulty by arguing that rent does +not enter into marginal costs (in any sense which is not +equally true of wages and profits) is to lose contact +with reality. Thus the attempt to explain money +costs in terms of the costs of producing the ultimate +agents of production leads us into a quagmire of unreality +and dubious hypothesis. For a systematic theory, +which will rest on firm foundations, we must interpret +money costs in very different terms. +</p> +<p> +The real costs which the price of a commodity measures +are not absolute, but comparative. Marginal +money costs reduce themselves in the last analysis +to the payments which must be made to secure the use +of the requisite agents of productions. These payments +<i>tend</i> to equal the payments which the same agents +could have commanded in alternative employments. +The payments which they could have commanded in +alternative employments, tend in their turn to equal +the derived marginal utilities of their services in those +<a name="165"> </a>employments. It is thus the loss of <i>Utility</i> +which +arises from the fact that these agents of production +are not available for alternative employments that is +measured by the money costs of a commodity at the +margin of production. +</p> +<p> +This conception of ultimate costs encounters an +instinctive repugnance, arising from a mistaken sense +of logical symmetry, which it will be well to examine. +Cost, it is objected, so interpreted loses its character +as an independent entity. It is merely something derived +from utility. Now in the earlier chapters of +this volume, we found reason to be impressed with +the general symmetry which pervades the relations +of demand and supply. Moreover, when we considered +the case of ordinary commodities we found that at +the back of demand and giving rise to it was utility; +at the back of supply, and limiting it, was cost. The +general symmetry between demand and supply thus +seemed almost to imply a fundamental symmetry +between utility and cost. If, then, cost in the last +analysis is derived from utility, does not this make +nonsense of the symmetry between demand and supply, +or, if we cling to this last symmetry as a demonstrable +truth, must we not refuse to admit that cost can be +derived from utility? +</p> +<p> +This is one of those false dilemmas which supply the +wiseacres of the world with a plausible case for distrusting +the logical faculty. If we have good reason for +believing that both of two apparently inconsistent +things are true, the explanation is seldom that one of +them is really false; it is more usually that they are +not really inconsistent. So it is here. The symmetry +<a name="166"> </a>between demand and supply is very great, and we +should always look to see if it holds good, but it is by no +means perfect, and it is in the last analysis that it most +notably fails. It is most important to distinguish +clearly between the utility and the cost of a commodity +as two separate and independent things. In +Chapter V, it will be remembered, we did not permit +ourselves to derive the costs of producing cotton lint +from the utility of cotton-seed. The refusal to do so was +essential to clear thought; it led to some very useful +practical corollaries. But to derive the cost of a commodity +from the utility of something which is produced +<i>with</i> it, as part of the same productive process; and to +derive the cost from the utilities which the agents, +which help to produce it, possess for other purposes, are +two entirely different things. In works on International +Trade, the reader will discover that the comparative +nature of real costs is so unmistakable that a Doctrine +of Comparative Costs is expounded with much formality +at the outset. This doctrine is apt to prove somewhat +puzzling, when we have to deal with it as an apparent +exception to the general tenor of economic theory. +Its difficulties disappear when we realize clearly that +the real cost of <i>anything</i> is the curtailment of the supply +of other useful things, which the production of that +particular thing entails. +</p> +<p> +§2. <i>The Allocation of Resources.</i> However strange the +above conception may seem, there should be no doubt +that this cost is very "real." Here the irregularities and +maladjustments of the economic world, the recurrence +of trade depressions and the like, do much to obscure +<a name="167"> </a>a clear vision of the essential realities. At a +time when +there is much unemployment, and much machinery +standing idle, it is so clear to common sense that we +<i>could</i> produce more of some particular thing without +diminishing the supply of other things, that any apparent +statement to the contrary may perhaps seem +the height of academic pedantry. But let me ask the +reader to consider with an open mind a familiar parallel. +During the recent war there was inevitably much waste +and muddle in the utilization of the military resources +of the Allies. Some regiments would be kept inactive +for long periods, not for purposes of rest or training, +but owing to some defect of organization. In the +manufacture of munitions, an insufficient appreciation +of the principles of joint demand led to the piling up of +excessive stores of certain materials, which were useless +until commensurate supplies of the complementary +factors could be obtained. It is unnecessary to multiply +examples. The waste of both man-power and material +was immense. But the allocation of these resources +between, for instance, the various theaters of war was +none the less a very real problem, which gave rise to +much engrossing controversy. It was an axiom that +the more resources you employed in Mesopotamia or in +Palestine, the less resources remained available for +France. No one thought of maintaining that, as long +as there was any waste of these resources, so long as +there remained any men to be "combed out" of unessential +industries, you could pour troops and munitions +into Salonika without stopping to consider the +needs of other theaters of war. Such a notion would +have been clearly imbecile, for the sufficient reason +<a name="168"> </a>that the sending of armies to Salonika would do +nothing +in itself to secure (however much it might incidentally +stimulate) the more efficient use of the resources which +remained. +</p> +<p> +Now this is precisely analogous to the problem of +the allocation of our resources for the purpose of peace. +Notwithstanding all the wastes and maladjustments +of the economic system, the use of resources to produce +one commodity <i>does</i> in general curtail the production +of others. The mere launching of a new business enterprise +does no more than the sending of an army to +Salonika, to eliminate waste in the remainder of the +economic organism. Unemployment, broadly speaking, +is a function not of the magnitude of the normal demand +for labor (which affects rather the wage-level), but of +fluctuations in the demand for labor; fluctuations +from one day to another as at the docks, from one +season to another as in the building trades, above all +from one period of years to another as in the cycles of +general trade boom and depression. Nothing will +diminish unemployment which does not serve to +diminish these fluctuations. A new business will not, +as a rule, have any such effect. If it is launched during +a trade depression (a most unusual proceeding), +it may temporarily absorb unemployed labor and idle +materials. But when the next boom comes, it will +be using, though presumably to greater advantage, +labor and materials which, but for it, would have +been employed for other purposes. Meanwhile the +causes making for unemployment will be unaffected. +Miscalculations will still be made, the building trades +will still become slack in the winter, the casual methods +<a name="169"> </a>of engaging dock laborers will still continue, +trade cycles +will still recur, while beneath them, and concealed by +them, some industries will expand and others will decay. +Thus, like the armies at Salonika, the new business +would in effect divert resources from elsewhere. +</p> +<p> +This truth needs to be firmly grasped in mind. It +is this that makes it in general unsound policy to subsidize +industries, either directly or indirectly, by means +of a protective tariff. It is this, indeed, that supplies +the answer to half the economic fallacies that are always +current. +</p> +<p> +The allocation of resources so as to yield the maximum +effect was rightly recognized as one of the most +vital and difficult of our war-time problems. To cope +with it, the Allied peoples devised one instrument after +another, and finally evolved the Supreme Allied Council. +The analogous problem in the economic world of +peace time is no less important and far more difficult; +but there is nothing to correspond to the Supreme Allied +Council. There we rely upon a co-operation which, +as was stressed in Chapter I, is unco-ordinated. That +co-operation has been evolved by the mutual competition +of innumerable business concerns, controlled by +men largely animated by the motive of pecuniary profit. +But it has not been evolved wholly by such means: +and how far that competition or that motive of profit +is essential to its efficiency are questions with which +this volume has not been in any way concerned. The +economic laws, the relations between utility, and price +and cost, with which it has been occupied, are an entirely +different matter; and these <i>are</i> essential to the +efficiency of any system of society. For if the marginal +<a name="170"> </a>utility of a commodity is equal to its marginal +cost, and +if this marginal cost is composed of payments to the +various agents of production at least as great as they +could have obtained if they had been used otherwise, +this amounts to saying that the agents of production +are so utilized as to yield the maximum utility; and +this is the same thing as saying that they are so utilized +as to produce the maximum wealth. +</p> +<p> +§3. <i>Utility and Wealth.</i> Upon this last point it is +important to be quite clear. An increase in wealth +seems a solid, tangible reality; something, which, +however much we may scorn it in our more precious +moods, we recognize, for a rather poor community, +to be an important object of endeavor. But an increase +in utility seems a vague, impalpable notion, +hardly deserving the same practical concern. None the +less the two things are identical. We greatly deceive +ourselves if we suppose wealth to be an objective reality. +It is true that, when we get behind the money in which +it is measured, we come upon commodities, like food +and clothes and houses and factories, which seem +comfortably solid and objective things; but we also +come upon many services, like those of gardeners and +doctors and hospital nurses, which we are bound to +reckon as part of our wealth, although they are not +embodied in any tangible commodities. Moreover, +although material commodities are objective realities +in themselves, and in many of their properties, they are +<i>not</i> objective realities in their property as wealth. A +pair of boots is an objective fact; so is the number of +pairs in existence at any time, so is their size, their +<a name="171"> </a>weight, the quantity of leather or of paper which +they +happen to contain. But the wealth which those boots +represent is not an objective fact. It depends upon the +opinion which men and women entertain as to their +utility; and these opinions take us into the subjective +regions of human psychology. Let us suppose, +for instance, that we calculated, on the basis of present +prices, that the boots in existence at the present time +represented 1/1000 part of our total wealth. Suppose, +then, that a miracle were to happen; that the skies +opened and rained boots upon us, of every size and +shape and pattern, until we had 1000 times as many +boots as we had before. Could we say that our total +real wealth had been doubled? Clearly we could +not. To obtain boots for nothing, and to wear a new +pair every week, would make us somewhat better off, +but not twice as well off as we were previously. In +other words, the real wealth of a thousand times as +many boots as we have now, is not a thousand times as +great as the wealth of the present number of boots. We +are, indeed, practically restating the Law of Diminishing +Utility; and this perhaps is enough to show that +wealth is fundamentally the same thing as utility. +</p> +<p> +Another point, however, is worth noting. Our real +wealth would be somewhat increased in the case supposed; +but if we were to turn to the money measure +of wealth, the opposite result would be far more likely, +For the price of boots would most likely fall to nothing, +and the total value of boots, in the commercial sense, +would accordingly be nothing also. This shows that +money values may be a most imperfect measure of +aggregate wealth; for what money values represent is +<a name="172"> </a>the product of the quantity of the commodity and +its +<i>marginal</i> utility, while aggregate wealth is <i>total</i> +utility, +which is a very different thing. This, it may be observed, +makes all attempts to compare the wealth of different +countries or different times, and no less to construct +Index Numbers of Prices, imperfect of necessity, +and arbitrary in their foundations. +</p> +<p> +§4. <i>Criteria of Policy.</i> The point has now been reached +at which we must take into account the very important +fact which was mentioned at the close of Chapter III. +The maximum utility which the laws of supply and +demand tend to bring about is a maximum <i>total</i> utility +indeed, but one still measured in terms of money. An +unequal distribution of wealth destroys any necessary +correspondence between that and the maximum <i>real</i> +utility. This consideration, however, does not affect +the general validity of the conclusion that the laws of +supply and demand represent what is socially desirable +now or under any system. For what is at fault here is +the distribution of wealth; and it is that which should +be changed, in so far as it is possible to do so. Now it is +important to realize that whenever it is possible to +supply a commodity to poor people below cost price, +it is possible to alter the distribution of wealth, for that +in effect is what is done. Purchasing power, which may +be taken from richer people by taxation, or which may +be obtained from "collective" profits on other trading, +is in effect transferred to the poor people in question, +though the transference is coupled with the condition +that the purchasing power must be expended in a +particular way. It is <i>in general</i> desirable that the +<a name="173"> </a>transference should be made without this condition +being attached. To this general statement, exceptions +indeed exist so numerous and important as possibly to +justify a great extension of social expenditure of this +type. Education should certainly be provided free of +charge, there are strong arguments for subsidizing +housing; the provision of milk to expectant mothers, +the feeding of school children, such instances can be +multiplied into a very extensive list. But it is important +to observe that in each case the justification of the +policy rests in the presumption that the service supplied +is one which it is particularly important that the beneficiaries +should have, <i>as compared with</i> the other things +upon which they might have preferred to expend the +equivalent purchasing power, had it been transferred +to them without conditions. Where there is no such +presumption, as surely there is none in the case of the +great bulk of commodities, the relation between price +and marginal cost should be rigidly maintained; it +is the distribution of purchasing power which we should +rather seek to alter. How far is it possible to alter that? +</p> +<p> +I suppose that it is inevitable that many readers will +have concluded that the preceding chapters must be +taken to mean that the distribution of wealth is not +susceptible of any appreciable change. I would remind +those readers of an important distinction upon which +impatient people have sometimes based a complaint +against economists. The economist, it is said, analyses +with great pomp and ceremony the laws governing the +distribution of wealth among the agents of production, +but says practically nothing about the distribution +between individuals and classes, which is the only thing +<a name="174"> </a>of any real interest to practical people. Now the +economist +concentrates on the agents of production for +the very good reason that it is only with respect to them +that any clear and certain laws as to distribution can +be laid down. Into the distribution between individuals +and classes there enter other and variable +factors, governed by no fundamental economic law; +and <i>here</i>, the conclusion should at once suggest itself, +is the field for action designed to alter the distribution +of wealth. What is possible or desirable in this field, +it is again not the purpose of this volume to discuss. +It is an obvious, even if not a very helpful conclusion +that an increase in the habit of saving among weekly +wage-earners might, without appreciably affecting the +distribution between Capital and Labor, greatly modify +the resulting distribution between social classes. +But questions as to how far it might be possible or +justifiable to achieve a similar result by the use of the +weapon of taxation, by changes in inheritance laws, or +by the public ownership of industry take us into a far +more uncertain and controversial sphere. The difficulties +and objections which present themselves are +familiar and formidable; but they are of quite a different +order from the economic laws which we have +been examining. The laws themselves do not entitle us +to make any dogmatic pronouncement upon these large +issues of social policy. +</p> +<p> +But this is not to deprive these laws of practical +importance. They represent essential criteria of sound +policy in the sphere of social reorganization no less than +in ordinary business. In our days a curious obsession +has led many people to disparage these criteria, as +<a name="175"> </a>though they were the sordid prejudices of a stupid +tradesman. Because it has been found a matter of +obvious practical convenience to maintain the roads +out of taxation or of rates, and to dispense with charges +for their use, it is suggested that the same principle +should be applied to the railways. Or, more commonly, +because it has been found convenient to make the same +charge for the carrying of letters between Land's End +and John o' Groats as between Hampstead and Highgate, +it is suggested that <i>this</i> principle should be applied +to railway rates and fares. It may be well, therefore, to +point out that the justification of uniform postal charges +rests upon the facts: (1) that the costs of collection, +sorting, etc., are so large a part of the costs of carrying +a letter, that the real cost between John o' Groats +and Land's End does not differ from that between +Hampstead and Highgate by as much as might at +first sight appear, (2) that the charges in any case are +very small; so that (3) the avoidance of the small degree +of taxes and bounties which the present system +implies is not worth the book-keeping expenses which +differential charges would involve. It should be obvious +that these considerations apply to the railways +with a greatly diminished force. They might possibly +justify what is known as the "zone" system of charges, +i.e. uniform rates within certain narrow areas. But the +notion of uniform rates throughout Great Britain +conjures up a vision of trains taking coal from South +Wales to Scotland, and others taking coal from Scotland +to South Wales, in accordance with the slightest +preferences of the consumers, and without regard to the +extra real cost involved, on a scale to which the "wastes +<a name="176"> </a>of competition" afford no parallel. It would in +fact +achieve the essential folly of "sending coals to Newcastle." +These considerations, however, are not what +interest the advocates of the postal principle. They seem +to recommend the obliteration or the confusion of the relations +between price and cost as a superior ideal. It is +important to be clear what exactly this ideal involves. +</p> +<p> +It involves, in the first place, as the whole argument +of this volume has gone to show, a less economical +employment of our productive resources; they would +be diverted to ends of less utility, and so produce less +real wealth. But this is not the worst. There is plenty +of waste and maladjustment in our economic system at +the present time. The desirable relation of price to +marginal cost is but imperfectly attained. The further +departures from this relation, which would follow from +any likely applications of the postal principle, might not +matter in themselves so very much. What is far more +serious is that the criteria of efficiency would become +blunted, and the clear aims of management would be +confused in fog. It is essential that every manager +should be on the alert to eliminate waste and to improve +efficiency, that he should be always trying to secure +the best results; but how can he do this if he has no +simple means of <i>measuring</i> what results are good and +what are bad? The measure which he has at present +is that of price, cost and the resultant profit, and it +would be fatal to take that away, unless an equally +simple and more accurate measure could be substituted +for it. +</p> +<p> +This is not a question, it should be observed, of +motive or incentive. Very likely we much exaggerate +<a name="177"> </a>the importance of the profit motive. It may be true +that men would work, perhaps that they already work +in fact, as zealously for a fixed salary, as for personal +gain. But aim and motive are two somewhat different +things, and the <i>aim</i> of profit, is, and will remain, essential +to the efficient conduct of business. In a game the +players are not animated by the motive of scoring runs +or points, but they aim at them; and the zest disappears +very speedily from the game, if that aim ceases +to be of interest. Moreover, while a scoring system is +always a somewhat arbitrary thing, measuring imperfectly +the true merits of the play, if it measures +them with the roughest accuracy, we prefer the issue +of our games to be decided so, rather than by the decisions +of an impartial judge, who can take into account +the finest points of skill. So it is in the world +of business. The scoring-board of profits may be an +imperfect one; let us, by all means, where we can, alter +the rules of the game so as to make it better. But +let us not imagine that it displays a finer insight or a +superior intellect to speak as though the scoring-board +could be dispensed with, and the test of profit and loss +treated as irrelevant. Quantitative measurement is +essential to efficiency. Let us be careful to remember +all that this implies. +</p> +<a name="178"> </a> +<h3><a name="Index">Index</a></h3> +<div class="letter"> +<div class="entry">Ability, <a href="#152">152</a></div> +<div class="entry">Accountancy, <a href="#58">58</a></div> +<div class="entry">Allocation of resources, <a href="#166">166</a></div> +<div class="entry">Ambiguities, <a href="#24">24</a></div> +<div class="entry">Australasia, <a href="#66">66</a></div> +</div> +<div class="letter"> +<div class="entry">Bastiat, Frederic, <a href="#5">5</a></div> +<div class="entry">Beef and hides, <a href="#7">7</a></div> +<div class="entry">Borrowing and lending, system of, <a href="#12">12</a></div> +<div class="entry">Business efficiency, <a href="#58">58</a></div> +<div class="entry">Business man as a purchaser, <a href="#47">47</a></div> +<div class="entry">Business risk, <a href="#104">104</a></div> +</div> +<div class="letter"> +<div class="entry">Capital, <a href="#119">119</a>;<br> +as representing a period of waiting, <a href="#123">123</a>;<br> +distribution, <a href="#131">131</a>;<br> +distribution and rate of interest, <a href="#137">137</a>;<br> +effect on labor of an increased supply, <a href="#77">77</a>;<br> +not a stock of consumable goods, <a href="#123">123</a>;<br> +reaction of price charges on, <a href="#31">31</a>;<br> +reflections upon, <a href="#11">11</a>;<br> +supply, <a href="#130">130</a>;<br> +supply as affected by charges in interest rate, <a href="#132">132</a></div> +<div class="entry">Capital goods, <a href="#61">61</a></div> +<div class="entry">Capital market, <a href="#13">13</a></div> +<div class="entry">Capitalism, <a href="#17">17</a></div> +<div class="entry">Capitalist, <a href="#116">116</a></div> +<div class="entry">Chance, <a href="#105">105</a></div> +<div class="entry">Coal industry, cost of production and price, <a + href="#52">52</a>;<br> +miners' wages, <a href="#75">75</a></div> +<div class="entry">Coats, J. & P., <a href="#75">75</a>, <a + href="#155">155</a></div> +<div class="entry">Collective saving, <a href="#129">129</a></div> +<div class="entry">Commodities, <a href="#7">7</a>, <a href="#19">19</a>;<br> +labor as a commodity, <a href="#19">19</a></div> +<div class="entry">Competition, <a href="#140">140</a></div> +<div class="entry">Composite demand, <a href="#80">80</a></div> +<div class="entry">Composite supply, <a href="#80">80</a></div> +<div class="entry">Consumable goods, <a href="#123">123</a></div> +<div class="entry">Consumers' goods and producers' goods, <a href="#49">49</a></div> +<div class="entry">Consumption, margin of, <a href="#37">37</a>;<br> +waiting for, <a href="#121">121</a></div> +<div class="entry">Control and risk-taking, <a href="#116">116</a></div> +<div class="entry">Controversy, <a href="#1">1</a>, <a href="#6">6</a></div> +<div class="entry">Coöperation, <a href="#3">3</a>;<br> +unorganized, <a href="#5">5</a>,<a href="#7">7</a></div> +<div class="entry">Cost, general relation of price, utility and cost, <a + href="#65">65</a>;<br> +price relation to, <a href="#37">37</a>, <a href="#39">39</a>, <a + href="#52">52</a>;<br> +rent as factor in real costs, <a href="#100">100</a>;<br> +ultimate, <a href="#82">82</a>, <a href="#162">162</a>;<br> +utility and, <a href="#165">165</a></div> +<div class="entry">Cotton and cotton-seed, <a href="#7">7</a>;<br> +contrast to wool and mutton, <a href="#71">71</a></div> +<div class="entry">Cotton industry, <a href="#154">154</a></div> +<div class="entry">Criteria of policy, <a href="#172">172</a></div> +<div class="entry">Currency inflation, <a href="#33">33</a></div> +<div class="entry">Cycles, <a href="#34">34</a>, <a href="#125">125</a></div> +</div> +<div class="letter"> +<div class="entry">Demand, ambiguity of expression "increase in +demand," <a href="#24">24</a>;<br> +derived, <a href="#82">82</a>;<br> +elastic and inelastic, <a href="#76">76</a>;<br> +<i>see also</i> Composite demand; Joint demand; Supply and demand</div> +<div class="entry">Derived demand, <a href="#82">82</a></div> +<div class="entry">Derived utility, <a href="#49">49</a></div> +<div class="entry">Diagrams, use of, <a href="#21">21</a></div> +<div class="entry">Diminishing utility, <a href="#40">40</a>;<br> +money and, <a href="#49">49</a></div> +<div class="entry">Directors, <a href="#135">135</a></div> +<div class="entry">Distribution of wealth, <a href="#131">131</a>, <a + href="#172">172</a>;<br> +interest rate and, <a href="#137">137</a></div> +<div class="entry">Dividends, <a href="#135">135</a></div> +<div class="entry">Division of labor, <a href="#3">3</a></div> +</div> +<div class="letter"> +<div class="entry">Economic laws, <a href="#140">140</a>, <a + href="#142">142</a>;<br> +fundamental character, <a href="#17">17</a> +<a name="179"> </a></div> +<div class="entry">Economic theory, <a href="#v">v</a>, <a href="#143">143</a>;<br> +fact and, <a href="#1">1</a></div> +<div class="entry">Economic world, orderly nature, <a href="#1">1</a></div> +<div class="entry">Education, <a href="#150">150</a>, <a href="#160">160</a></div> +<div class="entry">Efficiency, <a href="#58">58</a>, <a href="#177">177</a></div> +<div class="entry">Elastic demand, <a href="#76">76</a></div> +<div class="entry">Employers' associations, <a href="#156">156</a></div> +<div class="entry">Enterprise, <a href="#104">104</a>, <a href="#109">109</a></div> +<div class="entry">Entrepreneur, <a href="#113">113</a></div> +<div class="entry">"Equal pay for equal work," <a href="#158">158</a></div> +<div class="entry">Expectation, <a href="#106">106</a></div> +</div> +<div class="letter"> +<div class="entry">Fact and theory, <a href="#1">1</a></div> +<div class="entry">Farmers, <a href="#90">90</a></div> +<div class="entry">Fortunes, <a href="#116">116</a></div> +</div> +<div class="letter"> +<div class="entry">Gambling, <a href="#106">106</a></div> +<div class="entry">Government, enterprises, <a href="#114">114</a>;<br> +failings, <a href="#139">139</a></div> +</div> +<div class="letter"> +<div class="entry">Hides and beef, <a href="#7">7</a></div> +<div class="entry">Houses, <a href="#103">103</a></div> +<div class="entry">Housewife as purchaser, <a href="#41">41</a>, <a + href="#43">43</a>, <a href="#44">44</a>, <a href="#47">47</a></div> +<div class="entry">Housing, <a href="#64">64</a>, <a href="#129">129</a></div> +</div> +<div class="letter"> +<div class="entry">Ideas and institutions, <a href="#141">141</a></div> +<div class="entry">Incompetents, <a href="#59">59</a></div> +<div class="entry">Increase in demand, ambiguity, <a href="#24">24</a></div> +<div class="entry">Index numbers, <a href="#172">172</a></div> +<div class="entry">Inelastic demand, <a href="#76">76</a></div> +<div class="entry">Inflation, <a href="#63">63</a></div> +<div class="entry">Institutions and ideas, <a href="#141">141</a></div> +<div class="entry">Insurance companies, <a href="#107">107</a>, <a + href="#111">111</a>;<br> +significance, <a href="#108">108</a></div> +<div class="entry">Interest, <a href="#119">119</a>;<br> +necessity of, <a href="#129">129</a></div> +<div class="entry">Interest rate, <a href="#14">14</a>;<br> +changes and their effect on supply of capital, <a href="#132">132</a>;<br> +distribution and, <a href="#137">137</a>;<br> +price of land and, <a href="#102">102</a></div> +<div class="entry">Intuition, <a href="#114">114</a></div> +</div> +<div class="letter"> +<div class="entry">Joint demand, <a href="#66">66</a>;<br> +importance of the unimportant, <a href="#74">74</a>;<br> +marginal utility under, <a href="#69">69</a>;<br> +summary of considerations, <a href="#79">79</a></div> +<div class="entry">Joint products, <a href="#7">7</a>;<br> +cost of production, <a href="#40">40</a></div> +<div class="entry">Joint-stock company, <a href="#135">135</a></div> +<div class="entry">Joint supply, marginal cost under, <a href="#66">66</a>;<br> +summary of considerations, <a href="#79">79</a></div> +</div> +<div class="letter"> +<div class="entry">Keynes, J. M., <a href="#vi">vi</a></div> +</div> +<div class="letter"> +<div class="entry">Labor, <a href="#139">139</a>;<br> +apportionment among occupations, <a href="#153">153</a>;<br> +apportionment among places, <a href="#147">147</a>;<br> +apportionment among social grades, <a href="#149">149</a>;<br> +as a commodity, <a href="#19">19</a>;<br> +cost, difficulty of estimating, <a href="#163">163</a>;<br> +division, <a href="#3">3</a>;<br> +effect of increased supply of capital, <a href="#77">77</a>;<br> +four grades, <a href="#149">149</a>;<br> +mobility, <a href="#148">148</a>;<br> +product of, <a href="#119">119</a>;<br> +reaction of price changes on, <a href="#31">31</a>;<br> +supply in general, <a href="#145">145</a></div> +<div class="entry"><i>Laissez-faire</i>, <a href="#11">11</a>;<br> +retrospect on, <a href="#139">139</a></div> +<div class="entry">Land, characteristics, <a href="#83">83</a>;<br> +differential aspect, <a href="#87">87</a>;<br> +margin of transference, <a href="#94">94</a>, <a href="#96">96</a>;<br> +marginal, <a href="#88">88</a>;<br> +price and rent,relation, <a href="#102">102</a>;<br> +question of real costs, <a href="#100">100</a>;<br> +scarcity aspect, <a href="#84">84</a>;<br> +supply, <a href="#30">30</a>;<br> +tenure, <a href="#92">92</a>;<br> +urban, <a href="#94">94</a>;<br> +<i>see also</i> Rent</div> +<div class="entry">Landlords, <a href="#91">91</a>, <a href="#92">92</a></div> +<div class="entry">Large scale business, <a href="#58">58</a></div> +<div class="entry">Laws, fundamental, <a href="#18">18</a>, <a + href="#29">29</a></div> +</div> +<div class="letter"> +<div class="entry">Malthus, T.R., <a href="#146">146</a></div> +<div class="entry">Management, <a href="#104">104</a></div> +<div class="entry">Margin, danger of ignoring, <a href="#57">57</a></div> +<div class="entry">Margin of consumption, <a href="#37">37</a></div> +<div class="entry">Margin of production, <a href="#52">52</a></div> +<div class="entry">Margin of transference, <a href="#94">94</a>, <a + href="#96">96</a></div> +<div class="entry">Marginal cost, aspects, <a href="#55">55</a>;<br> +misinterpretation, <a href="#59">59</a>;<br> +under joint supply, <a href="#66">66</a></div> +<div class="entry">Marginal land, <a href="#88">88</a></div> +<div class="entry">Marginal purchaser <a href="#44">44</a> +<a name="180"> </a></div> +<div class="entry">Marginal utility, <a href="#42">42</a>;<br> +price relation to, <a href="#43">43</a>;<br> +under joint demand, <a href="#69">69</a></div> +<div class="entry">Market, <a href="#13">13</a></div> +<div class="entry">Marshall, Alfred, <a href="#vi">vi</a></div> +<div class="entry">Marx, Karl, <a href="#119">119</a></div> +<div class="entry">Mill, J. S., <a href="#86">86</a></div> +<div class="entry">Miners, <a href="#75">75</a></div> +<div class="entry">Monetary changes, disturbances of, <a href="#33">33</a></div> +<div class="entry">Money, diminishing utility, <a href="#49">49</a></div> +<div class="entry">Monte Carlo, <a href="#106">106</a></div> +<div class="entry">Mutton. <i>See</i> Wool and Mutton</div> +</div> +<div class="letter"> +<div class="entry">Natural ability, <a href="#152">152</a></div> +<div class="entry">Normal conditions, <a href="#36">36</a></div> +</div> +<div class="letter"> +<div class="entry">Occupations, <a href="#150">150</a>;<br> +apportionment of labor among, <a href="#153">153</a></div> +<div class="entry">Order, economic, <a href="#5">5</a></div> +</div> +<div class="letter"> +<div class="entry">Pasture versus tillage, <a href="#97">97</a></div> +<div class="entry">Pigou, A. C., <a href="#vi">vi</a></div> +<div class="entry">Policy, criteria, <a href="#172">172</a></div> +<div class="entry">Population, <a href="#85">85</a>, <a href="#146">146</a></div> +<div class="entry">Postal charges, <a href="#175">175</a></div> +<div class="entry">Poverty, <a href="#131">131</a>;<br> +national, <a href="#128">128</a>, <a href="#129">129</a></div> +<div class="entry">Price, consequences of higher, <a href="#60">60</a>;<br> +general relation with utility and cost, <a href="#65">65</a>;<br> +law of tendency, <a href="#19">19</a>;<br> +marginal utility and, <a href="#43">43</a>;<br> +post-war, <a href="#61">61</a>;<br> +reaction of changes in demand and supply, <a href="#27">27</a>;<br> +relation of demand and supply to, <a href="#20">20</a>;<br> +utility and, <a href="#40">40</a></div> +<div class="entry">Producers' goods, <a href="#49">49</a></div> +<div class="entry">Production, power of, <a href="#125">125</a>;<br> +real costs, <a href="#162">162</a>;<br> +waiting for, <a href="#120">120</a></div> +<div class="entry">Professions, <a href="#150">150</a></div> +<div class="entry">Profiteering, <a href="#75">75</a></div> +<div class="entry">Profits, <a href="#61">61</a>, <a href="#177">177</a>;<br> +elements, <a href="#104">104</a>;<br> +general analysis, <a href="#117">117</a>;<br> +in risky industries, <a href="#110">110</a>, <a href="#115">115</a></div> +<div class="entry">Protective tariff, <a href="#169">169</a></div> +<div class="entry">Psychology and economics, <a href="#1">1</a></div> +<div class="entry">Purchasers, business man, <a href="#47">47</a>;<br> +housewife, <a href="#41">41</a>, <a href="#43">43</a>, <a href="#44">44</a>, +<a href="#47">47</a>;<br> +marginal, <a href="#44">44</a></div> +<div class="entry">Purchasing power, <a href="#33">33</a>, <a + href="#61">61</a>, <a href="#172">172</a></div> +</div> +<div class="letter"> +<div class="entry">Railway rates, <a href="#175">175</a></div> +<div class="entry">Railways, <a href="#64">64</a></div> +<div class="entry">Rate of interest. <i>See</i> Interest rate</div> +<div class="entry">Rent, <a href="#82">82</a>, <a href="#83">83</a>;<br> +complex character, <a href="#90">90</a>;<br> +marginal land, <a href="#89">89</a>;<br> +necessity, <a href="#98">98</a>;<br> +rate of interest and, <a href="#102">102</a></div> +<div class="entry">Reserves, <a href="#136">136</a></div> +<div class="entry">Residuary profits, <a href="#110">110</a></div> +<div class="entry">Resources, allocation, <a href="#166">166</a></div> +<div class="entry">Risk, reward for, <a href="#104">104</a>;<br> +under large-scale organization, <a href="#111">111</a></div> +</div> +<div class="letter"> +<div class="entry">Satisfaction, <a href="#50">50</a></div> +<div class="entry">Saving, <a href="#127">127</a>, <a href="#174">174</a>;<br> +individual, <a href="#127">127</a>;<br> +involuntary, <a href="#134">134</a>;<br> +psychology,<a href="#133">133</a>;<br> +social, <a href="#128">128</a></div> +<div class="entry">School teachers, <a href="#160">160</a></div> +<div class="entry">Service, <a href="#19">19</a></div> +<div class="entry">Serving cotton, <a href="#74">74</a></div> +<div class="entry">Shareholders, <a href="#135">135</a></div> +<div class="entry">Sinking-fund, <a href="#134">134</a></div> +<div class="entry">Situation, <a href="#88">88</a></div> +<div class="entry">Smith, Adam, <a href="#v">v</a>, <a href="#139">139</a></div> +<div class="entry">Social grades, labor movement among, <a href="#149">149</a></div> +<div class="entry">Socialism, <a href="#9">9</a>,<a href="#11">11</a>,<a + href="#14">14</a>,<a href="#59">59</a>,<a href="#134">134</a>,<a + href="#141">141</a></div> +<div class="entry">Speculation, <a href="#112">112</a>-<a href="#113">113</a></div> +<div class="entry">Steel smelters, <a href="#76">76</a></div> +<div class="entry">Subsidies, industrial, <a href="#169">169</a></div> +<div class="entry">Substitutes, <a href="#80">80</a></div> +<div class="entry">Supply, reactions of price changes on, <a href="#30">30</a>;<br> +<i>see also</i> Composite supply; Joint supply</div> +<div class="entry">Supply and demand, changes in, and their reaction on +price, <a href="#27">27</a>;<br> +forces behind, <a href="#37">37</a>;<br> +general laws,<a href="#18">18</a>, <a href="#29">29</a>;<br> +relation of price to, <a href="#20">20</a>;<br> +wages and, <a href="#143">143</a></div> +<div class="entry">Supreme Allied Council, <a href="#169">169</a></div> +</div> +<a name="181"> </a> +<div class="letter"> +<div class="entry">Teachers, <a href="#160">160</a></div> +<div class="entry">Theory, economic, <a href="#v">v</a>, <a href="#1">1</a></div> +<div class="entry">Thrift, <a href="#127">127</a></div> +<div class="entry">Tillage versus pasture, <a href="#97">97</a></div> +<div class="entry">Trade cycles, <a href="#34">34</a>, <a href="#125">125</a></div> +<div class="entry">Trade depression, <a href="#33">33</a></div> +<div class="entry">Trade unions, <a href="#144">144</a>;<br> +actions, <a href="#154">154</a>;<br> +wage level and, <a href="#156">156</a></div> +</div> +<div class="letter"> +<div class="entry">Ultimate real costs, <a href="#82">82</a>, <a + href="#162">162</a></div> +<div class="entry">Unearned increment, <a href="#86">86</a></div> +<div class="entry">Unemployment, <a href="#168">168</a>;<br> +trade union policy and, <a href="#144">144</a></div> +<div class="entry">Utility, <a href="#37">37</a>;<br> +cost and, <a href="#165">165</a>;<br> +derived, <a href="#49">49</a>;<br> +general relation of price, utility and cost, <a href="#65">65</a>;<br> +law of diminishing utility, <a href="#40">40</a>;<br> +law of diminishing utility as applied to money, <a href="#49">49</a>;<br> +marginal, <a href="#42">42</a>;<br> +price relation to, <a href="#38">38</a>,<a href="#40">40</a>;<br> +wealth and, <a href="#170">170</a></div> +</div> +<div class="letter"> +<div class="entry">Wages, general wage level, <a href="#143">143</a>;<br> +trade unions and, <a href="#155">155</a>, <a href="#156">156</a>;<br> +women's, <a href="#157">157</a></div> +<div class="entry">Wages Fund, <a href="#125">125</a></div> +<div class="entry">Waiting, essence of, <a href="#126">126</a>;<br> +for consumption, <a href="#121">121</a>;<br> +for production, <a href="#120">120</a></div> +<div class="entry">Waste, economic, <a href="#167">167</a>, <a + href="#168">168</a>, <a href="#176">176</a></div> +<div class="entry">Wealth, distribution, <a href="#131">131</a>, <a + href="#137">137</a>,<a href="#172">172</a>;<br> +utility and, <a href="#170">170</a></div> +<div class="entry">"What should be" and "What is," <a href="#141">141</a></div> +<div class="entry">Women's wages, <a href="#157">157</a></div> +<div class="entry">Wool and mutton, <a href="#7">7</a>, <a href="#66">66</a>;<br> +contrast to cotton and cotton-seed, <a href="#71">71</a></div> +<div class="entry">Workers' control, <a href="#117">117</a></div> +</div> + + + + + + + +<pre> + + + + + +End of Project Gutenberg's Supply and Demand, by Hubert D. 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