UNIVERSITY OF CALIFORNIA AT LOS ANGELES THE LAWS OF SUPPLY AND DEMAND First Puhllghed. . . . March, 1912. Sicond Impression . , . October, 1912. THE LAWS OF SUPPLY AND DEMAND WITH SPECIAL REFERENCE TO THEIR INFLUENCE ON OVER-PRO- DUCTION AND UNEMPLOYMENT BY GEORGE BINNEY DIBBLEE M.A. LATE FELLOW OF ALL SOOLS' COLLEGE, OXFORD SECOND IMPRESSION. I' 3 > * • ■* ' > < > > J J J J > * , J LONDON CONSTABLE AND COMPANY LTD JO ORANGE STREET LEICESTER SQUARE W.C. 1912 ■HI: \ 7 I • V DEDICATIO Liotiello MiJford, liomini rnUvi carissimo amkissimoque, cui pJura debeo quam qiue, vel in chartis possim enumerare, vel aliier exponere ausim cotiari, hunc Ubrum dedico, qui quidem fontem originemque r-) hinc duxit. QucB enini de iis rehits, qua, in eo tractantur, diutissime |. , V ac necessitate nescio qua coactus in animo volutaveram, nuperrvme ■^) ei de indusiria disposui et ordinavi, noscendi causa, quern ad finem spectarent, simul utrum in rationem doctrinamque redigi possent accuratiorem. Spero quidem, ut nihil aliud, hoc tamen me profecisse, ut materiam perobscuram et difficiles explicatus hahentem hand jmrum dilucide enucleavei'im, sicubi vero id non sim assccutus, non me cuiquam futurum Itidihrio, ut qui vel fufilia molestaque com- mentatus sim, vel arroganiius cdiquid enuntiaverim. G. B. D. 218927 PREFACE It may be considered a mild achievement in these tempestuous times to write a work on political economy from which all discussion of tariff and free trade is rigorously excluded. In the following pages free trade is, I believe, nowhere specifically mentioned and where the word tariff occurs it is either in some passage purely descriptive or else accompanied by a statement excluding such parts of the topic as would lead on to the discussion of an unnecessarily vexed question. The operation of tariffs is of course con- trolled by the laws of supply and demand, but not peculiarly so and not in any way exhibiting a difference of principle with the conduct of unrestricted commerce. It was there- fore quite legitimate not to take this young cuckoo-bird of political economy into our nest, where he would infallibly have encroached on space, until there was room for nothing else. The present study commences with a reference to a dinner-table conversation in December, 1910, which is only worth mentioning in order to give the assurance that it is no rhetorical device to introduce cut-and-dried theories previously formed, but that it is the true starting-point of the inquiry. The only part of this book written out of order was the determination of the theory of value in Chapter IV. and that is necessarily the preliminary of all economic discussion. For the rest, the argument was discovered and written in the order which is followed in the text and the method is a progressive one from point to viii PREFACE point. Some of the deductions came to the author himself rather as a surprise and, what one may call the nett conclusion of the book, requires some courage to face. The position developed by the argument is nothing less than a direct assault on the orthodox theory of political economy, as established by the early English economists. So widely sweeping a condemnation of the old school is nowhere directly stated, but it must be logically and I hope not intolerantly inferred from minor and cumulative criticism of its various doctrines. I believe that this body of doctrine has entirely seen the close of its last period of usefulness and that it must be replaced. It has been maintained upright only so long by its logical coherence in spite of a mistaken or irrelevant social philosophy on which it was founded, in spite of preliminary assumptions always declared to be provisional, but accepted as actual by many followers, in spite of its condemnation by experience and of its demonstrated inapplicability in many ways to real life. Many of its outworks have been shot away without render- ing it weak or ridiculous. Infinite and reverent modifica- tions of obvious errors have been used to buttress it up, but they were unnecessary and they ought not to save it now. It has been held together by its own consistency and completeness and this completeness is the justification I feel for my belief that it ought to be swept away. Some of the conclusions stated in the text, which are to be found in Chapters X., XL and XII., where the argument proper ends and subsidiary discussions begin, are sufficiently new to deserve a preliminary consideration by those economists who are not fanatically devoted to the orthodox form of current theories. But it was not for economists that this discussion was primarily undertaken. It is rather to be described as a practical investigation of principles underlying the habits of business men. The starting-point PREFACE ix in every case has been the examination of the use of terms current in business, and where, as happens sufficiently often, there is some irreconcilable difference between economic definition and practical use, it is not the latter that is allowed to give way. No doubt this is partly due to my own weakness in the later theory of the subject and par- ticularly in knowledge of its mathematical developments, which have increased more rapidly than their readers. But perhaps a more valid justification for my practice may be that, where theoretical knowledge has been divorced from business experience, as it too frequently has been, it ie difficult for economists to be aware of the full content of common terms, which are often the condensation of layers of practical knowledge. These terms are, after all, not originated by economists, but adopted by them from complicated current use. It thus happens that their definitions lack richness as well as reality. The issue involved is one on which we shall all clearly be bound more and more to take sides in the future, and therefore I feel constrained to throw in my lot with the practical men and to confess that my present study is not founded so much on a rather limited reading as on twenty years of reflection and of experience in more than one kind of business in three countries. The result is unfortunately a certain amount of unfairness on my part in delivering apparently random criticisms on a body of economic doctrines rather vaguely indicated, as the orthodox English school, without selecting any particular author or book or even any precise argument, except in the case of Mill's law of value. It is equally true that the later defenders and modifiers of these doctrines have been neglected in these pages, and no notice has been taken of the number of cases where criticisms have been accepted and embodied and attacks have been skilfully parried. If this work were put X PREFACE forward as primarily scientific, such omissions would be indefensible, yet since its object is practical, and, as in order to be practical one must be brief, concentrated and concerned chiefly with exposition rather than with criticism or con- troversy, I have been obliged to neglect the unessential. I consider the modern modifications of the old school un- essential. The old school stands unreplaced. Its original language is still current and the men between forty and fifty, who guide the actual currents of business, know no other. We are too old to learn the higher mathematics and we doubt its usefulness in this field. Among the most notable creations of this venerable school, which has been so little injured by the criticism of half a century, is the economic man. He is the standard popinjay of science. As a working man he has been long ago abolished by the attacks of the Socialists. As an employer he has been given up since we learned that competition in eliminating the inefficient during a crisis is apt to gather a large number of others into its net of destruction. But as a consumer, the economic man still survives undisturbed. In the books the markets are still hungry, or ought to be so, and a glut is considered to be an exceptional case outside all laws. The most solid contribution to economics which I hope to afford in the following pages is the total destruction of the economic consumer. He is more essentially a fraud than the adaptable workman or the ever-provident employer. If anyone would thoroughly realize what phantoms these hungry buyers are, let him start a manufacturing business with the newest and most economical production but without selling connections. Let him turn out the goods cheaply, lower his prices and wait for customers. But, as everyone knows, it is in the moral sphere that the assumption of an economic man has been most fatal. Theoretically, economic science is no worse than unmoral. PKEFACE xi but in its proper sphere moral considerations are so much interlaced with it that true impartiality is impossible and in practice has never been attempted. The idealization of selfishness was quite a sound practical deduction from the theoretical postulate of universal efficiency. It was not slow in coming. In its time it made industrial England a treadmill and speculative America a slaughterhouse. What- ever we may now say or do to subvert it, it will still be dominant as a cheap philosophy in business for another hundred years. But, happily, although it will be hard to wipe out entirely, its influence has long been less than the outward respect paid to it. Many men gave it lip-service, who observed it little in their practice. Take all that business called the " higgling of the market " ; it has very little place in the stream of great commercial transactions. To over-estimate your own share in a transaction of exchange is probably in the end to effect a good bargain and to lose further opportunities of making a second. The chief requirement of modern commerce is to satisfy your customers and to keep round you as large a ring of them as possible. So selfishness in exchanges is discounted as a wise weapon and with further effort and better education we may come to see its equal futility in transactions of employment, in international commercial dealings and in the conduct of monopolies. There is a peculiar function still exercised by the old English school, which has not received due attention, in furnishing the intellectual buttresses to the doctrines of some of its chief opponents. The theoretical edifice of the early Socialists, not yet discarded, was founded directly on one of Ricardo's most celebrated mistakes, and their economic equipment, such as it is, is supported by little of anything more substantial than the weaknesses and omissions in current doctrines. The one original mind among their xii PEE FACE leaders was too much absorbed in practical life and politics to be able to develop his own fruitful ideas, while he accepted too readily an infusion from other theories less well-balanced than his own. When the theory of demand has been properly established, collectivist ideals will need to be subversively modified to meet it. The study of consumption and the formulation of the theory of demand must be the starting-point of the new political economy. The practical counterjDart of theory on these questions is the subject of our daily preoccupation in business and economists would find some profit in this matter by laying their minds beside ours. It is my earnest hope that my present study may be accepted as the second step in this direction. The first was taken by Jevons in 1879 in the celebrated preface to his second edition of the " Theory of Political Economy," where he couples with him- self Gossen as being the first to assert for economic science, that it is founded on the requirements of our human nature, on our personal estimates of them and on an account of the received civilized methods of exchanging personal sacrifices for personal requirements. That is not quite the way in which he puts the theorem, because he chooses to adopt the words, pleasure and pain, which do not at all cover the whole field of human requirements. But I see no breach of principle in choosing wider terms to express the whole field, which from the economic point of view is essentially one and the same. Unfortunately, in my judg- ment, Jevons after assuming psychological data hoped to get valuable results by putting them into mathematical mechanisms and obtained solutions which are entirely shrouded from my vision and whose utility I question. As a mathematical friend of mine, ^fr, Mark Barr, with whom I have often discussed this proljleni, maintains, if mathe- matics could really be made useful in business and conse- PKEFACE xiii quently in economics, there would be no difficulty in constructing a machine to measure the change in the rate of change of prices in cotton, sugar, wheat, &c., which would rapidly make anyone's fortune. I have to thank Mr. Barr for much valuable assistance and criticism and much useful illustration from practical life, by which the following pages benefit not a little. I desire also to thank my friend Mr. Frank Pember for his kindness in giving an elegant and classical form to a tribute of gratitude towards another old and valued friend, mentioned elsewhere. G. BINNEY DIBBLEE. Watford Old Farm, Guildford, December, 1911. Important. — For the convenience of readers all the laws and definitions quoted or formulated in the text are collected in a handy table at the end of the book {seep. 276), for pwyosts of easy reference. SYNOPSIS PEEFACE . ; p. vii. CHAPTER I THE LAW OF SUPPLY AND DEMAND General use of the term " the law of supply and demand" — Vagueness of its meaning— Mill's law of value — Its reversal in two direc- tions — Monopoly and glut — Marshall's theory of the equilibrium of supply and demand — Its limitations — Discussion on the mean- ing and scope of a market — Law of final bargaining . . p. 1 CHAPTEE n SUPPLY AND DEMAND Analysis of supply and demand — Are they quantities ? — Supply usually assumed for practical purposes to be a quantity or quantities — Demand mistakenly assumed to be a quantity — Break of continuity in demand — Common and inaccurate use of supply and demand curves — Analysisiof a transaction of sale and purchase — Exchange of sacrifices — Supply is crystallized, demand is uncrystallized sacrifice — Time-difference is the essential distinction — Supply can be roughly and usefully expressed in quantities — Demand has an element of futurity in it, which makes this impossible — Demand is a group of values . p. 12 CHAPTEE III WANTS AND SACRIFICES Psychological analysis of sale and purchase by means of medium of exchange — Its superior simplicity to barter — Doctrine of alterna- tive wants — Successive stages of the wants of an individual for xvi SYNOPSIS necessaries, variable alternatives and superfluities — Futility of most wants — Most wants prescribed by habits of vulgar imitation — Banfield's law restated — Wants develop from simplicity towards sophistication — Self-development, self-assertion and desire for distinction — The chief object of economic imitation is dictated on the whole by the lowest standards — Universal difficulty of avoiding vulgarity at second or third hand — Necessity of the reasoned study of consumption — Habits of consumption determine values as the sacrifices of the seller determine price . . p. 20 CHAPTEE IV VALUE AND PKICE Analysis of the distinction between value and price — Who are the true buyers and sellers, when so many are mere intermediaries ? Every buyer is the agent of the consumer and every seller is the agent of the producer — Definition of value — Market values — • Can values remain above price ? — Qualifications of value in current use — Strong attitude of the seller — Hit-and-miss nature of his naming of price — Definition of price — Its essential character is that it must be quoted or stated — Apparently exceptional cases — Definitions of supply and demand — Both of them essentially aggregates of self-values, but while supply can be easily and conveniently measured in quantities and prices demand cannot . p. 31 CHAPTEE V THE FUTURITY OF VALUES General rise in values quite possible in spite of Mill — Analysis of the buyer's sacrifice — Buying for services — Buying for trade — Buying for cash — The buyer has to replace out of future sacrifice his disbiu-sement in the present — Balance of interests between present enjoyment and future sacrifice — Description of a supposed general rise in values, commonly called a boom — Time- difference between the sacrifices of the buyer and the sacrifices of the seller — Chief problem of modern industry —World's productive capacity — Difficulty of marketing immense output — Necessity of maintaining the suction of demand . p. 40 SYNOPSIS xvii CHAPTER VI COST Predominance in wealth of the mercantile over the manufacturing cities — Huge population and small manufacturing product of London — Greater wealth goes to the selling community than to mere manufacture — Analysis of selling cost — Extreme complica- tion of the process of selling — High value of a goodwill or trade connection — Cost and difficulty of creating such goodwill — Perils of starting business without one — Comparative wholesale and retail prices of food in U.S. America — Cost of a carcase of beef — Cost of milk, vegetables and fruit in U.S. America — Given away with a pound of tea — Comparison with German and English conditions — Manufacturing and selling costs of a yard of calico in Lancashire — Superior position of the retailer in the selling chain — Obligation on the retailer of meeting the vanity of the cus- tomer — Strong position of the great retail stores all over the world — Curious case of the value of retail selling agencies . . p. 50 CHAPTER VII ANALYSIS OF COST Impossibility of pursuing inductive method in economics or of veri- fying facts — Refutation of economic dictum " that price tends in the long run to approximate to the cost of production " — An instance from the boot trade analysed — Another instance from the machine-tool trade — Important instance taken from the electrical industry — Mr. Cowan's analysis of the cost and profit of supplying electrical current for light, heat and power both on equal-priced schedules and under a classified scale of charges — Criticism of the expression "in the long run" — Constituent elements of cost are all of them variables, some of them being mutually interdependent — General picture of selling opera- tions and of the parts taken by producer, middleman and retailer — Definition of selling costs — Demand the chief deter- minant of price — Fluctuations of demand, both seasonal and accidental — Extravagant selling cost of professional services — Function of advertising — Humbug and imposture . . p. 63 L.S.D. b xviii SYNOPSIS CHAPTER VIII THE LAWS OF SUPPLY Tremendous development of productive power in modern times — Sudden improvement in communications opened world markets — Revolution in markets also effected by the telegraph and telephone — Resulting influence of this change on economic theory — Laws of diminishing and increasing return — Their spheres of operation — Their frequent alternate operation in the same industry — Their limitations — Both laws are really contained in larger laws — Law of contracting facilities of production — Law of expanding facilities of production — Illustration from an imaginary case of the alternate influence of these two laws given in the agricul- tural town of Dilberg and its supposed successive prosperity and decadence — New wheat lands being opened up in North and South America — Complicated case of interlacing action of these two laws in the rubber trade — Competition between plantation rubber and Brazilian wild rubber p. To CHAPTER IX MONOPOLY AND GLUT Unfortunate lack of words denoting degrees of stringency and plethora — Monopoly and glut both unsatisfactory, but the best available — Tendency of markets to run from glut to monopoly — Theory of the fluidity of markets — Situation of an isolated undeveloped agricultural community — Change wrought in markets by immense increase of productivity — Present necessity of maintaining a costly commercial mechanism to secure adequate reward for the producer — The old economic view tended to regard monopoly and glut as abnormal — The central point of my theory is that some measure of them is normal and that the maintenance of prices at equilibrium points between them is artificial — Three constituents of value — Natural monopolies generally restricted by the state — In other cases encouraged and protected by the state — Exaction of the full profits of an artificial monopoly is rare and difficult — Successful control of the supply of American refined oil by Mr. Rockefeller — History of the Standard Oil Trust — Glut followed by monopoly— The main profits go to the selling end SYNOPSIS xix of a business — Special cases of partial monopoly — Land the most common subject of monopoly — Ricardo's law of rent only part of wider generalization — Land subject to both primary and secondary demand — Special partial monopoly in saleable talents offers very similar case to rent— Law of graduated returns on partial monopoly — Apparent inequality of rewards for talents due to action of this law — No intrinsic value in talents or services p. 88 CHAPTER X THE LAWS OF DEMAND Three main conclusions already reached — Demand is chief deter- minant of price — Demand is a group of values— Economics and the science of exchange are a part of or are founded on psychology and ethics — The chief object of economic effort — Law of rising demand or law of monopoly — Monopoly restrained or modified by satisfaction of alternative wants — Extreme cases of monopoly — Law of substituted demand — "The next best" or "the just as good" — Law of vanishing demand or law of glut — Law of recurring demfind — Law of anticipated recurrence of demand — Periodicity-agio in value of goods — Law of stratification of demand p. 107 CHAPTER XI INTERMEDIATE AND SECONDARY DEMAND Distinction between the intermediate buyer and the final buyer or consumer — Distinction between demand for consumption and demand for instruments or tools, which are secondary to the demand for ultimate consumption — Question of terms — Illus- tration of passing baskets of strawberries — Instance of passing beef through several hands to the ultimate consumer — All inter- mediate demand is affected by any check in ultimate demand — Law of intermediate demand — Chain of buyers and sellers required for every commodity — Secondary demand — Law of secondary demand — Direct operation of the laws of simple demand confined to a small number of transactions — Its indirect effect wide-reaching — Complication of the adjusting machinery p. 121 XX SYNOPSIS CHAPTER XII THK LAW OF THE EQUATION OF SUPPLY AND DEMAND The great selling machinery of the world— Its field of operation- Its necessity— Its function— Evolution of mutual facilities in bargaining by development of mechanical complexity—Stability of our system is not absolute nor natural, but the result of enormous effort— Comparison of our system with a rocking-stono — Mill's law of value re-stated — Its limitations— Instances of reversal of Mill's law when prices fall owing to a glut and when prices are forced up owing to a monopoly — Practical maxim thut commodities must not be offered too cheaply — Failure of Mill's law p. 132 CHAPTER Xin CONTROL OF SUPPLY Definition of economic meaning of legitimate and illegitimate control of supply — Co-operation to control supply among a linked chain of intermediate buyers and sellers — A trade can be regarded as a group or a series, or again as a series of groups or else as a group of series — Special function of the strong links in each series — Historical survey of mercantile development — Fluctuations of trade — Function of the selling organism as a whole in controlling supplies — Theory of the " great exchange " — Critical limitations of legitimate control of supply — Instance from the Lancashire cotton trade of controlling supply by working short time through co-operation of masters and men — Brazilian valorization of coffee p. 141 CHAPTER XTV COMBINATIONS TO CONTROL SUPPLY Nature of combinations— Test of their legitimate operation— Futility of the Sherman law — Initial difficulty of forming combinations — Distinction between stability of prices and stable equilibrium of a market— Possibility of extortion by monopolies makes them an SYNOPSIS xxi object of universal suspicion — Various forms of combinations — Assignment of trade areas — Maintenance of prices — Regulation of output — Shipping conferences — Nomenclature of combinations — Name of Judge Gary's woi^ld steel combination not yet settled — French syndicats — German kartels — Stalil-Verband — Russian Prodameta — English combinations — J. & P. Coats — Lancashire and Yorkshire combines — Bank amalgamations — American com- binations — Pools, mergers and trusts — Flexibility and power of modern American trust — Obloquy attached to the term — Mr. Schwab on the term "trust" — History of formation of United States Steel Corporation — Mr. H. K. Smith's report — Two movements, one a defensive manufacturing pool to maintain prices, the other a combination to monopolize raw material, united together to form the United States Steel Corporation — Its weakness as a manufacturing concern — Judge Gary's dinners — Its attempt to monopolize supplies of ore, coke and fluxing material — The "act of God to relieve the independents" — ■ Tennessee Coal and Iron Co.'s deal — General weakness of mere manufacturing combinations— Strength and weakness of com- binations of all kinds — Their special danger to the community through draining o3 money in a crisis . . . • P- loo CHAPTER XV THE MANIPULATION OF DEMAND In exchange initiative has to be taken by the seller — Ajipearances often the reverse — Solicitation of demand^Relative advanta^-es of small and large trading — High value of good selling ability^ Three methods of getting customers — Personal connection — Commercial travelling— Advertising — Enormous expenditure on advertising — Estimated to be £100,000^000 annually in the United Kingdom— Probably from £500,000,000 to £600,000,000 annually in the world — Mysterious commodity of publicity — Philosophy of publicity— History of hungry markets succeeded by surfeited markets — Necessary element of misrepresentation in much advertising — Customers desire to be flattered and deceived — A^Tiat is "the best "?— Analysis of the utility of advertising — Modern developments p. 178 xxii SYNOPSIS CHAPTER XYI OVER-PKODUCTION Economic dictum that general over-production is impossible — Also that goods in the long i-un are exchanged for goods — Both these theories are wrong, because they take no account of the time-ele- ment in value — Illustration of the loss due to delay in exchanges — Criticism of Mr. Beveridge — Analysis of the doctrine that time is an element of value — Illustrations from the case of a fortnight's delay in the sale of 5,000 pairs of boots — Devaluation of the boots — Definition of over-production — General over-production possible but unusual except from financial causes — Causes of local over- production — Sometimes but rarelj' due to reckless capitalization — Capital on the vrhole nowadays is too cautious — Present difficulty of financing industry — Pressure of over-production in industry comes generally from inside the trade itself — Contrast of different types of mind in industry — Energetic and inventive type with a tendency to produce recklessly — Cautious and con- servative type, which generally controls all the best selling con- nections — Deadlock between the two often produces prolonged depression in trades — Deceptive paradox that all industries are carried on somewhere at a loss — Consideration of seasonal fluc- tuations of trade — Question whether general over-production is due to specific trade causes or financial causes generated by outside accident — Inclination to accept latter theory — Over-pro- duction an entirely modern problem due to cheap manufacture — Is this tendency an increasing one ? .... p. 193 CHAPTER XVII TRADE CRISES Financial crises involve trade crises — English crisis 1901-3, and American crisis 1907-8 — How does financial stringency produce a trade crisis ? — Quantitative theory of money — Supposed effects of withdrawal of £oO,000,000 of gold from world currency — It might involve a shrinkage of real money equal to £7,000,000,000 — Drain on credit alone is not so bad as a drain on gold — Analysis of the quantitative theory of money — Effects of rapidly rising and falling prices — Two causes of financial stringency- Accidental physical cause — Bad banking or financial management SYNOPSIS xxiii — Two other causes are industrial — Over-production or under- demand — Phenomenon of general rise in prices — Present rise in prices analysed — Not due to plethora of gold — More probably due to temporary predominance of selling agencies — Prevailing high prices lead to general unrest and political agitation . p. 210 CHA.PTER XVIII THE SALE OF LABOUR Is human exertion a commodity ?— Paradoxes of labour sold and given away side by side — Case of underpaid women — Case of starving authors — Sale of the higher kinds of services — Profes- sional services — Salaried middle classes — Working classes — - Skilled labour and trade unions — Growing solidarity between skilled and unskilled labour — Rise of trade unions is the most important industrial fact in the modern world next to the general development of communications — Their double function as bargainers for sale of labour and maintainors of reserves of labour — Their enormous power is rooted in the latter capacity — Great mistake of early Victorian masters not to maintain their own reserves of skilled labour — Pretentious ineptitude of laissez faire theories of those days — Political advantage accruing to trade unions from being both benefit societies and fighting organizations — Advantage of this dual position in the case of the Trades Disputes Act— Question of security of the person in trade disputes — Peaceful picketing — Sinister power in the terrorism of unknown men — Real services of trade unions — Problem of un- skilled labour — Constructive work of trade unions is probably at an end— Their policy is now self-seeking, shortsighted and destructive —Right to strike — Futility of a general strike — Demoralization resulting from general breach of contracts p. 227 CHAPTER XIX THE RIGHT TO WORK Reserves of unemployed constitute most difficult moral and politica problem of modern times — State help required to solve it — Right to work — Experiment of universal industrial control by the state — Doctrine of intrinsic value— Doctrine of time-element in value — Right to work implies right to have your product sold for xxiv SYNOPSIS you — Difficulty of helping unskilled unemployed lies in fact that economic value of this laboiu" is very low — Its independence also destroys half its value — Comparison of British, French and German labour — Eesistance to adaptation makes demoralization certain — Unemploj-able and occasionally employable class — Casual labour — Minimum wage — Theoretical justification — Practical justification — Habits of continuous labour must not be broken down so as to become discontinuous — Hypothetical concrete case— Danger of collusive evasion — Case of women's labour — Minimum wage would certainly break down by collusion — Privation of casual employment for women would be not a boon but a penalty — State notoriously a bad seller — Socialist solution of trade waste — Criticism of Eamsay Macdonald — State incompetence to sell goods at home will be redoubled in foreign trade — Socialist state necessarily an isolated and poor state p. 2-16 CHAPTEE XX CONCLUSION Theory of selfishness in business quite absurd but still prevalent — Laws of supply and demand are the habits of our commercial system — The "great exchange" — Apparent injustice of the exchange in crucial instances — Our commercial system aims at a pedestrian kind of justice — The chief obstacles to the smooth working of the " great exchange " are place and time — The first is easy to surmount because it is a question of distribution — The second is more difficult because it is a question of value- Protection of state necessary to value— State limits forms of property by regulating contracts — State fails when it leaves questions of principle and tries to interfere in details — Failure of U.S. government against the American trusts— The American Tobacco Co. and its successful evasion of the Sherman law — State property— Wealth of the state— Economic value of personal talents, habits of industry and high character . . p. 264 HANDY TABLE OF THE LAWS, DEFINITIONS, TERMS, &u P- ^'6 THE LAWS OF SUPPLY AND DEMAND CHAPTER I THE LAW OF SUPPLY AND DEMAND On a recent visit to America, which occurred in the autumn of last year just after the Congressional Elections, I happened to be in a household in New Jersey where we were discussing the reasons for the immediate fall of retail prices in the district on the day after the Democratic victory was declared. There was of course a tendency to take party sides on the question, some maintaining that the fall in prices was due to expected changes in the tariff, and others the contrary. One of our number, an eminent lawyer in New York and presumably a Republican in politics, asserted sagely that the tariff had nothing to do with it, but that the fall in prices was due to the operation of the law of supply and demand. This ex cathedra judgment indirectly brought the discussion to an end, because I found myself asking him with more seriousness than he observed whether he could help me to understand what the law of supply and demand was, and how he defined supply and demand, because I had had difficulties about it. As he seemed to scent a political discussion arising out of my question, he courteously evaded it in order to spare the company and I L.S.D. B 2 THE LAWS OF SUPPLY AND DEMAND was aware of having perhajjs exceeded the hmits imposed on general conversation. But I remained intensely curious as to the pro23er mean- ing of this most frequent expression, so much so, that it seemed to me an object for more extended study. I noted that the term is freely used in the plural, Avhen some economic meaning can be attached to it as representing Mill's law of value together with the law of the equilibrium of supply and demand, the two chief laws of supply, and perhaps Bamfield's theory of wants and the laws of demand as formulated by Professor Marshall and others. But as it is more commonly used, in the singular, the expression lacks definition, and it is difficult to attach to it any specific meaning whatever. When used in conversation and more glibly in the columns of the press, it seems to be accepted in any dis- cussion as necessarily terminating the argument, like some appeal to a bourgeois Cssar. The word, law, carries weight and the sanction which accompanies it by implica- tion is the predominant force of selfishness, as the sole arbiter of economic problems. It represents a rather brutal assertion of common-sense against the intrusion of sentiment into business. The mere use of an impressive phrase in a loose way in conversation or current writing is not in itself so infrequent as to require attention. But what brings about the use of this particular term in so portentous a manner without any definite relation to economic laws as they are now recognized and formulated ? What is supply and what is demand and what is their all-embracii;g law ? The law of value as stated by Mill * is that " demand and supply, the quantity demanded and the quantity sup- * J. S. Mill. "rrinciplcs of Puliliciil Economy," Book III. Cap. II., Sec. o. THE LAW OF SUPPLY AND DEMAND 3 plied, will be made equal. If unequal at any moment, comjietition equalizes them." He goes on to describe briefly that this process of competition brings fresh buyers as prices fall and brings fresh sellers as prices rise. This is not equivalent to the law of the equilibrium of supply and demand, as formulated by Mill's followers, which must be considered later, but, stated baldly and without any of the qualifications immediately elaborated in the context by Mill, it represents the popular idea of the law of supply and demand more especially on the largest scale. That is to say that most people really believe that this law operates irresistibly everywhere on a world scale, without any limitations as to the area of the market or to the restriction of supplies or to their indefinite multi- plication. They have cloudy visions of world quantities on sale on one side opposed to world buyers on the other, with the sole requirement of running a price up and down a little scale in order to bring the opposing forces en rajyport at a given point, when the gigantic bargain is made. Nothing could in practice be more untrue. It is untrue because, although Mill's theory is within limits correct, the limitations to it imposed by business are more important than the law itself, and a little consideration will show that in all practical cases the line has to be drawn so closely above and below the equation or equilibrium point that there is practically very little room for the operation of the law itself. The proof of this is within the common know- ledge, if not within the experience of all. Any restriction of supply within a market gives rise to a \ scarcity running into a monopoly. With monopoly the \ price rises, and may rise, until the demand stops. So far on the side of rising prices there is at first sight nothing not in accordance with Mill's law of value, except that, aa B 2 4 THE LAWS OF SUPPLY AND DEMAND Mill shows, the restriction of supply brings about a rise in price quite out of proportion to mere quantities. But it is not uncommon to see such an increase of price, if it is caused by a genuine or even threatened shortage, which the buyers know or suspect, actually effect an increase in the demand, more especially so where the market is active and limited. Such a tendency on the Stock Exchange would be described as a run to cover by the " shorts," where the effect would be only temporary, although the operation might be painful. But it is not only in the wayward and speculative market for stocks that this reversal of the market tendency occurs, it is frequent also in the material markets of the world such as those of wheat, iron and cotton. Certain supplies of staple commodities the world must have, and dealers, who are buying not for speculation but for consumption, must protect themselves against a threatened scarcity, and they have therefore to buy steadily on a rising market. For the purposes of the present argument it is only necessary to notice that on a rising scale of prices Mill's law of value is often reversed for the time being. On a falling scale of prices the result is not entirely parallel, but here also there is a reversal, and when it comes it will be more marked, and its effect for a considerable period will be paralyzing. With an exuberant supply every seller knows that the situation is full of danger for him. The price sags downward only slowly, so long as the market still requires material for immediate consumption. After that prices falling still further will tempt buyers to lay in large stocks. A further fall will induce a little speculation even among the oldest and steadiest buyers. But if supplies are still forced on the market, a terrible thing happens. There will be no buying at all at any price. Stocks are left to go to waste or ruin, even if they are not, as sometimes happens, destroyed. That is what is called THE LAW OF SUPPLY AND DEMAND 5 the " glut of the market." It is the complete reversal of the law of value on a falling price list.* Economists have often mentioned, but not, so far as I know, analyzed this remarkable phenomenon of the glut of the market. In theory it is supposed to be abnormal, whereas in practice greengrocers realize it very often on Saturday nights and fishmongers possibly at any time ; every farmer knows it in one season out of a dozen, and most manufacturers look after its occurrence far more anxiously than after their cost of production. Kegarded as the upper and lower limits of Mill's law of value, theory has to take notice that these are a threatened monopoly on one side and the glut of the market on the other; each may import, one gradually and the other suddenly, a reversal of the law. To succeed in business the ordinary man may neglect or be ignorant of Mill's law, but he must be very keen to observe the moment and degree of its reversal on the upper schedule of prices in order to make a living and to avoid, like ruin, which it often brings, the paralyzing reversal of it on the lower schedule. It is interesting to notice the similarity of a reversal in both contrary eventualities, but the difference in their methods of doing so is still more important. It makes one suspect that supply and demand are not each quantities of goods, or groups of people, or lists of prices. They are possibly dissimilar. What they are I must leave for con- sideration until a later chapter. Mill's law of value is no more than a crude statement of one part of the process of the equation of supply and demand. The subject has been more completely and more minutely covered by Professor Marshall in his theory of the * For a graphical explanation of this reversal of Mill's law of value, both ways, see Diagram I., p. 282. 6 THE LAWS OF SUPPLY AND DEMAND equilibrium of supply and demand. But I think, myself, in elaborating his generalization. Professor Marshall has still further narrowed the field of operation of his law. He gives an admirable illustration from a corn market, or, as they would say in America, a wheat market, in a country town where the area is not too big for all buyers and sellers to keep more or less equally well informed as to the movement of supplies and prices. In such a case, he says,* " the amount which each farmer or other seller offers for sale at any price is governed by his own need for money in hand and by his calculation of the present and future conditions of the market with which he is connected. There are some prices which no seller would accept, some which no one would refuse. There are other intermediate prices which would be accepted for larger or smaller amounts by many or all of the sellers. Let us assume, for the sake of simplicity, that all the corn in the market is of the same quality. An acute dealer having corn for sale may perhaps, after looking round him, come to the conclusion that, if 37.5. could be got throughout the day, the farmers between them would be willing to sell to the extent of about 1,000 quarters, and that, if no more than 36.9. could be got, several would refuse to sell, or would sell only small quantities, so that only 700 quarters would be brought forward for sale and that a price of 35s. would only induce some 500 quarters to be brought forward. Suppose him further to calculate that millers and others would be willing to buy 900 quarters if they could be got at 35s. each, but only 700 if they could not be got for less than 36s., and only 600 if they could not be got for less than 37s. He will conclude that a price of 36s., if established at once, would equate supply and demand, because the amount offered for sale at that price would equal the amount which could just * Marshall. " Priiiciplos of Economics," Book V., Cap. II. THE LAW OF SUPrLY AND DEMAND 7 find purchasers at that price. He will therefore take at once any offer considerably over 3Gs. ; and other sellers will do the same. Buyers on their part will make similar calculations ; and if at any time the price should rise considerably above 36s. they will argue that the supply will be much greater than the demand at that price ; therefore, even those of them who would rather pay that price than go unserved, wait, and by waiting help to bring the price down. On the other hand, when the price is much below 36s. even those sellers who would rather take the price than leave the market with their corn unsold, may argue that at that price the demand will be in excess of the supply ; so they wait, and by waiting help to bring the price up." He concludes that the price of 36s. has thus a claim to be called the true equilibrium price. So much is admissible, but when he continues that, if it were fixed on at the beginning and adhered to throughout, this price would exactly equate demand and supply, we must leave him. One may call 36s. the equilibrium price, as the average price of all transactions, but if it had been the fixed price at any time in any modern free market all transactions would have been altered. In such a market as he describes there are always individuals * who will not sell at less than 37s., and others who will not buy at more than 35s. ; these are strong men and narrow men. Round them the crowd adjusts itself, composed partly of many who are weak and lazy, and partly of a few who are far- seeing and aim at a large bulk of transactions, where many small gains cover a few small losses. Such an adjustment shows itself in various vacillations in the quotations, , * For a vivid illustration of an obstinate seller, read the story told by Mr. Ililairo Belloc about the great barrel of Brule wine in his " Path to Eome." It is a true description of a bit of real life, such as cannot be left out of economics. 8 THE LAWS OF SUPPLY AND DEMAND which, after taking in the obstinate men on both sides, broaden down to the average level, unless there are further disturbing elements. To take this objection to Professor Marshall's illustration may appear trivial, but it is not so in reality. In the first place, I follow Jevons in thinking that human nature is the last thing to be neglected in analyzing economic organization. Secondly, I have to emphasize the minute- ness of the field covered by such a market as that chosen and described. If the field were not minute, the operation of this law of the equilibrium of supply and demand would be still less true. It is, in fact, so minute that the reversals of tendency discussed in connection with Mill's law of value can never take place. Ex hypothesi all buyers and sellers come into Professor Marshall's market with limited quanti- ties of goods and of money. In other words the real equi- librium price of 36s. a quarter has been fixed not at all in the market described, but outside in the market of the world. How can this be ? A market as Professor Marshall has described elsewhere may be large or small, but it must be governed in all parts of it by one price for equivalent quantities over a certain length of time. Such a market is a pure assumption, but it is a very useful assumption, and one that is consistently adopted in practice. We speak, for instance, of the Liverpool * cotton market and the New York * How purely artificial in a geographical sense a real market may be is seen in the peqictual controversy which goes on between Manchester buj-crs and Liverpool merchants as to whether "spot" cotton lying at the Manchester Sliip Canal docks shall bo tendcnible at equal rates with Liverpool " spot " cotton as against a Liverpool Cotton Exchange contract. That is to say, it is proposed to inclndo Manchester geogra])hiciilly within the Liverpool cotton market. The argument on one side is that, for I^ancashire spinners, cotton lying at the Manchester docks is even more available than cotton in Liverpool. The reply made on the other is that Lancashire is not the only buyer THE LAW OF SUPPLY A^D DEMAND 9 cotton market. Although each is really no more than an influential section in a world cotton market, yet as each has its own psychological conditions, its limitations and ignorances, so the illusion is kept up that each is inde- pendent. It is worth noting that in practice the small men who cling most faithfully to such an illusion pay a steady tribute to the big operators who cultivate a wider view. But below the big markets are the medium markets and again below them are the small ones. The best analogy for the complexity of the system is obtained from Clifford's theory of mind-stuff", where matter is supposed to be com- posed of vortices within vortices, every vortex exerting a pull or influence on its parent vortex, according to its speed and steadiness of rotation, receiving similar influences from its own constituent vortices. Professor Marshall's typical market is almost the smallest practical instance he could get, limited further by the fact that no information comes in from outside as to the course of prices elsewhere, which in practice is always happening. In fact, it is an embryo for illustrative purposes. Within the strict limits of his illustration the law of the equilibrium of supply and demand holds good. But the application of the law is true only in so far as it is narrow. It could better be described as the law of final bargaining* in the Liverpool market, which, supplies cotton largely for continental spinners, and also that the merchants in a speculative centre Like Liverpool have often to return cotton to New York against a " bear " contract. For either of these purposes " spot " cotton at Manchester is not so conveniently tenderable as Liverpool cotton. A similar vexed question of widening its area of tender has often been discussed on the New York Cotton Exchange as to whether cotton lying in various southern centres should be tenderable against a New York contract. But so far iti neither case can brokers be brought to agree as to the equalization of values. * I consider it better to drop the word "equilibrium" from the name of this law for reasons which will be shown more plainly in 10 THE LAWS OF SUPPLY AND DEMAND ■where the bargaming is carried on between experts on terms the broad features of M'hich have been practically determined by more weighty conditions elsewhere. The struggle here is not so much between real buyers and real sellers as between groups of professionals over the size of their margins. The opposing forces are neither producers nor consumers themselves, but consist mainly of two classes of operators : of those who want a good profit on a small number of transactions, contrasted with a smaller group of experts who are content with a small profit each time over a large number of transactions. The struggle between the real buyer and the real seller, that is, the producer and the consumer, takes place on a wider field. We may conclude that the common use of such a term as the law of supply and demand is not altogether meaning- less, but it is misleading, in so far as it has a meaning, and equivocal in any case. If there be a general law governing the world's production and consumption, it is nothing quite so simple. The explanation of this system of exchange, which makes each man's sacrifice proportional to his estimate of his enjoyments, is unfortunately not arrived at so easily. The deeper we examine this complexity the less do we find it to depend on assessable and ponderable Chapter XII. It is more suitable to speak of the stable or unstable equilibrium of a market, and of the equation of supply and demand, which is the term I have adopted. The following is suggested as a formula for the LAW OF FINAL BAEGAIXING: " Where prices in a large market have been determined within certain limits by the laws of supply and demand, the final and critical fluctuations of price within any section of that market will so vary about an intermediate equilibrium point, as to give play to the varying characters of the dealers and at the same time to equate the largest possible amount of goods supplied with the largest possible amoimt of goods demanded in that section. Such an equilibrium price for any period may be approximately stated as the average price of all transactions during that period." THE LAW OF SUPPLY AND DEMAND 11 material quantities. Our language in economics is limited largely to quantities and the use of quantitative terms has dragged thought in its train. But behind the bulky, inert and deceptive quantities lie the vital realities of our variable personal estimates of them, of the sacrifices we will make to obtain them and of the struggle which continues incessantly between the sacrifices of production on one side and the personal estimate of enjoyment on the other. CHAPTER II SUPPLY AND DEMAND Supply and demand have generally been assumed to be tl)e same in kind and this kind to be any kind of goods of marketable quality, of which there are sellers of certain quantities at certain prices and for which buyers are willing to make offers for certain quantities at certain prices. For convenience quantities and groups of quantities have been taken on either side as more or less stable units, while the price is believed to be the chief varying condition. This habit of simplifying the problem is deceptive and, as we saw above, cannot be considered as covering any large number of facts. Those generalizations, such as Mill's law of value and others, which are founded on such assumptions, have only a very limited field of operation. In theory the assumption of definite quantities on each side of any bargain will ultimately be found to be a bad method of analysis. The business of the world has been conducted for so long under the influence of habit that the upward and downward movement of price, outside the limited field of operation conducted by expert bargainors, is a less usual occurrence than in theory it ought to be. In the world of business the opposing masses of supply and demand vary far more easily, if imperceptibly, than the supposed central variable of price. To put it more clearly, under a fractional variation of price vast quantities of goods will be withdrawn from sale or pushed on the market, always under the utmost possible conditions of secrecy, on SUPPLY AND DEMAND 13 the sellers' side of the contest ; on the buyers' side, there is not the same concerted action behind a veil, because the "workings of the spirit are, like the wind, free of intention or self-consciousness, but small falls and small rises in the market price will cause whole areas of wants to become effective or to fade away into unexjDected weakness and nullity. The great experts in business spend their lives in testing this supposed strength or weakness of a market. The assumption of fixed quantities or groups of quantities at named prices to represent supply and demand is bad as a method, because in fact neither are quantities. It is true that on the side of supply the idea of quantities looms large. In practice commodities are offered in blocks at quoted prices and the total available supplies of the great staple materials of commerce are calculable even in the world market. We have come, therefore, habitually to speak of supply as a matter of physical existence or, in the case of "futures," of calculable existence. The inference is there- fore general in economics that supply is a concrete thing so nearly measurable in quantity and price that these may be taken as its practical equivalents. But the great problem that confronts theorists and business men alike is to estimate demand. If skilled practical men give up their lives to this pursuit, often with only partial success, it is obvious that for economists to generalize easily on the subject is but to brush the skirts of the difficulty. The only knowable demand is ^st demand , which is enshrined in the history of prices. The assump- tion that the history of past demand, or dead demand, justifies one in expecting also a similar course of future demand is made less and less frequently by anyone in pro- portion to the length of time he has been in business. It is almost as safe to assume that a curve of past demand will be reversed, as that it will be continued. "^ ■% 14 THE LAWS OF SUPPLY AND DEMAND Like everything which is a direct offspring of human feelings and human wants, reversal of demand at some moment is a necessity, recurrence of it a probability and the occasion of the one or the duration of the intervening period before the other quite incalculable except on so generous a scale of averaging as is only permissible to very wise heads and very long purses. If demand were to be left to itself, supply in business could be undertaken only by very rich individuals or by powerful corporations. We shall see later on * that demand is not and cannot be left to itself. A course of study in economics has made us all familiar with two short curves, cutting each other at an equilibrium point, which represent respectively supply and demand. It is the neatest way of expressing Mill's law of value and no outrage to truth follows so long as the abscissas are kept short for quantities and prices, and it is at the same time clearly explained that the diagram is purely illustrative. To bring them strictly into relation with facts the curve of supply alone is approximately valid, because only supply can quantitatively for practical purposes be expressed. The other curve is nothing more than a convenient reversal of the supply curve drawn to furnish the proper kind of intersection, which by inference from Mill's law of value is required by the hypothesis. The two curves are made to cut each other sharply at a point where a transaction of sale and purchase takes place, and then the curves drift hopelessly apart and apparently further transactions of the same kind are impossil)le. This odd feature of the curves is not any serious misrepresentation of the truth, because each separate transaction of sale and purchase, when looked into microscopically, has, considered by and in itself, * Seo Cap. XV. on the Manipulation of Demand. SUPPLY AND DEMAND 15 something of this final character. That is to say, as we shall see later, demand terminates with satisfaction and is renewed owing to the occurrence of a fresh set o£ circum- stances, not specifically connected with the first transaction. These two intersecting curves are a fair illustration of the operation of the law of final bargaining* under the assumption that it is operating on a minute scale. They are, however, very far from general curves of supply and demand. Of two such curves, that of supply, which represents only a succession of concrete masses of goods at named prices, is ascertainable from the history of the past and can be inferred with tolerable certainty up to some future point not too far removed from the present. But demand in my opinion is not expressible in any curve. A pseudo-curve might be obtained, not very far distant by inference from demand, by drawing a line through the intersecting points of a series of diagrams of the character mentioned above, each representing single transactions. Such a curve would practically for the past be a history of prices, and for the future nothing at all. Demand, valid demand, future demand is beyond sound inference, beyond prophecy and remains always in the regions of speculation. Trading is only possible on our present scale, because of the vast organization kept up by the producing part of the world to manipulate demand, to deceive it and often to call it into being. The argument on which this depends requires a deeper analysis. Any transaction of sale and purchase is a meeting- place of supply and demand in two categories, those of thought and extension. In the latter, which we may take first, as the least important, equality is ipso facto assumed. That is to say, in the category of extension or, as we may * See Cap. I., p. 10, note, and Handy Table. 16 THE LAWS OF SUPPLY AND DEMAND more conveniently put it, in relation to the question of quantity, a transaction of sale and purchase implies an exchange of something for something else, which is, economically speaking, its exact equivalent. In the category of thought, when thought is taken to include feeling in its ordinary sense, since, economically speaking, no feeling need be considered except in so far as it results in some personal intellectual estimate of it by each for himself, wide differences are discovered between the, as yet undefined, entities of supply and demand. Supply and demand are the opposite sides of an exchange. What finally do peoj)le exchange in, let ub say, the sale of a quarter of wheat for 3G pieces of silver? Essentially both these objects are symbols for two kinds of the same thing, for the personal sacrifices of individuals or groups of individuals. Just as the quarter of wheat and the sum of silver are each expressions in a different form of personal sacrifices, so also are the terms, supply and demand, descriptions of something similarly different on a larger scale. Yet the group of personal sacrifices represented by the term, supj)ly, are different and opposed in more than one way to the corresponding groujD under the term, demand. Most obviously they differ in respect of time. Supply appears in the form of concrete results of past sacrifices made by the sellers, and that is why for convenience' sake it is generally expressed in quantities of named goods at fixed prices, even though in reality it may be something else. But demand, which is a group of prospective sacri- fices on the part of buyers, is necessarily inchoate and can only 1)0 brought into quantitative character by an act of the imagination. Supjily is crystallized, demand is uncrys- tallized sacrifice. ]\rore subtly supply and demand diverge owing to the variations in the personal ratio involved in all sacrifice. SUPPLY AND DEMAND 17 The economic ingredients in all personal sacrifice are, roughly speaking, talent, effort and abstention, but no two people have exactly the same estimate of how much of each they will put forth or sustain for a specific reward. Thus equal sacrifices are never interchanged, but only rough personal estimates of w^hat may be equivalent to some named quantity of a common medium.* This imports the question whether those who supply and those who demand differ only as individuals from one another or whether they also differ from each other as members of one group as opposed to all the members of another group. The answer is, they do. Not only does each supplier differ from each supplier or demander, but he differs as a supplier from every demander in a totally different way from that in which he differs from other suppliers. And it is in this fashion. Every supplier has to make his sacrifices by rule of thumb or tradition or by a hazardous estimate of prospective demand, while each demander estimates his sacrifice only at the moment of purchase with many additional facts before him which no supplier can expect to obtain. In another fashion these differences in time and quality between buying and selling react on one another. For instance, the real variations caused by the personal factor on the side of the seller have a different influence on the meeting-point of price from that which is caused by any change in the mind of the buyer. In supply, sacrifices are crystallized in the form of goods. These are not wholly fixed quantities Accident may occasionally affect their quality and unexpected fluctuations in quantity may react * This is the philosophical justification of the common medium of exchange. It is not only the mechanical instrument of exchange, but the mental gauge of the personal saci'ifice to each side, and the latter function is essentially the more important. L.S.D. 18 THE LAWS OF SUPPLY AND DEMAND on their price. But as a rule these variations are limited in their action. Supply is generally preconditioned under circumstances which are fairly well known and, apart from the vagaries of demand, can be to a certain extent forecasted. The opposite is true about demand. The personal factor so predominates here that any accident up to the last moment may determine a considerable variation. In fact, a certain amount of abnormalities may so be counted on to occur that a sane kind of normal stability can illogically but practically be assumed from their frequent recurrence. But this is where Nature requires a little assistance from art. As we shall see later on these accidents have to be carefully considered in modern business, which devotes a considerable part of its machinery to the task of influencing the personal factor in demand, stimulating any favourable influence, counteracting the unfortunate tendencies which might paralyze the eagerness of the buj^er and above all watching for the moment when supply must at any cost be controlled and the reserves withheld. These differences between supply and demand might be considered fantastic, if they were a mere matter of theory. But theory here, I hold, is right and useful, because it is following practice. We are safe in recognizing a rea! 'Jifference between supply and demand when we see the Jbuyer and the seller behaving so differently. We come, then, to the following conclusions. Supply so clearly resembles mere brutal quantities of priced goods that it may be accepted as such for all practical purposes. Demand has an element of futurity, which carries with it infinite possibility of variation in the spiritual factor of its constitu- tion. To treat demand as quantitative is the merest speculation. Demand is nothing more tangible than a group of valaes, SUPPLY AND DEMAND 19 and until we have come to an acceptable understanding of value, such as approximates most closely to the common use of the term, demand also must remain undefined. For the present I will only say, that I take the value of any object to be, whatever anyone icill give for it in the recognized medium of exchange. c2 CHAPTER III WANTS AND SACRIFICES In the course of the last chapter I concluded that a series of quantities of goods at fixed prices was near enough to supply for the practical purj)Oses of the economist, but that in reality like demand, supply was something else. If we take any unit from either series of supply or demand we shall find that both are composed of the same psychological elements. Each is essentially a personal equation between the wants and sacrifices of an individual whether he be a buyer or a seller. Assuming the introduction of the simplest form of the division of labour and of the rudest method of exchange every operation of sale and purchase can be analyzed to contain at least three equations ; first, the personal equation made by the producer, here also the seller, between his sacrifices of exertion and abstention in order to produce a certain commodity and his expectation of a reward or compensation for it in some exchange ; secondly, a similar personal equation of the wants and sacrifices of the buyer or consumer in acquiring or reserv- ing from consumption a quantity of some medium of exchange whereby he can obtain the above-mentioned commodity ; thirdly, the equation of these two groups of sacrifices by trading. This trading is done by each of the two parties mentally estimating how much of his own personal sacrifices is equivalent to a named quantity of the common medium of exchange which each is accustomed to handle. WANTS AND SACRIFICES 21 Such a treble eqaation is the ultimate analysis of the pro- cess of buying and selling which has been perfected by civiliza- tion. All the complicated machinery of production, money and credit tends to assure the simplicity of this transaction as opposed to the more involved mental processes required in a ruder condition of mankind. For instance, under a system of barter the process is far more complex since each buyer is also a seller and has to make a double equation for him- self and contrast them with the double equation of his co-trader. With barter there must be at least five mental equations, possibly six. We have come to this, then, that buyers have wants and sellers have wants, but the want of the seller is stereotyped in kind and variable only in amount ; that is to say, he ■wants more or less of a commonly used medium of exchange. His position thus is more easily analyzed so far as want is concerned. The buyer, on the other hand, has a certain number of wants stereotyped in kind, such as generally pass for necessaries, but a very much larger number of variable wants which may be alternatively satisfied, more or less, according to his means. That is to say, many of these wants are, in the buyer's mind, means to some further end and, while the end is permanent, the wants leading to the end may be alternative and interchangeable.* One want may therefore be legitimately discarded, if its satisfaction is expensive, in favour of the satisfaction of another at a lower price. In considering the complicated question of human wants, using the word in its economic sense of wants, which have some possibility of being realized, there are two useful ways of generalizing about them. One consists in taking all the wants of one individual, observing their comparative * Soe below, Chap. X., p. 109. 22 THE LAWS OF SUPPLY AND DEMAND influence on him and noting his personal ratio of exertion or sacrifice which he is wilhng to make for them. This is naturall}' a problem of consumj^tion and may be extended to consider wants of groups of people as well as of indi- viduals. The second is effected by considering together all the wants of many people for the same or similar objects, and estimating the corresjDonding exertions necessary to satisfy them with the expectation of an equivalent return. Such a study is the everyday task of business and is called the estimation of the demand for a particular article of commerce. To this we shall recur later. The first group of facts is of primary economic importance and has often been suggested as a subject for a separate division of the science under the name of consumption. But so far singularly little has been made of it and its con- sideration has been relegated to what Aristotle would have called domestic economics. Actually its study is highly necessary in any attempt to determine the laws of demand, owing to the preponderating proportion of variable wants among our needs and the very considerable field occupied by what may be considered artificial or stimulated wants. Instead of this study, an assumption takes its place that, whatever his deficiencies otherwise may be, a man at least knows what he wants and knows also when and how to buy an object to satisfy him. This assumption is so far from being true that for at least half his expenditure an ordinary individual does not know what he wants, and out of the other half for at least a half he does not get what he wants. It is only by becoming the creature of habit and the victim of mimicry or stimulation that he accomplishes very badly a task which is really more difficult than that of earning his income. That this apparent paradox is not untrue even of the great masses of the poor can be perceived by reflect- ing that of few vital necessities of their existence, at least WANTS AND SACRIFICES 23 four — education, sanitation, insurance and provision for old age — have to be procured for them by the State or the municij)ality, and another, their food, is injudiciously chosen and in this country wastefully and unattractively prepared. In what sense can we say that the buyer only occasionally knows what he wants? In this sense, that even for his necessaries, and still more often for his luxuries, he is seldom without an alternative satisfaction for any desire. These alternatives are so numerous that they embrace a rivalry between one want and another, competing with each other for prior satisfaction, a rivalry between different kinds of objects to satisfy a determined want and finally a rivalry between mere qualities of the same object. A man may be in doubt until the last moment before the satisfaction of any want, and it is mainly an acquired habit of certain choices which stands between most of us and the waste of an enormous deal of time. The best classification of wants is afforded by noting the number of alternative satisfactions for each. We are accustomed to call those objects the " necessaries of life," where our habits permit very little choice in selection. Ample food is a necessity for the poor in the sense that exhausting labour requires adequate nourishment and leaves only a margin for luxury, yet even here in this country there is very considerable room for choice in foods even for a poor man. A black coat and a tall hat are absolute necessities in this country for a city clerk and for many others, who have to curtail their food, in some cases, to get them. A good address, that is, a suitable residence in a fashionable locality, is a necessity for a rising Government official, even if he have to stint for it his children's education. But the necessaries of life in most cases cover a small part of the field of our expenditure. Except in the case 24 THE LAWS OF SUPPLY AND DEMAND of married women of the lower classes, the greater j)art of anyone's income is usually devoted to the satisfaction of variable wants. That is to say, that most of us can afford to allow taste or caprice to dictate an infinite variety of alternative satisfactions which tend in time to get narrowed down by weariness into a routine of habit with a border of petty enjoyments. Again, outside the variable wants are the obvious super- fluities which take up a much larger part of the annual expenditure of the middle and upper classes than any of us would care to admit. Half the furniture of any house is mere mimicry of other establishments whose use is in display without beauty or comfort. Half the clothing of either children or adults is dictated by fashion and discarded before consumption. Half the wages of most of those who pay any for domestic service are for the performance of ceremony useless," boring and time-wasteful. Few of us are perhaps willing to admit this specifically in our own cases because all kinds of useless waste and ceremony have for ourselves associations to which, out of habit or tradi- tional sentiment, we attribute supposed importance. But it is easier to see the truth of such a generalization in the habits of others, particularly of the very rich, whose estates and stables, yachts, gardens and pictures are bought for them, kept going for them and regulated for them down to the last boot-button by a whole army of officials and experts with only an occasional reference to any personal enjoyment, which their owner may expect from them. It is interesting to notice that it is not rare to find some men, driven by the pressure of these envied circumstances, turning from material enjoyments not so much out of refinement of character as in order to make some small assertion of individuality. It is often the millionaires who WANTS AND SACRIFICES 25 have the simplest personal tastes. But as a rule individual leanings of this kind are treated as a private idiosyncracy and not permitted to influence the outward life of stereo- typed magnificence, which habit, the opinion of others and the mere impossibility of buying for oneself on that scale impose on those who inherit or acquire immense fortunes. To the moralist the public proceedings of the rich are of small importance. He would be interested in watching, as he would put it, the struggle of a reformed Dives to recapture his soul. For him the humble incompetent efforts of an individual endeavouring to resist the pressure of circumstances so seldom paralleled, without the know- ledge of himself and fate, which a struggling clerk with a large family may acquire through his very difficulties, out- weigh infinitely in interest the colossal and empty shell of useless routine from which the owner may be himself trying to escape. But to the economist the empty shell for the moment is everything and the man nothing. For no one but the philosopher observes the real man and thousands have their eyes eagerly fixed on his dome of many-coloured glass trying to contrive some poor and vulgar imitation of it for themselves in Surbiton or Brooklyn or Neuilly. It was long ago recognized that there is a certain pro- gressive change in the character of our wants as they come to be satisfied and Banfield postulated an immature form of this law by saying that "the first proposition of the theory of consumption is that the satisfaction of every lower want in the scale creates a desire of a higher character." Here a certain difficulty is imported by the use of the words " lower and higher," which have a doubtful economic significance. If the meaning of " lower and higher ' implies an ethical standard the proposition is very question- able and probably untrue. The safer way of re-stating it 26 THE LAWS OF SUPPLY AND DEMAND economically would be to say that the progression was from simpler to more developed desires, development unfortu- nately implying with many individuals not so much improve- ment as sophistication. The nobler part of most men's lives lies in meeting the obligations of necessity for their families and any further measure of success they may obtain is not always devoted to so unimpeachable an aim. A man's first efforts, so far as he follows a serious purpose, are directed to attaining and perhaps improving on the standard set for him either by his family or his chosen companions. When he marries he must redouble those efforts to bring and keep those dependent on him up to the same level, whether it be of culture or wealth. In most cases one largely depends on the other. But the obligations of his inherited or chosen standard once satis- fied, in many cases the man is free to direct his surplus to some further aim. How often this fails to be in a higher direction either ethically or intellectually is a matter of common observa- tion. Self-development, self-assertion and the desire for distinction are but different forms of the same instinct which each one of us has for advancement, after the imposed standards have been amply met. For the saint, the student and the hero the inner needs call for extremity of effort with but distant, if any, prospect of reward. For the successful politician and the conquering man of business effort is partly instinctive and partly conscious seeking after the rewards of ambition. The professional and salaried classes follow the path of duty with some humility, but with clear ideas about the necessity of remuneration. But curiously enough none of these classes set the pace or pattern within the economic sphere of consumption. In this, our present sul)ject, we see at once that the higher forms of desire trouble us very little, because the vast AVANTS AND SACllIFICES 27 majority of buyers in a pitiable form of humility exhaust tbeir resources in a fourth or fifth-rate repetition of some mock ideal. Even the most sldlled developments in the arts, which might in a sense be called the objects of a higher desire, are followed by consumers in a sad imitative fashion. Appreciation is allotted to these goods as to most others according to the appraisement of recognized guides, who may be disinterested, but often are not. Anyone behind the scenes in a great capital will know how much in the spheres of art, music or the stage can l)e effected with little merit by the help of the recognized organizations and what a combination of talent, energy and resourceful- ness is required to attain success without them. We cannot expect to find the best artistic results attained under the maximum of commercial encouragement, and it is only the occasional desire for the distinction of being right entertained by a few which counteracts the enormous pressure of the commercial machine. The study of consumption, when it comes to be thoroughly done, will be a grimy business. The human race is nowhere more vulgar than in its expenditure. In spending, even more than in getting, we lay waste our lives. It is a dis- heartening reflection that not even the most cultivated of us can escape from this kind of degradation ; if we refrain from fresh vulgarity ourselves, we continue to take it at second or third hand from the habits and fashions of others. It is not worth the thought of a noble woman, when it comes to spending money, to be careful to avoid every- thing that comes from a tainted source. She will take pains, and rightly, in discouraging cruelty and refuse to wear the feathers of the egret or the fur of the unborn lamb ; but her hats may be the echo of one designed for a Mademoiselle de Maupin and the cut of her gown may have 28 THE LAWS OF SUPPLY AND DEMAND first seen the light at Ascot or at Auteuil. Even economy and cheapness will not save her ; let her hat only cost her 15s., it is odds that 5s. of that will have gone for material and labour while the other 10s. will be payment for what the milliner will consider " her insj^iration." It is almost ironical that so much effort should be devoted to accumulation, when the correlative duty of dis- bursement offers so little opportunity for nobility of character. Perhaps it is the instinct of postponing the more difficult task which often drives the modern million- aire to become a multi-millionaire. Those who have led or are leading the finest lives had little or nothing to spend, and their example fails us. We fall naturally and lazily into the rut of following in this sordid business the example of those who take it most seriously, we lay our- selves open to the advances of the insidious salesman or the wily advertiser and, when any large block of expendi- ture has to be perpetrated, we say in effect to someone, carelessly selected : See what you can make of it with such an outlay. I have not the space here for the reasoned study of con- sumption which still leaves a gap in economic science. Piegarded from the point of view of the laws of supply and the laws of demand, consumption for us affects but one half of the personal equation between the want of the buyer and the sacrifice he is prepared to make for it. The habits of consumption — and we have seen that consumption is a mingling of necessity, traditions and caprice— dictate the values which the buyer will place upon various commodi- ties, which are the fancied objects of his desires, and the prices he will be prepared to pay for them. But although the buyer settles the values to himself of these commodi- ties he does not alone regulate the prices of them. To determine these is the prerogative of the seller, and the WANTS AND SACKIFICES 29 result within him of similar mental equations of wants and sacrifices, which we have analyzed in the case of his antagonist. How price differs from value in idea, when it is so almost coincident with it in quality and quantity, must be reserved for the next chapter, where their relations are exactly considered and each is defined. In considering the question how far consumption influences value and correspondingly demand affects price it is of paramount importance to understand the variable, capricious and often artificial nature of human wants. Without desiring to be cynical or paradoxical I am convinced that there are few things which, if left to themselves, are so little within the compass of calculation. Human wants are strangely indeterminate things, occasionally grouping themselves, as if to aim at some ideal, yet seeking, in order to reach that ideal, objects which contain its negation. Their inherent waywardness leads them easily into confusion and exposes them to distortion by artificial impulses. The most inter- esting problem about human wants is to determine how far they are vague and paradoxical by nature and how far they have become so after the efforts of manipulation. I am inclined to the opinion that the manipulating forces tend towards steadiness and operate to make business possible on regular lines. When we come later on to consider the vast machinery organized by the producers and sellers of this world to stimulate demand, to create wants and often to abuse and deceive them, it is evident that we are nearly out of reach of any simple interpretation of these phenomena. The respective degrees of natural and artificial complexity are still to some extent behind a veil. Much of our present involved and over-luxurious habits of consumption are due to the immense productivity of 30 THE LAWS OF SUPPLY AND DEMAND organized industry. We are nowadays too well off, materially speaking, and poorer than we used to be in the things of the spirit. Privation refines wants and earlier ages were not cursed with the vulgarity of easy circum- stances prevailing through many classes. Yet there is one form of vulgarity prevalent then and prevalent now, the aimless habit of accumulation. But our modern accumu- lation is prompted by different desires. Of old avarice was the child of fear, a habit formed during the uncertainties of fortune ; to-day the love of money is not fostered by vicissi- tude, but prompted by the reluctance to part with the power of choice. The rich will not resign a general command of commodities for specific enjoyment and expected disappointment. So great fortunes roll up more easily and provide spontaneously the great masses of capital beloved of the old-fashioned economist, capital more required at the present day to sell a commodity than to make it. CHAPTER IV VALUE AND PRICE Value and price are two terms which it has always been difficult to distinguish from one another. Even when they are consciously defined it is not easy to separate them, and wherever they are in current use it is generally found that they become interchangeable in most pas-^^ages where they occur in the argument. It is thus necessary to admit that either they overlap throughout a large portion of their respective meanings, or else they coincide in meaning at a certain point, and that, too, at a point where both terms are most frequently employed. Of these two alternatives the latter seems to me the more probable, and, as I propose to use the words, it is certainly true. The point where they coincide in meaning is that moment of a buying and selling transaction, when the deal is completed, where value is crystallized and realized in price and price becomes the measure of value. What, then, have value and price really meant before this moment, when each has realized itself in completion ? The answer to that question can be ascertained only by sur- veying the states of mind of the two parties to a transaction of sale and purchase. These two parties are at the outset of our analysis themselves indeterminate. In modern civilized life for every article which is transferred from a producer to a consumer a large number of sale and purchase transac- tions take place. They may be as few as two or three, but very seldom less ; they may be as many as twenty. Who, 32 THE LAWS OF SUPPLY AND DEMAND then, are these parties, most of them successively buyers and sellers, and how can any state of mind be attributed to them universally in one capacity and again an opposite one universally in the reverse capacity ? The difficulty is not so great as it sounds, because it can easily be seen that every seller is psychologically a producer and remains during the process of selling the agent of the producer ; that is to say, he has either made sacrifices to create a commo- dity, which he does not himself intend to enjoy, or else he has in his exchanges taken upon himself the pecuniary risks of such a position. In either case, so far as he is a seller, he does not hope for a compensation by consuming his property, except as a desperate alternative, but is asking for an equivalent in return for his own sacrifices. Every buyer is, similarly, in the reverse position of being an inten- tional consumer or agent for the ultimate consumer. So far as he buys, he has to bear in mind and estimate his own prospective enjoyment or the enjoyment of some other person to whom tiie property will ultimately be transferred. That estimate of prospective enjoyment or utility is value. It is a nebulous quantity with a hard core. Value is the measure in terms of exchange of the sacrifice which the buyer, or more precisely the consumer or his agent, is pre- pared to make for some object, wherewith to relieve a necessity or secure an enjoyment. It is, perhaps, not quite strictly right to call it a quantity, since it is nebulous and cannot be accurately measured. But it is always endeavouring to express itself as a quantity. Even in modern civilized life, where the bulk of useful commodities are disi)layed for sale at fixed prices, we often do not know what we are prepared to pay for either our necessities or our enjoyments. To take two extreme cases : many a father has never realized how VALUE AND PRICE 33 great a sacrifice he would make to pay for a vital operation on his child until circumstances have tested him : on the other hand, an economical housewife may be heard to say that she went out to buy a flower-vase for 2s, 6d. and had to pay 7s. 6d. for it. In each case the ultimate satisfaction was constant, but the sacrifices exacted for it have varied to a great degree. Our civiHzation presupposes an enormous aggregate of habitual wants with concomitant values, which are not so fixed as they appear to be. Such classes of wants are on the whole satisfied by an amount of sacrifice which custom has approximately determined in each case. A disturbance of this custom produces unpleasantness, disturbs trade, and is therefore, where possible, avoided. Within these limits values and prices easily coincide. Beyond these limits lies the region of alternative wants where, owing to fluctuations, prices often do not meet values : the desires prompting the latter have then to be satisfied elsewhere or else values rise until they meet prices ! In a few rare cases desires remain unsatisfied either by the original objects or by any substitutes for them. Such surviving and unsatisfied desires thus become the main incentives to exceptional eftort, so far as this occurs in the economic sphere. From these considerations, if they are correctly stated, it follows that values remain sometimes, but not in the majority of cases, below the level of prices ; but it is only when they come up to the level of prices and materialize in the shape of " market values " that they come into the light of public day and attain to the dignity of quotation. In fact, it is very hard to give instances of values, which are quoted as apart from prices. The ordinary commercial offer to buy may be so, but it is more often a tentative experiment to test the stability of price. A firm and final L.S.D. D 34 THE LAWS OF SUPPLY AND DEMAND offer to buy is a statement of value as apart from price.* Perhaps I may give a humble but precise illustration of this case in the instructions given by a housewife to her husband going into town telling him to buy a particular vegetable, if it is in season, at a named price, but otherwise to fall back on something else within her means. As a mere matter of debate it may be asked whether, if values may remain below prices and be equal to them, they may not also rise above them. Theoretically they can and do, but it is very seldom they do so for any considerable time. Any particular transaction where a value finds a price lower than itself is closed by completion and the market is made. If high values continue to exist after successive transactions have taken place at lower prices it is odds that the sellers will discover the fact and prices will go up rapidly or other sellers will rush in and spoil the market. Stories used to go round Lancashire of a Manchester merchant who in the old days found a part of Japan where gold was to be had in equal exchange for silver ; but after one profitable season he could not go back there because his life was in danger. In defence of the attribute, nebulous, as applied to value, differentiating it from price, which is nothing if not defi- nite, I may urge the extraordinary variety of qualifications of value, wherever this has to be estimated without any * As an instance of sensational deviation of value from price I may quote from Mr. F. W. Hirst, " The Stock Exchange," p. 75 : " The investor should note that a quotation in the ofTicial list does not mean, in the case of securities seldom dealt in, that your broker can at any time get a jobber to deal in the stock at the nominal or quoted price. "When there is a slump in the market and a rush of soiling orders with no support, as h;i])pcncd in rubber shares in the months of June and July, 1910, the jobbers are apt to bo away at lunch all day, and the brokers have to report to their clients that they simply cannot find a purchaser." VALUE AND PRICE 35 transaction of sale or purchase to fall back upon. Take the terms known to any business man such as "replacement value," " insurance value," " taxable value," " rateable value," " capitalization of annual value," " value under a forced sale," " value as a going concern," "value as between willing buyer and willing seller," " break-up value," " pro- bate value," and so forth, everyone of these special descrip- tions having a known meaning connected with a definite purpose, but each and every one carrying in the terms of its name an admission that it is only an approximation to the real thing. ^ The transaction generally known as sale and purchase is theoretically supposed to take place between a pair of higglers, the seller coming down and the buyer going up until they meet. In ordinary commerce this is, however, unusual. In the great majority of cases the buyer comes with his notion of value and waits to see if this is correctly interpreted within certain limits of variation by the seller ; in other words, he looks round to see if he can satisfy his want at a reasonable price. This brings us to the point of view of the other party to the transaction, to the state of mind of the seller, and we find a very real difference between it and that of his opponent. At first the seller seems to have all the advan- tages of the situation. To begin with, he has generally named a price and apparently made a market. These prices remain fixed during a reasonable period of time and have the enormous advantage of being quoted as the current price and the apparent measure of value even though no trans- action takes place. That is to say, buyers may refuse a current price for days but they may not be able to get the quotation lowered until perhaps a group of outside buyers, ignorant of the real situation, comes forward to accept the old price, which does not reflect the true balance of forces. d2 36 THE LAWS OF SUPPLY AND DEMAND This would help to sustain prices which otherwise would have to go down. Such a hollow situation is sometimes seen in the press quotations of a blank day on the Stock Exchange, when it is customary to print in the lists and newspapers the previous day's prices, and this, although there has been meanwhile every preparation for a heavy fall. On the other hand, while the seller has the temporary advantage of choosing the conditions of the contest and of naming and maintaining his terms, he is at a serious dis- advantage in a prolonged struggle. He has committed him- self directly or indirectly to the sacrifices required for production and he may not have much time in which to meet his liabilities. When he comes to the point of being willing to make concessions the fixed prices he has named become a clog to him. In retail trade he cannot in most cases give way at all and for the sake of his goodwill and good name he must swallow from time to time considerable losses, whose cost has to be added to his normal profit elsewhere. There exist, of course, various devices for mitigating these disasters, when they cannot be avoided, and the best known form of them is employed by big drapers and general stores, who, to avoid the necessity and risk of holding over doubtful stocks for a new season, announce periodical bargain sales to which the public are attracted by lavish advertising. At these bargain sales prices arc lowered to meet the market without conceding any permanent reduction in ordinary times. We see, therefore, that price has not the inevitable character with which it is ostentatiously clothed. Fixed prices are a deceptive device to hide the hit-or-miss nature of the seller's problem. He has to gauge values beforehand and determine his estimate at the highest figure possible which will give him a reasonable chance of VALUE AND PRICE 37 completing his sale. Price is the measure, stated in terms of exchange, of the equivalent required by the seller, that is, the producer or his agent, for the sacrifices directly or indirectly incurred in producing and bringing a commodity to the market. Here the essential word is "stated." It constitutes the definite nature of price in opposition to the nebulous form of value. There can be no such thing as a nebulous price. Sooner or later the equivalent required by the seller changes hands and measures the amount of the transaction. To avoid confusion we must make a distinction, not often required, between nominal prices, which are no more than offers for sale, and real prices in the economic sense, which are the figures stereotyped in completed transactions. The most perfect approximation in business to true economic price is the double quotation given by the stockjobber to the broker where the jobber has to be bound either way to buy or sell and with only his fixed margin of profit. Where the uncertainty of the transaction is great the jobber can only cover his risk by making his margin a wide one. In ordinary business there are occasional forms of sale ■where the definite character of price is obscured by the postponement of its determination until the last moment. Of this nature are the common auction where the buyers have to take the initiative, or the Dutch auction where the sellers take the initiative by successively lowering the price. In each of these cases the price emerges almost accidentally at the last moment. But it has to be definite. More difficult to analyze are the cases of professional charges, where the bill by custom often comes in after the transaction is over, or where the work is done to order and charged for according to the seller's sale. But always in the final stage price emerges, as a definite equivalent for sacrifice in production, as a point at which value is 218927 38 THE LAWS OF SUPPLY AND DEMAND temporarily for that transaction determined and fixed, and therefore as a measure of the vaUie so far as the particular transaction is concerned. How far does the determination of value and price help us in the understanding of supi^h^ and demand ? Are each of the latter functions of the former ? Not exactly and not to the same extent in both cases. If that were the case we should be able to state the exact relations between value and demand on the one side, and on the other side between supply and price. Of demand, however, it is clear that it is of the nature of value, that it is more extended than value and therefore that it is probably a grouj) of values* regarded in relation to a group of particular commodities of the same kind. Demand is not a group of values of different kinds, some of pounds of tea, some of bushels of wheat and some of yards of cloth. Between such values there is no relation covered by the term, demand, except in a wider sense where all three commodities are regarded as necessaries of life. But the demand for sugar is such a group of the values of definite quantities of sugar as may be considered to come within practical probability of purchase. Supply may be defined as a group of sacrifices made by producers in manufacturing articles of the same kind. It is usually and conveniently measured in quantities and prices. Similarly demand is a group of values of the same kind. It cannot be definitely measured and must be considered as an indeterminate aggregate. It is inde- terminate because no one can tell how many values will come within the operating field of a market. A slight lowering of the cost of production of a commodity, a change of fashion, a new invention, such as makes the commodity ♦ In Cap. X., p. 107, it is held that demand may be even a single value. VALUE AND PKICE 39 a l)y-procluct of some large manufacture, will awaken fresh strata of unsuspected demand through a lowering of the price. Similarly a contraction of demand will follow on any increased cost of a commodity to the extent sometimes of ultimate disappearance ; although this rarely happens, unless some efficient substitute of the original commodity is ready to take its place. In the case of supi)ly and price the relation is not that of aggregate and constituent. As "we have seen, supply is not essentially a series of quantities at named prices, but for practical purposes it may be and is generally assumed as such. That is to say, that, although in the ultimate analysis supply is as much a thing of the spirit as demand and although it is essentially an aggregate of self-values, yet as these self-values have already at any given moment of trading been converted into sacrifices and embodied in commodities and measured in prices, these series of quantities at named i^rices may acceptably be held as far better equivalents to the entities of real supply than any ascertainable representative series in the case of demand. This very much simplifies the study of supply and the determination of its laws as compared with those of demand. CHAPTEE V THE FUTURITY OF VALUES Of the nature of value, so far as we have ascertained the full content of the most common use of the word in com- merce and exchange, the most essential characteristic and that which specifically differentiates it from price, is the element of futurity. A value or willingness to buy remains up to the moment of realization in a purchase, a future sacrifice of some goods or benefits or their equivalents. And there is a further element of futurity, more elusive than the other, which still remains in the breast of the buyer even at the moment of the completion of the contract, and that is, that while he is nominally handing over the medium of exchange, which is the fruit of past sacrifices, he is really handing over the equivalent of future sacrifices. It is this element of futurity,* as here defined, which imparts some measure of novelty to the idea of value, as generally accepted by economists. Such an element of novelty can only be proved by the test of time and the general assent of students of the science. It involves a result so startling as the reversal of what Mill t held to be axiomatic, viz., that there cannot be a general rise in values. So long as values are held to be only general prices, i.e., prices measured in exchangeable quantities of * "VVitli regard to the futurity of values, see Cap. XVI., p. 199, for the loss of a time-agio in delayed sales. t See Book III., Cap. I., Sec. 4. THE FUTUEITY OF VALUES 41 all commodities other than the named one — as distinct from money prices — it is obvious that a general rise of money prices is possible, but not a general rise in values. But when we realize that values are the measure of a future sacrifice of the results of past or future effort, it is evident that they can rise simultaneously over limited and large areas and theoretically also over everywhere together. The results of past effort are fixed, or nearly so, in the combined and concrete results of the process of production. The results of future effort, for which in a transaction of sale and purchase they are exchanged, are elastic, often to a surprising extent. Let us examine more carefully the nature of the buyer's sacrifice, which constitutes value. He comes prepared as a rule to pay for his purchase in cash, bills or, more rarely, services. In the latter case the futurity of the sacrifice in the transaction is evident. In the case of bills, futurity is also clearly an element. In this group of cases, embracing all the big operations of trade and therefore including several times over the sale and resale of many commodities, which only go once through the process of retail sale, the object of the futurity element is to postpone the necessity of payment until the expected trader's profit has been secured. The feature of futurity in this class of dealings is so well understood that it is accurately measured as discount. The trader buys his block or line of goods, pays for them with a bill, which has to exceed the cash cost of the goods by just the cost of futurity so as to enable the seller in discounting the bill to realize his own price, then resells his purchase at a presumable profit, meets after the end of three or six months his own bill and thus realizes the reward of his skill and speculative courage in his margin of profit. Let us analyse the more difficult case of a cash payment 42 THE LAWS OF SUPPLY AND DEMAND to ascertain whether the element of futurity is there in all cases. At first sight the passage of money — excluding here cases cf borrowed money, which are simj^ler — seems to point to the transfer of the results of past sacrifices. Further analysis discloses that this is not really the case. Money, although it is the fruit of accumulation, here repre- sents the alternative powers of enjoyment or the useful replacement of effort, and if we dissect two cases of the latter and one of the former we can see that in all three futurity is nearly always present, if latent, in value. The three kinds of transaction are differentiated by the intention of the purchaser. Take first the case of the purchase of necessaries to keep going the human machine, the establishment or the work- shop. If all this is not explicitly what an accountant would allow as capital expenditure, it is certainly the replacement of wear and tear, the renewal of life or the tools of production, needs which are a perpetual drain on our usual resources, exacting sacrifices as well now and in the future as in the past. Any sum spent for such a purpose is exactly exchangeable with a future sacrifice of the same kind, repeatable day by day until we die. Secondly, we have the purchase of the usual instruments of capital by means of previously accumulated money capital, where the element of futurity is enshrined in its most coldly calculated form. The third case is that of the purchase of a mere luxury with cash or even with post-obits. Here the use of post-obits does not import the element of futurity which we are seeking. The purchaser only endeavours by this device not reasonably to adjust the sacrifices required by his enjoyment but only to avoid or postpone them as long as possible. Yet the element of futurity is still present even in the purchase of consumable luxuries, because the pur- THE FUTURITY OF VALUES 43 chaser will always have to face the results of his temporary enjoyment and may be forced into the necessity of replacing his lost currency. And that is in practice what most of us do. We maintain a certain standard of expenditure, only a small part of which goes in casual enjoyment, and we are careful to be in a position to replace out of income or by our efforts the sums required to continue living up to this standard. It comes to this, then, that there is a rate of exchange maintained more or less equably by the vacillating human will between the results of past effort and the fruit of future effort. The buyer pays for his enjoyments in a kind of bimetallic note, exchangeable in the coin of either the past or the future, as he pleases, and although the nominal sum is fixed, the rate of exchange between his two currencies is determined by his personal estimate of the balance between effort and enjoyment. But this inter- changeability with one another of two aspects of property at all times at some ratio is i2)so facto inherent in the nature of property. That is why we can say effectively that pay- ments are made in the equivalents of future sacrifices. If the point is once accepted that values are offers of payment in future sacrifices or their equivalent, it follows that a general psychological stimulus over a certain area will carry with it a general rise in values. The human race has to live on future effort and but uses the results of past effort to make the start of future effort on a certain acquired level of efficiency. That is to say, that we do not perpetually have to return to using spades and distaffs, but can employ modern machinery and organization. But we could not live on past effort alone for more than a few months. It is therefore theoretically true that in the area of the whole world an addition to the capacities of endurance and efficiency of all mankind together would raise values universally. 44 THE LA^YS OF SUPPLY AND DEMAND But it is not merely true theoretically on our present showing, it is also a matter of experience that such a general rise in prices over considerable areas, especially in new countries, does leave behind a general residuum of benefit, even after the temporary inflation which accom- panies it has subsided. And the cause and explanation of this phenomenon is to be found in the fact that prices have only followed and taken advantage of the general rise in values, which is the real solid gain of the community. Mill took the instance of a general rise in prices to indicate an illusion prevalent among many people, which he describes as an indistinct feeling, when all prices rise, as if all things simultaneously had risen in value and all possessors had become enriched. My own experience of men in business is, that they are not more subject to illusion than philosophers, but it is seldom that they find it necessary to go out of their way to explain things. In fact, the weakness of an able man of business is that he is too reticent and seldom j^arts with knowledge that he can turn to account in profitable ways. Now, as to the beneficial effect to a community of a general rise in values and prices there are no two opinions among business men ; they will tell you that a " boom " — Anglice, a sharp general rise in prices — if honest and not carried so far as to lose all its benefits in a severe reaction, is much to be desired, especially in new countries. Our theory has led us so far as to make us believe that since values are largely future in their nature, there can be a general rise both in values and consequently, without unsoundness, also in prices ; that is to say, possessors of useful property are enriched all round because there is a universal inclination to put forward more effort in the future to acquire a specific unit of property, than there was before. Let us follow the course of a " boom " in a new or old THE FUTURITY OF VALUES 45 country under the hypothesis that the improvement in trade is not engineered in any dishonest way by underground financial powers. An observer would note, if he kept his head, that prices, while rising sharply all round, have risen in a certain order. A brisk demand for article A. entails a better demand for B. and so on down to K., P. or V. according to the duration of the "boom." It is amoral certainty that there will always be dealers in X., Y. and Z. who are outside the scope of the improvement in business or behind the times in equipment. One of these gentlemen will probably necessarily retire from business to become the financial critic of the community, possibly the local historian and even, perhaps, a philosopher. Now the crucial fact about the " boom " is that all along the line there has been a margin, where a profit could be made in A. before B. and F. rose in price and dealers in B. and F. again made their turn before M. and R. became too expensive. Thus all who kept their sails well trimmed felfc for a moment the favourable breeze before they were blanketed by others. Probably all well- equipped and progressive firms would have in the end a considerable residue of extra profit remaining and those who were so well organized as to have the power of rapid expansion would have made fortunes. Others in the ordinary ruck of traders should find themselves well through with a good profit, with improved methods and extended factories, with better-knit connections and reinforced reserves. There will have been a few failures, but those who fail during good times need not be reckoned as a loss to the community. But without exaggerating the temporary and particular profits of a large number of individuals the " boom would have brought a more real and universal benefit to the com- munity, which is more apt to evade observation. I refer to the effect of mutual encouragement to effort among all 46 THE LAWS OF SUPPLY AND DEMAND classes, which prevails during the period of increased hopes and swift realizations. It is at this point that we find the real increment of value. Everyone works a little harder, a little more intelligently and with greater goodwill to secure immediate and helpful co-operation than in ordinary times. The resulting effects of such a common concentration of efficiency are out of all proportion to the sum total of the individual efforts put forth. All that part of business machinery which has the adjustment of relations in charge finds its task immeasurably simplified and the stimulus to fresh effort is enormous. Real values rise because within the area of influence the tendency to effort is increased four or fivefold. Prices follow values but often a little behind, leaving a moral gain to the community over and above the commercial one, a moral gain solidly embedded in a better organization, greater self-confidence and the advancement of a few specially talented leaders to the front. But important as this element of futurity in values may be, it does not play such a large part in the ordinary machinery of commerce as the ordinary time-difference between the sacrifices of the seller and the sacrifices of the buyer. This time-difference, which is almost but not quite universal, is largely a result of the growth of civilization and the increase of complexity in our commercial relations. Time was, when all our ordering was, as the tailors would say, "bespoke." Nowadays we have to have all but our particular luxuries " ready made." In no other way can they be made cheap enough to meet modern needs. Fancy a yard of standard calico, which costs S'^d. in Stockport, being " bespoke " at 100 yards at a time, which might be just about enough for Mr. liockefeller's household. The cost would more pro])ably be 2.s. Gd. a yard. No, the requirements of modern industry are great fore- sight to anticipate the demand for any class of goods, THE FUTURITY OF VALUES 47 considerable capital to supply the means of production for them and a still larger provision of capital to hold the stocks of goods ready for the market. And here we come to the edge of the great problem of our gigantic industrial system. If we open the sluices of modern productive resources, developed under the factory system in the last seventy years, goods pour out at an amazingly cheap and ever cheaper rate and the market is flooded beyond any possibility of commercial remuneration. The analogy is eminently appropriate without any labouring. No barriers of price could withstand the outflow and the resulting inunda- tion would mean the waste of the product and the probable destruction of the means of supply. Modern industry therefore, besides the necessity of lowering the cost of production by a great expenditure of capital, has had to devote an even greater aggregate capital to a machinery for marketing the goods, a machinery which consists of a system of checks and barriers for the purpose of maintaining intermediate levels of price which are fairly comparable to a series of locks constructed to let flood waters slowly down to the level of the plain. In order to avoid the appearance of paradox and to assert our seriousness let us look at a few facts. The town of Oldham with 100,000 inhabitants has spindle capacity enough to supply more than the regular needs of the whole of Europe in the common counts of yarn. To manipulate such an output and market it as well as the other output of Lancashire the merchants and warehousemen of Manchester and Liverpool, not to mention the marketing organization contained in other Lancashire towns, have a greater cajjital employed than that required in all the manufacturing industries of the cotton trade. It is roughly true to say that nowadays it costs more to sell most articles than to make them, even in the case of the most highly organized and most 48 THE LAWS OF SUPPLY AND DEMAND eminently specialized industry in the world. This is a point to which I shall return later in the next chapter. For the moment I am concerned to inquire as briefly as possible into the nature of the difficulty, which creates so enormous a problem. It is evident that the old maxim derived from Mill's law of value will not help us here ; mere cheapness and abundance will not by themselves sufficiently increase the demand. A little cheaj)ness and a little abundance will gradually increase the demand and with this modification of the law of value we begin to come to grips with our problem. The two tasks of the producer have to be taken in hand together. On the one hand, he must make a huge outlay for modern econo- mical production ; on the other, he has himself or with the aid of middlemen and merchants to keep available a still larger amount of capital to be able to hold up the goods, to maintain his markets and to secure the price which is his necessary reward for both operations. The process has been best described for me in a single word by an American friend, who stated that the only way to meet demand was to allow it always to remain a force of suction. If demand is for a moment satisfied the suction disappears and the seller finds himself perilously near to the glut of the market. Such a necessity for securing the suction of demand is only another way of putting the maintenance of values. Since demand consists of values and nothing else, the dis- appearance of values means the diminution and disappearance of demand. In my formulation of the laws of demand, such as I hope to make, we shall have to understand how and why values disapj^ear and reappear and what means there are of preserving them, of creating them, and of re-creating them. There is no such thing economically speaking as ** intrinsic value." THE FUTURITY OF VALUES 49 There is still a further element of futurity in value, which cannot here be determined until we have thoroughly analyzed cost and cost of selling, which we shall come to do in the next two chapters. A particular form of future value is described and discussed in Chapter X.. under the heading of the law of recurring demand.* ^o See p. 117. S.D. CHAPTEE YI COST To state, as I did at the end of the last chapter, that it probably required more capital to market the product of Oldham than was employed in manufacturing it may correctly describe a general fact, but it would be extremely dijfficult to prove it in detail. There will always be, however, prodigious difficulties to be faced in economics, the explana- tion of which must be a matter of inference, since the analysis of all the facts is admittedly beyond our powers. And one of the most remarkable is the predominance in wealth and capital of the mercantile as compared with the manufacturing cities of the world. This was no less true in the days of Tyre and of Carthage or during the com- mercial predominance of Florence, Genoa and Venice. Each of those mercantile queens had probably for purposes of military protection to make, as well as to market, some of her own wares, but it was the marketing that brought the profits. In our own day the great cities of Glasgow and Philadelphia, both of which are great ports as well as manufacturing centres, are nearer than most to the ancient model ; neither are yet quite in the first rank and they stand noticeably behind the great commercial capitals, while the purely manufacturing centres are forgotten in some row still further back. Let us take the great cotton industry already mentioned. A hundred years ago Liverpool was the selling and buying centre, while Manchester manufactured. There was a COST 51 certain rivalry between them with a balance of wealth in favour of Liverpool. Now Manchester with Salford and her continuous suburbs has a population of well over a million and stands the second city of the Empire; this place has been gained by her becoming the mercantile centre for cotton goods, as Liverpool remains for cotton, while Manchester cotton manufactures have left her for more special and less wealthy centres. Coarse yarns are spun at Oldham, finer counts at Bolton, the weaving centre is at Blackburn, while bleaching and calico-printing are carried on throughout the district wherever the water facilities are sufficient. But the two mercantile cities are incomparably more wealthy than any of their rivals and almost equal to all of them together. We have another even more surprising instance in the greatest city the world has ever yet seen, London with an estimated contiguous population of well over seven millions, about equal at the present moment to that of the Dominion of Canada or of the wealthy country of Belgium, is often spoken of as a considerable manufacturing city. This is true in a limited sense, but her manufactures are of a minor order, and her chief industries are of the adjusting and accommodating type. Of the great trades she leads only in building and letterpress printing. She puts together machinery whose parts are largely made elsewhere. She turns out furniture, jewellery, watches, beer, chemicals and hand-made clothes and boots. Of industry in the modern sense, which uses "power" for production, she is almost ignorant. The proof of this odd fact I discovered in the report of the Commission on London Traffic, still only a few years old. There were then 638 factories in London registered as coming under the Factory Acts, with an average horse-power of 54. The total power employed within the London area under the Factory Acts, chiefly e2 52 THE LAWS OF SUPPLY AND DEMAND used in newspaper printing, was 34*750 h.p. Just twice as much power as that is required to drive the S.S. Mauretania through the water. Yet the wealth of London considerably exceeds that of the next twelve cities in the Empire taken together, and is vastly more than the combined wealth of the next twenty purely industrial towns, such as Coventry, Wolverhampton, Oldham, Bolton, Preston, Huddersfield or Toronto, to name only a few. The greatest and wealthiest city in the world grows ever fatter and richer without herself using more than a small fragment of modern industrial power. Only the equally commercial cities of New York and Chicago are likely to surpass her in the near future or in the more distant future Buenos Ayres or Montreal. Such raw lumps of fact are staggering when thrown at one suddenly, and I confess that they defy complete analysis. We must be content with a broad inference or two, such as, that the productive power of modern industry is so tremendous that a comparatively small amount of capital laid down in some dozen suitable English, German and American towns with a well-trained industrial population will be able to produce most kinds of goods capable of indefinite multiplication, sufficient for the whole world. But we are now talking of such large quantities, as without further mercantile organization could never be profitably absorbed. It is not production that is costly, but market- ing. Since apparently the greater part of the rewards of industry go to those members of our commercial organiza- tion, who are engaged in the adjusting duties of selling, buying and selling again, we have also to infer that there is some corresjionding difficulty in these tasks which enables those engaged in them to gain their great rewards. It cannot be all chicanery and tliievery. It would be easier to unravel this difficulty of comparing COST 53 the cost of production and the cost of selling, if we could once arrive at a clear estimate of what the net cost of manufacture of any article may be, as distinct from the further cost of placing it on the market, with which it is generally overlaid. One, and the larger, part of the cost of seUing may be approximately obtained by finding the difference between the first wholesale price of the completely finished article, and the final retail price at which it passes into the hands of the consumer. Such difference, however, is not by any means the whole of the selling cost of the named article, for the clear reason that there is no manufacturer in the world, who does not devote some of his capital, a part of his salaries and wages and the greater part of his own private energies to building up what he would call his " connection." In other words, the first manu- facturer, before the prime product passes from his hands, has already spent on it indirectly in one way or another any- thing from one-fifth to one-tenth of the net manufacturing cost of the product in obtaining for it its first market. In America the proportion might very likely be greater, because the public there seem to enjoy high prices, and the manufacturers and middlemen have more margin in which to let themselves have their fling in advertising, semi- advertising and generally building up their connections. All of which costs money, and has to be added to the price. It has further to be remembered that many articles pass through more than one manufacturer's hands and each of these has his selling costs ; again, most articles go through the hands of carriers by land and sea, each of whom has his selling costs ; and, when finally the bantling typical commodity emerges into the hands of the first middleman, it finds the loading up of selling cost comparatively only at its beginning stage. The middlemen will have under- stood their duty badly, if they are not able to run up, as 54 THE LAWS OF SUPPLY AND DEMAND we shall see, anything from 20 per cent, to 30 per cent, on the first wholesale net price. It is our final friend, the retailer, who succeeds in putting on the biggest increment, because he has the hardest task in selling to the consumer, and he also, I am told on high authority, is the last person to consent to any cutting down of his share of the plunder when times are bad, or when any scarcity of the prime cost of the material causes a disastrous fluctuation in the market. Hitherto it has been the practice to mass all these complicated charges under the general term of " cost of production." But how unenlightening such a lazy avoidance of analysis has been we shall see when we come to ascertain whether demand has any, or what, influence on price. The whole problem of demand has been hidden away from economists by the hoary incrustations that have grown up round " cost of production." Of course, the words can be defined to mean anything and everything, if we choose to consider the article, as finally finished or produced, only when it is in the possession of the consumer. This is the easiest way out of the difficulty of defining the cost of production, but we shall see later on that it is fundamentally unsound. Before passing on to this consideration I should like to dwell on the extraordinary value attached in any important trading community to the business connection or goodwill of any firm engaged in manufacturing or commerce. The construction of such a goodwill is the result of years of effort, expenditure and self-denial, and the want of it is the chief barrier against the establishment of a new manu- facturing business. In fact, it has long ago been recognized that the 8imi)lest way of avoiding this initial difficulty of Btarting a new business was to creep into a " connection " by imitation of a trade mark or some course equivalent to COST 65 misrepresentation of the new firm's goods as being those of some established house. In the trade with the Far East such a crime has a reputed blackness only equal to that of horse-stealing in Arizona. I was told by a leading mining engineer that he had found it worth while on behalf of a company, which he represented, to buy up some Burmese lead mines, which had been worked out thirty years before, because their "hong" or mercantile connection, which included the right to use a certain stamp on their ingots, was still something to conjure with on the Canton River. All the immensely valuable properties included under the name of trade marks are really so much accumulated selling power, and their amount is the best proof we can find that what is now esteemed so highly must have cost a great deal in time, effort and money to build up. In point of fact, building up such a connection has to be taken as part of selling cost. Another method of proof of such value, if one is wanted, can be obtained by starting a new business of modern manufacture after the most approved methods. Such a new venture has the one definite advantage of being able in all probability to fine down the net costs of production to some small extent by adopting the latest methods, but an experienced manager will know well that this is less than half the battle. He will have no chance of succeeding against established firms without either a great deal of one of the following advantages or, better still, some fair supply of each of them. First, he may have imported existing connections to the help of his new firm by getting influential investors to take a large stake in it. Secondly, he must be well provided with capital to stand his initial losses. Thirdly, he may find an exceptional opening for a popular novelty, which will establish a new connec- tion for his own firm. I have watched new manufacturing 56 THE LAWS OF SUPPLY AND DEMAND concerns start with a little of all these advantages and yet come to grief. Let us come now to a few concrete cases covering both necessaries and luxuries. We have at first hand and up to date the report lately issued by the Department of Agri- culture of the United States of America. The investigations were undertaken rather more than a year ago by the Government over fifty different cities selected as types, large, medium and small, in order to ascertain how much was added by the retailer to the cost of the various neces- saries of life over and above the wholesale cost as they came into his hands. As the United States are still the largest producers of meat in the world let us take the case of a carcase of beef as being most worth detailed examina- tion. The wholesale price for half such a carcase, weighing in the aggregate 289 lbs. delivered by rail in a small town in Pennsylvania will be $21.68 or 7^ cents a pound. The butcher will then divide this into twelve different cuts or items, so many pounds each of chuck, flank, plate, neck, rib, round, sirloin, suet, bones, oft'al, &c., each of which will have a different market rate, and he will receive for the aggregate $33.06 or at the rate of 11^ cents a pound. • Such a case is an instance of an addition of 55 per cent, to the wholesale price, which was above the average, for the fifty cities, of 38 per cent. The smaller towns, on the whole, exceeded the average, and in eleven out of fifty the retailer added more than 50 per cent. ' But this margin of 55 per cent, added to the wholesale cost of the beef in Pennsylvania is not the full total which ; must be called the selling price of beef. Before the meat came to its wayside station in Pennsylvania it had passed through a dozen hands, each of whom added his fragment of manufacture by feeding, killing, dressing, refrigerating and carrying, and in his demand of payment for these COST 57 services included in each case some charge to cover hie own share of selling cost, not the least part of which, especially in the case of the packer, was the necessity of being pro- vided with large capital to hold over stocks and control the market, when required. The freight cost of the steer, who once owned, or was, the carcase of beef, from Texas to the stock farm in Kansas, and from Kansas to the wholesale meat packer in Chicago and thence in the shape of refrigerated beef to Pennsylvania, was estimated by the U.S.A. Department of Agriculture to be, including intermediate handling, about 1 cent a pound. The remaining 6| cents a pound had to remunerate the ranch owner, the stockfeeder and the Chicago packer, each of whom had his goodwill to maintain out of his share of the proceeds. It would probably not be over-estimating this share of the selling cost undertaken by rancher, feeder, packer and railways to take it at a total of 1^ cents per pound of meat, although this can be nothing more than a hypothetical figure. On this assumption the net cost of production of a pound of beef must be taken as 6 cents, intermediate selling cost as 1^ cents, final selling costs as 4 cents, making an addition to the true cost of production of about 91§ per cent. The American returns taken from the above and other sources, mostly Government reports on retail prices, show that the case of beef is more favourable than many others. Taking other articles at their final or retail selling costs only, without troubling to estimate, as above in the case of beef, what we have called the intermediate selling costs, we find that milk comes out at still worse rates. Here the dairyman gets 4 cents a quart, the carrier ^ cent, and the retailer 3^ cents out of a price of 8 cents to the consumer, so that the last selling stage puts on 70 per cent, instead of an average 38 per cent, as in the case of beef. Bottled 68 THE LAWS OF SUPPLY AND DEMAND milk in New York also brings 8 cents a quart, of which the producer receives 2J cents the carrier 1 cent and the retailer 4^ cents. This last item, as compared with milk in the can, seems to point to some undue manipulation of the market. With regard to potatoes, onions, water-melons and coffee, it was estimated by the Industrial Commission ten years ago that the consumer paid a price 200 per cent, higher than the wholesale cost ; for poultry, apples, and strawberries about 100 per cent. more. In the most favourable case of butter, the producer received 85 per cent, of the gross price, a difference to be accounted for by supposing that here the original producer took the costs of selling largely on his own back by advertising and getting himself into direct touch with his ultimate customer. But without taking up the details of the American butter trade further analysis of this case is impossible. In a private report issued in the interests of the American tariff party by a tame committee inspired by Senator Lodge a droll case was mentioned which can be accepted as true, and, if bo, is very much to the point in a discussion of the costs of selling and of production. A certain merchant took up a new line of tea and received from the wholesaler the following alternative propositions : he could sell the tea at 27 cents a pound to the public taking his ordinary profit or he could sell it at 60 cents a pound and advertise the gift of a handsome present with so many pounds. Such a case is not without parallel in our own country and clearly here we have an artilicial addition to the cost of selling a named number of pounds of tea, which is equivalent to the difference between the value of the gift and the higher price charged on so many pounds of tea under the gift system. The American food prices are most interesting in this particular relation because we have the combined elements of the lowest possible cost of production and great difficulty COST 69 in reaching the customer without other complications, and it is fortunate that the statistics on- the subject here are precise and authoritative. I can get no comprehensive comparisons between production and selling costs for foods in either England or Germany, the two other great progressive countries, and I can only offer a personal opinion based on inadequate figures and a small experience of trading in both countries. I am under the impression that for foodstuffs in great industrial centres of Germany, like Berlin and Cologne, high selling costs are approxi- mating to the American standard, which in the country districts of Germany are checked by surviving customary prices. There is a most extraordinary disparity between retail prices of foodstuffs in different districts of Germany, but the general tendency is steadily upward. In Berlin I am frequently told by friends, who have direct oppor- tunities of judging, that the expense of living, even for articles which should not be much affected by the tariff, is already higher than in London. In England selling costs of foods are probably lower than anywhere except perhaps in some small agricultural country, where the market of such towns as there are is eagerly competed for by agri- culturists, who are poor in trading resources. But we have in this country an excellent instance of a prime necessary of life, comparable even to food in its indis- pensable utility. Indeed, in the sense of the word "necessary of life," as we used it in the chapter on "Wants and Sacrifices," it is even more a universal " necessary " than any one kind of food. Because, while there are many alternative kinds of meats, grains and vegetables, which have different values according to local utilities, a yard of calico is almost the indispensable unit of cheap textiles throughout the world. Taking as a standard the quality sold in a small Lancashire town at 3|(L per yard, I analyzed, 60 THE LAWS OF SUPPLY AND DEMAND with the help of a manufacturer in a large way of business in several branches of the cotton trade, the several elements making up this figure, as closely as we together could. We were satisfied that we could get no nearer to detailed accuracy than to take the net cost of production at about one-half of this figure when cotton was at a medium price and rather more than that when cotton, whose price is unfortunately very variable, stood at a high figure. As the consumer's price stands generally at a stable figure, the fluctuations in the selling margin of 100 per cent, caused by the varying price of cotton have to be borne by the inter- mediate selling parties, each one except the retailer taking his share of the squeeze, of which the larger share falls to the manufacturer. The most interesting point in this phenomenon is the strong position held by the retailer, because he has hold of the last link in the final selling end of the chain, and I am strongly confirmed by it in the view I take as to the essential difficulty of final selling by the man who has to come face to face with the demand. It would not be difficult to multiply instances of enormous increments to net cost of production made by the selling cost of luxuries. The prime cost of such commodities as soda-water, millinery, fancy stationery, confectionery or flowers bears very little relation to the ultimate price paid by the consumer. The chief cost of these articles is taken up by the elaborate organization necessary to convey them to the customer or to his notice or to attract him to come and inquire about them. On the seller of fancy luxuries the especial obligation lies of persuading the buyer that he is not buying one of a thousand or a million similar com- modities, but just the one particular special exceptional article brought before his notice. Such persuasion is extremely expensive, but when well done brings a fortune. An American wit attributed the commercial success of the COST 61 "Waldorf-Astoria," a giant hotel in New York, to the fact that it provided exclusiveness for the million. One of the most successful of modern selling devices, invented in England, perfected in America and now prevail- ing everywhere, has been, as an American Westerner would say, the idea of corralling the buyer within the four walla of a general store and of bewildering him there by offering him everything at once. The germ of the idea arose in the English co-operative stores, but now it has spread every- where. We have Wanamaker's & Macy's and twenty others in America, the Grands Magazins du Louvre, the Galeries Lafayette and the Bon March6 in Paris, Whiteley's, Harrod's, Selfridge's in London, Tietz throughout Germany and Wertheim's Waarenhans in Berlin. Although under these conditions the cost of display is considerable and the amount paid in advertising colossal, yet the profits are handsome and sure. They have the large margin of the ordinary 30 to 80 per cent, of the retailer to cut into and in special cases even more. Mr. Selfridge, presiding in the spring of last year at the meeting of his company which owns a vast department store in London, stated that the cash discounts obtained by his firm were enough to pay the whole of his debenture interest, which included replacement of the capital value of his building and the cost of his lease. One curious proof of the profits accruing out of retail selling arose in a case of the partial bankruptcy of a firm to be unnamed. It had been originally started to promote the sale of a commodity of general use whose special virtues were protected by a patent. The chief part of the company's capital was laid down in branch agencies for the sale of this speciality, branches which were also allowed to engage in general business in their own lines. After a time the sale of the patented commodity was shown to be small and 62 THE LAWS OF SUPPLY AND DEMAND unprofitable, the capital of the company was exhausted and the business of the company passed into the hands of a receiver whose natural course of action would have been to close it down. But in the course of his investigation into the business of the company he found that the retail agencies were most of them making a profit on their general trading, so they were continued for the immediate benefit of the creditors and the ultimate profit of the company, which ultimately emerged from its state of liquidation and came later on to pay very handsome dividends to its shareholders. Not to multiply instances we have seen enough to be aware that the old term, cost of production, in its compre- hensive sense is really a function of two variables ; one, the net or real cost of production, which may be taken to be the costs of material, labour and management ; the other, the costs of selling or marketing under modern conditions. Of these the latter is generally at least equal to the former, occasionally only slightly below it and often far above it. Where there are great fluctuations in price we must look for them not so much in the net cost of production as in the selling cost, which has to take on itself all the duties of expansion and contraction to suit the market. CHAPTEE VII ANALYSIS OF COST Even if there were available a far greater number of instances than were given in the last chapter where selling costs are of great and decisive influence in determining price and probably more so than the cost of production (meaning by this term, the net cost of production with- out selling costs), it would not amount to evidence which has any inductive value. A sufficient record of facts to establish a theory of this kind is out of reach in two ways, because not only is the amount of detail required for proof too vast for human industry and knowledge to collect, but, more important still, the evidence from its nature cannot be verified. Businesses cannot be cut open like frogs. The few men who hold the threads of the great realities of business are too much concerned to keep their knowledge for their own profit and as a rule too much immersed in the details of practical life to have any regard for general ideas. Their instinct in dealing with the mere investigator and observer is to cover up their tracks as far as possible and encourage his general con- fusion of ideas. The only theories for which they have any use are those which will turn the stream of business in their own direction. We must consequently look for proof in our investiga- tion to what results may be given by the deductive method of reasoning, bearing in mind that such concrete instances as are brought forward are to be taken, like 64 THE LAWS OF SUPPLY AND DEMAND the use of curves, as purely illustrative. Indeed, these concrete instances, from which one cannot altogether refrain, have a special peril of their own. The truer they are, like libels, the more dangerous is their publication. The facts of business are hard to handle in detail and often those who appeal to them have to be at pains in disguising them beyond possible identification or at least to make a decent pretence in covering up their sources of information. I should be timid in asking one manufacturer for the use of his books in order to ascertain his real cost of production ; it would be absurd to expect any considerable number of people to give up this private information. As for finding out a merchant's margin of profit, it is very seldom that you can get any of them at the best of times to admit in the most general terms that they have made anything but a loss. If anyone wants to find a group of professed philanthropists working for nothing, or less, let him go some day and ask a few questions on any mercantile exchange. Beginning our inquiry therefore at the other end, we may ask, what truth is there, theoretically speaking, in the old economic dictum that, in the case of those articles, which are capable of indefinite production and reproduction, where the law of diminishing returns does not come into operation, price tends " in the long run " to approximate to the cost of production ? This is one of the most ancient of those phrases in economics which have tended to darken counsel. It can be made to resemble an axiom by narrowing down all the circumstances which tend to vary price and by enlarging the term, cost of production, until it covers also cost of selling, which is essentially something different. The prevalence of the phrase that " price depends on cost of production " is simply an indication that the general belief among economists remained for a long time that selling was a mechanical process ANALYSIS OF COST 65 conducted on regular margins and that the sole variable was cost of manufacture. However it is put, the dictum is really logically absurd, as we can see by assuming it to be true. The manufacturing cost of an article, where the law of increasing returns operates, depends very considerably on the total amount of the demand. That is to say, it is much cheaper to make certain articles by the thousand than by the dozen. Since bootmaking machinery, for instance, was introduced from America, the cost of making a single pair of boots of a certain grade, when 20,000 pairs are being made in one factory during the year, has been reduced probably to 5s., while formerly, with an output of 2,000 pairs a year, the cost was certainly not less than 9s. Cost of production therefore depends on demand. Demand also dejDends on price because more pairs of boots are sold at 9s. than formerly at 15s. Since we started with the assumption that price depends on the cost of production we have come back to the vicious circle that A. depends on B., which dej)ends on C, which depends on the original A. It is the nursery game of a circle of people sitting on one another's knees. We have already had an instance in the last chapter — rather a ridiculous one, we must admit — of the merchant who had the option of selling his tea, the same tea, at two prices : it is sufficient, however, to illustrate what is theoretically true, that the cost of making an article being x pounds and y being the normal selling costs, with a small profit, if the article is launched in the routine of trade with a normal demand, the price would normally be x -\- y. But if the firm be possessed of exceptional enterprise and the article be one capable of some novelty in description it is a naturally alternative policy to launch the article in question at a price x -}- y -\- z, where z represents a con- siderable sum spent in advertising, including also a special L.S.D. F 66 THE LAWS OF SUPPLY AND DEMAND extra profit to the firm as a reward for their enterprise. Where is the cost of production then ? It has been the same x in both cases, while the price has varied from X -\- y io X -\- y -\- z. This latter case is so far from being absurd, that it is typical of a very characteristic difference in the cast of mind of traders on one and on the other side of the Atlantic. It is more frequently the American policy to aim at the higher profit and undertake the greater trouble and risk. I can elaborate the illustration from a business, which I select not so much that I have been personally engaged near enough to the fringe of it to be acquainted with some of its ins and outs as because it is specially inter- esting from the point of view of demand. I refer to the trade in machine tools. Machine tools are the necessary instruments of the manufacture of all iron and steel. They are therefore intermediate necessaries and the demand for them, because it is secondary,* is as nearly constant as one can expect to find. Fashions and empires v(\a.y change, but the means of cutting and shaping iron and steel will be wanted in any case whether the ultimate purpose of the iron and the steel be one thing or the other. The demand for machine tools is as constant as the general fluctuations of trade will allow. They are further used by an extremely able and well-informed set of men, whose interests are deeply engaged in putting into practice without delay every discovery or invention which cheapens the cost of manufacture. The buyers, therefore, in this case are eager enough to ascertain and adopt any novelty of merit and the pushing of the sale of such novelties has not the same initial difficulties as in other trades. Under these * For (lofinition of sccoiuLuy dcraaiid, soo Cap. XI., p. 128, and Handy Table. ANALYSIS OF COST 67 actual conditions let us suppose that some useful novelty of design in, say, a milling machine has been discovered and adopted simultaneously by two firms, one in America and one in England. We will suppose further that, though the improvement is not distinctive enough to be patented, it offers a real and appreciable advantage. It is possible and not unlikely that the two firms would each treat the new advantage in quite a different way. The Englishman would put it on his regular line of machines, add something or perhaj^s nothing to his price, and look for an increased profit through a larger number of sales and in an increase of the prestige of his firm. The odds are that the American would go differently to work. He would call his old machine, thus improved, by a new name, cover it with " talking points," to use commercial slang, and advertise the novelty for all it was worth and for a good deal more. It is true he would certainly have to charge a much higher price than the EngHshman, but if he understood the selling part of his business well, his machine would be far better known and possibly have even a greater sale than that of his rival. You might come to see the two machines any day for sale side by side in Diisseldorf, the great mercantile centre for machine tools in Germany, one priced about 50 per cent, more than the other, but each, if you eliminated useless fripperies, fundamentally costing the same to make. How far did cost of production aft'ect those prices ? I am indebted for a much more subtle class of cases to a paper read by Mr. Cowan, an electrical engineer, at the last meeting of the British Association. He attempted to deal with a case of great difficulty, simultaneous manufacture of almost identical articles under similar conditions where nevertheless custom sometimes allowed differences in the rate of charge. This is one of the cases where customary price has a striking influence on the result. To take as an f2 68 THE LAWS OF SUPPLY AND DEMAND instance the seats of a theatre, there is very little difference between the cost of production of a stall at 7s. Qd. or a seat in the pit at 2s. 6d. What is sold is an opportunity of seeing an expensive performance on the other side of the footlights. But custom has made the division between classes of seats and as there are few demanding the favoured seats and many demanding the others, the selling cost to the small demand is greater and justifies a far higher price. So also in the case of railway travelling, first-class seats are hard to sell to a few people, and the railway company has to take this into account and charge accordingly. But the cost of carrying any individual is practically the same in one case as the other. In fact, the railway company loses on the higher priced seats and makes its losses up on the third-class traffic. It is only custom in this country which prevents the adoption of the American system of one class. In a still more interesting field of investigation there are not as yet any customary prices to differentiate the values. The electrical companies have to supply one commodity, namely, electrical units for three different purposes — light, power and heat. Opinion in this country, having no tradition of different classes among consumers to helj? them, tends to make equal charges for each electrical unit, since the cost of production in each case is the same. Mr. Cowan's point is that though what is made is an electrical unit in all cases, what is sold is in one case a unit of light, in another a unit of power and in another a unit of heat. His argument amounts to this, that since the amount of light used is limited, the selling cost is high and the charge should be proportionate. Power has a ])etter factor of demand and a lower charge is justified. Heat is a case where there is practically no demand at any but a low rate, but with a low rate the demand would be so great as ANALYSIS OF COST 69 practically to abolish selling cost, thus justifying a rate very little above the cost of manufacture. Could we have a better instance of how selling cost, which is a function of demand, becomes the real determinant of price? Mr. Cowan's views were not universally accepted, largely owing to mixed ideas prevalent about justice, fairness and the necessity of taking cost of production as the main determinant of price. But he had a triumphant answer to all this loose thinking. He showed that in practice the lowering of the price of a unit of power and the further lowering of the price of a unit of heat not only need not injure the consumer of light, whose payments remained at a rate justified by his demand, but might even in certain given circumstances benefit him. That is to say, it was within the bounds of probability that with a low charge for a unit of heat the demand for this form of electrical energy might increase to an extent, where the joint consumption would lower the whole cost of manufacture to a point where the original user of light might also benefit by lower rates. The easiest way of demonstrating this hypothesis will be to show Mr. Cowan's curves of the three variables.* Before leaving this familiar dictum about the cost of production, which I confess is something of a bogey to me, I must criticise the use of the words " in the long run." We have had " a long run " since the Victorian 'forties and yet price is not still tending to the cost of manufacture, but jumping away from it. The case seems to me one not so much of bad prophecy as of the evil results of attempting to wrest economics to suit a certain philosophical theory. But whether it was a consequence of Benthamism or owing to the fatal assump- tion of an economic man the early English economists and * See Diagram II., p. 287. 70 THE LAWS OF SUPPLY AND DEMAND some of their followers seem always dominated by a theory of perfectibility. They believed passionately in a possible state of perfection in the material world, in the power of mankind to recognize it and in a natural inclination to move in that direction. All three are questionable propositions. Our vague wanderings on the earth and experiments with matter may be a preparation for something higher, but the road to it is not clearly pointed out by any progressive change in our habits. The general improvements in our physical condi- tion and, if any, in our culture seem to have been reached not so much through idealism, as owing to an increasingly intelligent sensitiveness. It is difficult to be so confident about the present trend of our social and economical strivings as to continue to use the words "in the long run " with any boisterous hopefulness. Nor, on the other hand, need we be worried about what they represent. They stand to me for no more than a useless form of speculation in economics. If, as I believe, economics is a pedestrian form of psychology we may be sure that economic problems will have ample opportunity of being stated and restated in order to correspond with our perpetually modifying civili- zation. That is why we have come to a point when the generalizations, which were approximately true in 1850, already, some of them, require restating to suit modern conditions. The close analysis of the constituent elements of cost is a matter of great difficulty, because all the factors of which it is composed are variables. There is one which is ai)parently constant, namely, the cost of manufacture, but, as we saw above, it is not really so until the total amount of demand has been estimated and the scale and rate of output determined. Even the manufacturer has thus to keep his eye on demand. But the output once fixed for a ANALYSIS OF COST 71 given quantity the cost of manufacture becomes the lower limit, below which price cannot fall without discouraging production. Above this limit the rest of cost is included in selling costs, which are again susceptible of further analysis. If we take the whole group of producers and sellers together, consisting severally of manufacturer, middlemen and retailer, we find that each has his part to play in meeting demand. The manufacturer has to determine the output, guided to some extent generally by the expert assistance in the form of orders of the middlemen. The middlemen are, as a rule, the largest capitalists of the whole group, and their function is to control supply by absorbing quantities of commodities at the receiving end of their chain and parting with them judiciously at the other end of their chain to the retailer. Their duties resemble those of locks which let the flood waters of production fall gradually down to the level where consumption is ready for them. For this purpose the resources required are considerable, but as the quantities which are handled are immense, each middleman's toll of profit on each article is small. The retailer who undertakes the final duty of sale to the customer has in the vast majority of cases little, if any, capital. His turnover is small and his labours are great, so that his proportion of profits on each article sold has to be comparatively high. Eisks have to be covered at every stage. The aggregate payments for these services and risks are the selling costs of the commodity. They are, as we can see, including also the cost of manufacture, all functions of demand, which is therefore the chief determinant of price. The complicated problem of selling will be continuously better understood, as the study of consumption becomes recognized to be the chief field still undeveloped in economics. When the waywardness of the consumer has 72 THE LAWS OF SUPPLY AND DEMAND been fully grasped the immense task of the seller will be more generally appreciated. Something of its magnitude must be inferred from the mere wealth of the mercantile cities, arguing the employment of huge capital and the receiptof no inconsiderable income. The complete duties of the sellers regarded as a consoli- dated group are not confined only to the mechanical one of holding back the immense output of modern production and allowing it to filter slowly through their hands. This may be called the control of supply. They have also to regulate and manipulate demand, which is quite a separate duty and requires very intensive study of its seasonal fluctua- tions. When we come to formulate the laws of demand it will become clear that the alternate disappearance and recurrence of demand for any commodity is its most characteristic feature. In general consumption there is not a single tide, as in the ocean, flowing and ebbing equally on either side of the globe, but endless competing fluctua- tions, some of which have interlinking influences on one another and others which are entirely independent. There are spring hats and autumn toques, summer flannels and winter overcoats ; these are seasonal and universal. Other recurrent demand is diurnal and therefore practically perpetual, such as for food, and conveyance to work. But how about the demand for watches, jewellery, theatre tickets, portmanteaux, coffins, wedding dresses, &c. ? For these the demand of any individual or any small group is so spasmodic, as to be incalculable, so that even the retail sellers of these commodities have to be provided with consideral)le capital and to keep large stocks and to rely on the building up of a goodwill sufficiently widely known in order to bring them a large number of occasional buyers. They could never depend on the regular demand of a limited group of clients. ANALYSIS OF COST 73 The greatest difficulty is presented in the case of the sellers of professional services, ^Yhere the waste of high attainments and even of human lives and energies is shocking and has to be paid for in the prices charged. The hit-and-miss character of the plan of allowing or rather requiring an expensively educated man to put up his name on the door and wait for business to come to him is the root cause of the unnecessary cost of much legal, medical and engineering services in this country. I should hesitate to say that our want of system in this respect is a reproach to us in the world, but it should be so. Apparently there is an inclination among us to glory in the few dazzling incomes made at the exj)ense of much unmerited failure, as if they were the proof of exceptional talents in the nation. They are nothing of the kind. Besides lying in wait for demand, so to speak, the sellers have often to go abroad and gather it in. Their most usual method of prosecuting this part of their business consists of advertising in its various forms and the great expense of this branch of selling enterprise is sometimes borne by all departments of sellers in varying shares, but is more often paid by one set in the chain of partners, whoever may have the largest amount of available capital for the purpose. The habits in this respect differ from trade to trade. For instance, if we examine the separate trades in this country we find that soaps, mustard, cocoa and chocolates, mineral waters and patent medicines are advertised chiefly by their manufacturers ; wines, whiskies, tobaccos, teas and fancy goods by the great mercantile houses, some of whom are also retailers ; while the great retail shops and stores advertise clothes, fashions, cutlery and a vast quantity of mixed necessaries. The object of very extensive advertising in all these branches is not only to attract the ultimate customer, but also by creating a 74 THE LAWS OF SUPPLY AND DEMAND private goodwill for the firm ^Yhich undertakes the expendi- ture to capture a larger share of the intermediate profits than would otherwise come to its share in the ordinary routine. There are again other ways of attracting the ultimate consumer besides advertising. Some are perfectly legiti- mate, such as good salesmanship, canvassing, sending out commercial travellers and forward agents. Others are doubtfully so, such as giving away showy trash w^ith a pound of tea. But the most successful are the out-and- out impostures. I am not speaking here of the dishonest branches of competition, such as secret commissions, bribery of agents, misrepresentation and adulteration, but of mere blatant humbugger3^ Human nature has a real liking for being taken in and if the impostor is clever, his equals in ability see through him, but do not want to show him up or are deterred by the trouble of doing so and therefore are free to enjoy the spectacle of watching him impose on others. This is a kind of talent which has great openings in business and especially in finance, journalism and the sale of quack medicines. Economically speaking, these gains are the reward of exceptional selling skill where the character of the commodity offered is worthless or negligible. Xnte to Second Imjm'xxio/i on Mr. Cowan's Theory of Electrical Units, — It has beeu suggested that, 1 liave here neglected or ignored the iiiHiience of the load-factor on the cost of production of electrical units for lighting. The fact is that the influence of the load-factor had been considered and eliminated by Mr. Cowan in order that the question of mere quantity might be considered by itself. If we return to this question of load-factor, it will be seen that this operating influence is itself only a function of demand in another form. It can be analyzwl into three elements : the periodicity of demand for light in large quantities; the regularity of demand at various })erio that either in buying or selling there is a limit, where the law in each case ceases to be true, and, that to determine that limit is more imjDortant for him than to realize the truth of the law itself. All prices are continually fluctuating from a series, which is in a condition of stable, to one, which is in unstable equilbrium. The criterion of the passage from one to the other is the rate of change. If a seller having a large stock wishes to attract more buyers, he tries a small lowering of price and may attract a great increase of custom. The market, he knows then, is 80 far stable. If he repeats the process and attracts fewer customers, he takes it as a note of warning. If he goes on to make a great cut in prices and gets a disappointing demand, he recognizes that the market is becoming unstable. Should he be forced by outside con- siderations to throw his whole stock on the market, he will break prices altogether and get no buyers except professional bargain hunters. Supposing, however, that the dealer has a moderate stock and finds that the demand is firm and that there is no outside competition, he will test his market by raising prices, at first tentatively and after- wards by bold instalments. The first small increases will discourage weak demand, but the bold advances will pro- bably encourage it. That is to say, the market becomes unstable in the other direction. Buyers, knowing that they have to buy, and not seeing any other source of supply, will be eager not to be left out and there will be a rush, which may take prices anywhere. Neither of these supposed 136 THE LAWS OF SUPPLY AND DEMAND Bituations are extraordinary imaginative perversions. They happen every day. If we repeat the double hypothesis the other way, that is, from the buyer's point of view, let us suppose a large buyer with great and immediate needs, which he attempts to conceal, going into a market, which has ample supplies for his purpose offered at ordinary prices. So long as he can buy steadily* in moderate quantitites, he can absorb all he wants without raising prices greatly, but any impatient offer of higher rates may combine the whole market against him and prices will rise indefinitely. In other words, the market will become unstable against him. Let us suppose the same buyer, but with needs not quite so pressing and with more acumen, besides courage and capital, going in to the same market and, where, as in the case of a public exchange of stocks and shares or wheat or iron, he can affect prices by taking the initiative, he may succeed in breaking the market by " bear " sales and thus in lowering the quotations instead of raising them. He will then be able to buy back again and secure all he wants at lower levels of price. In other words, he will succeed, if he can produce in the direction favourable to himself a state of unstable instead of stable equilibrium in his market. Mill failed to realize the abiding conditions of a much * An instance of this kind of difficulty successfully surmounted appears in the transactions of a certain Government, which shall bo nameless. This Government, having need to buy soldiers' clotliing in vast quantities, sent a representative to Bradford to ask for tenders on a large scale. A trial order for 100,000 was offered on the understanding that a groat deal more would be required, and that the lowest tenders would bo most favoured. Tenders were sent in, I am told, by twelve or thirteen firms, and they were all accepted. As the tenders for 100,000 units were each made on the basis of a possible order for a million, there was a general loss made by the firms fulfilling the orders. LAW OF EQUATION OF SUPPLY AND DEMAND 137 vaster world than the small area, which is covered by the operation of his law. The markets, whose movements he attempted to describe, are hedged in by heights, beyond which he never saw. He never recognized outside the long but narrow stadium of tame competition the two extremes of security on the edge of which prices perilously balance themselves. Much less could he postulate the existence of any critical distinction, determining the approach to either of them. So his law is useless in practice, because it does not acknowledge or even suggest its limits. It fails by not stating these limits and by not offering a criterion whereby they could be inferred. A proper statement of this law with its limits would most likely attract many men, now wholly absorbed in practical life, to give serious attention to economic science, for the simple reason that the determination of these limits accurately day by day is the chief problem of the business of the buyer and of the seller. Can the seller dispose of his stuff without weakening the market ? Can the buyer conceal his needs and satisfy his wants without making the market unstable against himself ? These are the problems of the big seller and the big buyer, which govern markets and incidentally also affect the fortunes of the smaller men. It is a well-known practical maxim for the seller that an article, particularly a new one, must not be put on the market too cheap or there will be no demand for it at all. This is the secret of the success of many wild-cat companies, whose shares, if offered to the public at par, would not be looked at, but when quoted at three or four times tlieir nominal value are often eagerly taken up. Again, in order to avoid the appearance of paradox, let me quote from a book* on stocks and shares, recently written by Mr, Hartley * See " Stocks and Shares," by Hartley Withers, p. 288 ; also Mr, F. W. Hirst, " The Stock Exchange," p. 165. "A man really seems 138 THE LAWS OF SUPPLY AND DEMAND Withers, as follows : " All securities, even the soberest and steadiest, are affected more or less by this economic eccen- tricity which makes folk inclined to buy them when they are rising and to sell them when they are falling ; the eccentricity arises from the complication by which human feeling plays so important a part in the price of securities." He need not have written as if this eccentricity of our unconscious valuations was confined solely to securities. It governs all our buying whenever we have to make separate and personal estimates of value and it would be more con- spicuously apparent, if so many of our purchases were not simply a matter of habit. The dominion of habit dulls the individual judgment and lessens its vagaries. Besides, a large part of our expenditure is not devoted to the satisfac- tion of direct enjoyment, but seeks remoter ends, and, since so many transactions of sale and purchase are due to secon- dary or intermediate demand, these cases come more under the influence of routine and are less the subject of separate personal estimates of value. It is extremely difficult to bring these human eccentricities, common as they are, within the limits of a generalization which shall also include Mill's law of value. The attempt I am now making to formulate a comprehensive law I regard as extremely unsatisfactory on account of its length and wordiness, but there is every reason to suppose that, if it is accepted by economists as covering the essential facts of the case, it will not be long before a shorter and more satisfac- tory expression of it can be found. For the present I am less concerned to be succinct than to be sure of omitting no aspect of the vagaries of i)ricos in this group of transactions. to require a {^ront and unusiial amount of courn^n to buy freely when securities are dieap, and none at all to buy when they arc dciir." LAW OF EQUATION OF SUPPLY AND DEMAND 139 The Law of the Equation of Supply and Demand. " When in any market there is a condition of stable equilibrium, that is to say, where supply, or the quantities of goods offered for sale, is approximately, but not exactly, equal to demand, or the self-estimated requirements of buyers at reputed prices, any excess of the former is met by fluctuating prices tending to fall, which will increase demand, and any excess of the latter by fluctuating prices tending to rise, which will increase supply. When in any market there is a great excess of supply, the equilibrium of the market can only be restored by with- drawing and reserving a large part of supply, otherwise falling prices will not continue to increase demand. When in any market there is a great excess of demand at reputed prices, and supply is either naturally or artificially restricted, while a large part of this demand will be diverted at first by rising prices according to the laws of demand, in the end demand will not continue to decrease, but will become insistent up to the limit of capacity." The law states three propositions, of which the first deals with a state of stable equilibrium and the two latter with states of unstable equilibrium having tendencies in opposite directions. Of these two latter cases, the reversal of Mill's law of value is obvious in one, whenever a state of glut is reached in the market ; that is, falling prices will attract buyers up to a certain point, when suddenly there will be no buyers at all. In the case of an excess of demand, the reversal is more difficult to perceive because we cannot state demand in quantities until actual sales occur. Demand, until that moment, can only be estimated, nor can demand be consciously and concertedly withdrawn, as happens in the case of supply, when the opposite eventuality takes place. Yet the reversal certainly comes with rising prices, similarly as in the case of falling prices, as every 140 THE LAWS OF SUPPLY AND DEMAND experienced dealer knows. With a short supply and an eager demand, a slight rise in price will choke off a few indifferent buyers ; a further sharp rise in price will exclude at once that portion of demand which is not sufficiently well equipped with means to make a purchase ; then the dealer will find himself face to face with a steady group of buyers, able to pay well and determined, perhaps forced, to buy at almost any price. Here is where the reversal occurs. A further rise in price will not diminish demand ; it may very likely increase it by drawing the attention of remoter buyers to the danger of a threatened scarcity. The series of transactions then comes directly under the opera- tion of the law of rising demand ; in other words, monopoly has set in. The further course of prices is now controlled by no more than the capacity of the buyers. The dealer having, we will say, 800 articles to dispose of and 1,000 buyers has only to mark prices up by large increments until one by one 200 buyers find themselves excluded from competition by want of money. Mill's law fails because it explains neither glut nor monopoly.* By inference it classes both as abnormal occur- rences, whereas essentially they are natural and, if not guarded against, alternately prevalent. But the whole organization of trade is devoted to regulate supplies and manipulate demand on one side, and buyers on the other side have trained themselves to forced abstention or to turn to the satisfaction of alternative wants, so that between the efforts of both the stormy waters on either extreme are avoided and the preponderating number of transactions take place in the little smooth pond which is governed by what has been called the law of value. * In order to exhibit graphically the process of operation of the reversal of Mill's law of value in both directions, T have included a chart or diagram illustrating the movements of supply and demand, with instances of glut and monopoly. See p. 282. CHAPTER XIII CONTROL OF SUPPLY So long as it was a question of developing the argument, the units whose actions we had to examine were more useful when small and in all questions of demand the unit generally taken was the individual. But now that our theory is presumably established, we shall get a clearer insight by examining the mass movements of the largest possible number of buyers and sellers, and taking by pre- ference our instances from the most highly developed trades. If the instances on a large scale and in the most highly organized forms of industry confirm the deductive reasoning which the study of human nature in little led us to believe to be right, it will go far to prove that our conclusions are just and sound. And, logically speaking, that is as far as we can go. With human efforts and human wills, the experimental method is impossible. A commercial enter- prise is and must be undertaken for gain and not for advancement of knowledge. The conditions under which it is carried on either to ultimate success or failure are neces- sarily so complicated that the causes of either issue remain within the sphere of practical judgment and are not amenable to scientific test. The control of supply is one of the two ways in which the group of sellers endeavour to prevent a condition of unstable equilibrium being established to their own disadvantage. It is the more important of these two ways, although the other, manipulation of demand, is, as we shall see in a later 142 THE LAWS OF SUPPLY AND DEMAND chapter, a much greater object of preoccupation to the group of sellers than is generally supposed. But although manipulation of demand is conscious, persistent and universal in its application to markets, it cannot compare in its influence on jjrices with the force and complete effective- ness of operation, which can be brought about by efficient control of supply. The cause of this powerful influence is seated deep in human nature as we have expressed it in the law of rising demand. The prospective buyer has no pro- tection from his own desires or necessities except the rather precarious one of his own will and self-restraint or the more frequent one of his incapacity to furnish the desired equivalent. It stands to reason that if the control of supply is so efficient a weapon in the hands of the sellers, wherever it can be effectively brought about, it becomes available for purposes of offence as well as defence. Such a distinction touches the root of one of the most, if not actually the most, interesting question in all economics and one which is therefore largely confused or intentionally complicated by moral considerations. Since the avoidance of all confusion of thought is the most vital necessity of economic inquiry I am led to observe that the use of two words is here unavoidable, which usually import a moral judgment, a connotation which I therefore expressly disclaim. When I say that the control of supply may be legitimately and illegitimately exercised, I refer only to economic laws and not to political enactments nor to moral requirements. To be more precise, on the assumption that our whole commercial organization, with its elaborate mechanism constructed for the purpose of maintaining the stable equilibrium of markets, fuUils the reasonal)le and bene- ficial purpose of securing as nearly as possible equal rewards for equal sacrifices, it is right to say that the CONTROL OF SUPPLY 143 exercise of any forces so far as they tend to maintain such an equilibrium is legitimate and the use of all forces to an extent, which tends to disturb it, is illegitimate. These words in economics are to imply no moral meaning what- ever. It is therefore clear that a co-operation or com- bination to control supply may be called legitimate, when it tends to support a market, which threatens to "slump,"* and illegitimate, when it goes beyond and tends to actual stringency, without suggesting praise or blame to the parties operating in either case. One can imagine in any market price balanced like a huge rock in a small cup on the top of a hill with all the sellers in the world pushing it on one side and all the buyers in the world pushing it on the other. There is a large professional element whose influence can be exerted either way. So far as the system has any conscious intention, which is doubtful, it would aim at keeping price rolling from side to side of the cup without going over the edge and downhill on one side or the other. Supposing, however, that the sellers could obtain such an unexpected accession of strength on their side as to overcome the normal forces of the buyers together with the normal and automatic assistance to the other side of the balancing professional interests, they would, and sometimes do, turn a condition of stable equilibrium into an unstable one in their own favour and send the rock rolling downhill on the further side. Such an accession of force may be obtained by an effective control of supply, and it is very * It seems to me pedantic not to use words like "slump" and •'boom " whicli are definite, exactly descriptive and already in common use in business. But in deference to those who may still be suffi- ciently unacquainted with them to regard them as slang I have placed them in quotation marks, so as not to damage the appearance of seriousness in my argument. It is easier to rely on some business slang for an exact meaning than on that of some economic jargon. 144 THE LAWS OF SUPPLY AND DEMAND evident that the use of this force may pass from the legitimate to the illegitimate stage either gradually and imperceptibly or suddenly and with great violence. As a rule the exact moment of transition is imperceptible and the violent effects are only seen later. We must study the habits of these forces with some minuteness in order to be able to distinguish between their legitimate and illegitimate exercise. As complete control of supply seldom or never comes into the hands of any one individual or firm in the case of the great staple industries, it is generally effected to a partial extent by the co-operation or combination of sellers. It must be made clear that control of supply is and remains a very different thing from monopoly, which is only an extreme form of it. Some measure of control is necessary in every form of production ; but control of supply to this degree is not always a conscious effort, it is more often an automatic and unconscious effort amongst a whole group, the stimulus to which is received by each individual of the group separately and distinctly from the fluctuations of price in his own particular section of the market. In a former chapter* we spoke of production and selling being the joint work of a series of individuals or firms who handed the commodity, in which their common interests were involved, from one to the other like porters handing up baskets of fruit from the hold of a ship. This collection of individuals are to some extent a group, called a trade, with common interests represented by their own newspapers and methods of ascertaining quotations and prices, and also to some extent a series, where each unit has relations with only one unit on each side of him. The control of supply is effected to some extent by common action and com- mon opinion. The whole trade estimates the ultimate * See Cap. XI., p. 123. CONTROL OF SUPPLY 145 consumer's needs and adjusts its supply by communicat- ing the news of the markets' requirements to the ultimate producer. A more important factor in regulating supply, however, is the necessity of each man to maintain his own margin of profit, every link being a capitalist to some slight extent and able to hold small reserve stocks when the market goes against him. Thus the shock of a falling price caused by over-supply or under-deraand is partly absorbed in each link and partly transmitted to the next, until it reaches the producer who has to shut down his works or accumulate stocks according to his financial capacity. The reserve force in this group, regarded as a group, can be drawn from two directions ; first, from the general financial staixling of the trade, which is partly the sum of their individual credits and partly a function of the strength of their weakest link ; secondly, from the separate and individual staying power of the strongest individual link of the trade, regarded as a series. It would be well here to remind ourselves that we have been speaking of one series and one group for purposes of simplicity of language, while in practice there are hundreds of parallel series in a big industry, and besides the whole group or trade any amount of minor groups according to the way in which we wish to classify them. In these co-ordinate series ranging from manufacturer to retailer there is generally a group of special traders, each exercising the same function in his own series, who either by custom or as the result of some internal struggle have acquired a predominance over other individuals in their series, through their control of the largest supply of capital. We may call this link the strongest in the series, whose function it is to absorb more of the shock of falling price and to accumulate larger stocks, when required, than any other. The risks of these strong links are greater than those of L.S.D. L 146 THE LAWS OF SUPPLY AND DEMAND others, but their profits are much higher. As their position is so responsible, their control of supply is less automatic than with small traders, and becomes a conscious estimating of market tendencies. They become the brains of the trade and to a large extent they fix the initial prices in any market, thereby exercising considerable influence. This dominant force in a trade may exist anywhere along the line. Very seldom it is to be found with the producer of the raw material or with the original manufacturer or with the final retailer. More often it lies in one group of merchants, such as the Manchester exporters of cotton goods or the London importers of produce. Or again, it may reside, and very commonly does, in a group of finishing manufacturers, where large stocks are necessarily held so as to go cheaply through one final operation. Under this instance would come the oil refiners of Cleveland and New York, the beef packers of Chicago and before the recent revival of English milling the great wheat milling houses of the middle-west of the United States. This elaborate and automatic system, largely sub- conscious in its operation, is the central feature of our modern industrial system. I say, modern, advisedly, because although very highly developed mercantile communities existed in ancient and mediaeval times they were never the central point of their economic world. Agriculture was the all-important industry until the eighteenth century and agricultural produce could easily market itself in the hungry days, since the suction of the demand for food was constant. With the rise of the factory system of production, coincident with a perfected system of com- munication bringing cheap grain to our doors, the suction both for miscellaneous goods and food became unstable and intermittent. The period of transition may be said to have CONTROL OF SUPPLY 147 lasted for fifty years from the close of the Napoleonic wars, and during this period the English school of economics was developed and through its adherence to mistaken assump- tions stereotyped itself. The classical English economists never knew the real modern system, where the selling of commodities has become more and more difficult and expensive. It would be rash to say that we are not now going through another period of transition,* but whether that be the case or no it is certain that some kind of automatic and highly organized selling mechanism will always be required, so as to secure that the anticipatory sacrifices of the producer shall not be over-discounted by the indifference of the consumer, when commodities have to be offered in large quantities on the market. It is impossible to exaggerate the compelling influence of this unconscious or semi-conscious system on our economic life. It dominates every trade separately and all the trades together. The adjusting organism of finance is only a general department of the system, specialized to handle * The transition I speak of would be some important economic change involving a new principle, which might transform or dispense with our selling mechanism. At present I cannot see the direction which this reform, if it be a reform, would take, as I am convinced that the Socialist solution would be quite inadequate in this respect, even supposing that their system did not break down elsewhere, as in production. No Socialist, so far as I know, has yet shown, that he understood the function of capital in regulating supplies, as I have endeavoured to demonstrate it in this chapter, and the system must be understood before it can be replaced. In another and a minor sense I feel sure that we are going through a period of transition. The general rise in prices in England (see 14th Abstract of Labour Statistics in the United Kingdom, August 24, 1911), as elsewhere, can- not be entirely explained by a fall in the value of gold. I feel con- vinced that the world's selling mechanism has become temporarily too expensive. This point is more fully dealt with in a later chapter ' on " Trade Crises." l2 148 THE LAWS OF SUPPLY AND DEMAND what is only an important detail of exchange. Production has become its servant and waits for its orders. In fact, most producers are forced to take a share in it themselves and spend as much thought in selling their produce as in making it. New industries rise up at its command or are extinguished by its indifference. When it is working smoothly and strenuously and its financial pulse beats with a regularity that is monotonous we have steady trade ; in other words, the producer is being adequately rewarded for his sacrifices by the buyer and soberly plans further developments for cheaper production. But sometimes the pulse is feverish, prices are " booming " after some tem- porary shortage of commodities and the unwary producer pronounces that trade is what he calls good and proceeds to over-extend his capacity of output and strain his credit. The inevitable reaction finds him in a weak position, obliged to force goods on an unwilling market, and then it is that the organized buffers of the selling system receive and dis- tribute the shock of falling prices and by dividing the risks and losses prevent as far as possible all but their very weak- est members from falling into bankruptcy. But we must postpone the consideration of these recurring cycles of exaltation and depression until we have time to consider them specially in our chapters on "Over-production" and •' Trade Crises." The special function of the colossal selling organism of the economic world is the correct interpretation of the laws of demand, the calculation of the period of recurrence of demand, the early prevision of changes in values with the estimate of their extent and the proper appreciation of the rate of change in prices as the chief criterion of coming changes in values. These exacting problems have to be solved day by day, as a task of the practical judgment, and it is needless to say that the experience obtained by these CONTROL OF SUPPLY 149 solutions is of a hit-or-miss character. In other words, the practical judgment acquires sub-conscious skill independent of any theory, and so far no theory to my mind has ever yet accurately described the process, much less has it been of any practical help in guiding policy. After the practical judgment of the state of the market has been formed by those, whose skill entitles them, or those, whose responsi- bility forces them, to act on their own opinion, the practical duty of the selling parties is to keep supply just short of the demand of the moment and, as that is always difficult in modern industry, where vast stocks of commodities are begging to be converted into cash, at any rate to maintain the appearance of doing so. This is the field of operation where the great speculators in staple goods, the most exquisitely trained brains of the selling and buying world, are exercised. Although these elaborate financial operations are not generally included in the term, industry, and in popular language are often represented as radically opposed to honest toil, they are not essentially so and to the philosophic eye are its most perfectly developed form. On the cotton, wheat and sugar exchanges of the world the great battles of the world are fought out to determine, whether the producer is to be underpaid for his sacrifices, or the consumer be seduced into paying too much, or whether on the whole the sweat of a negro in the cotton belt shall be exchanged for a fair equivalent in amount of the sweat of a Chinese coolie in Singapore.* If one takes the extreme units so far apart, so different in nature, each so wayward in his self-estimates, one can realize that, complicated as the machinery is and skilled as its operators may be, it is very probably still beneath its task and capable of infinite improvement and development. I cannot resist the * This is what I have called elsewhere the " great exchange." See Cap. XX., p. 266, aud Handy Table. 150 THE LAWS OF SUPPLY AND DEMAND recognition of some nobility in an effort so colossal made by mankind, ignoble as the details of its transactions are and sordid as so much of the motives of the innumerable subordinate agents must be. Control of supply is legitimate where it is just sufficient to maintain the suction of demand in a market. It is com- pelled to guard against the important psychological change that takes place in the consumer or his agent, which is known as the blunting of the edge of desire, an occurrence which makes a critical change in values. This change is critical, because it is the mark of the passing of demand under the operation of the law of vanishing demand, where with every regular decrement of price it becomes apparent that the rate of change in values is accelerating in a down- ward direction. It means that with a sluggish demand in a market for wheat a fixed number of quarters marked down by a shilling at a time per quarter will, down to a point, bring in more buyers steadily, but beyond that point prices marked down rapidly by many points will find few takers. Control of supply may also be legitimately exercised to bring about a stringency even greater than that required just to maintain the suction of demand. But here we begin to get on dangerous ground. In order to get limita- tion of supply at its source, which is the only point at which we can rely upon it, so high a degree of intelligence, self- restraint and abnegation are demanded, as are generally to be obtained only by the promise of some exceptional reward, 80 that the general result of any combinations in restraint of output is either that they are insufficiently enforced and therefore fail in their object or that, if they are well enough organized under efficient leaders to curtail supply and raise price, they are generally in a position to go further and take advantage of the public by establishing a temjjorary monopoly or permanent stringency. It then becomes a CONTROL OF SUPPLY 151 question of mere prudence for the leaders to determine, whether they will take all they can for the present and drop off gorged or follow a longer-sighted policy by never raising prices so much as to attract competition from outside their ring and thus secure a comfortable permanent partial monopoly for their associates. An instance of conscious control of supply, which remains undeniably within legitimate limits, is often resorted to in the Lancashire cotton trade and also, I daresay, elsewhere. The Lancashire cotton industry is very highly organized and the federations of employers and employed stand over against one another ready to dispute about their several rights or co-operate for the common good as the case may require. Now, there is one feature about the cotton industry, which is unfortunate for Lancashire, and serves to maintain this staple trade necessarily at a high pitch of efficiency combined with great elasticity of organi- zation and that is the narrow source of supply for the greater part of the mills which spin a certain style of yarn. They depend absolutely at present on a limited area of territory in the United States, an area which is controlled by similar climatic conditions and therefore is subject all over to exactly the same good and evil fortune governing the whole supply of raw material. The cotton crop is the better for a slight touch of frost, which seems to fine it and give it a strong fibre, but too much frost involves great destruction. Under these circumstances, where the size of the crop is easily ascertained, and given experienced skill among New Orleans and New York brokers in cornering supplies, it follows that a small shortage in the crop might involve a great increase in the price. This would be the case if the Lancashire mills, requiring a crop of 10,000,000 bales, were to compete with each other for a crop of only 9,000,000 bales. This course in the past 152 THE LAWS OF SUPPLY AND DEMAND they have often followed, but experience has taught them to do better. They know that if the price of cotton is forced up to Id. a pound the corresponding prices for yarn, grey, bleached and printed cloths will be more than their own markets can swallow in any large quantity. So the various groups of manufacturers find themselves between a corner of their raw material and a probable glut of their manufactured goods at the advanced prices ; about as uncomfortable a position for a trader, as one can imagine. The situation is a special one, and quite beyond the power of control of any automatic adjustment such as we have pictured as covering the ordinary vicissitudes of most trades. Stocks cannot under these circumstances be accumulated, because goods made out of Id. cotton in 1911 cannot be sold in 1912 in competition with new goods made out of 6d., 5d. or even 4d. cotton. No, the production for that single year must be curtailed and the system chosen must be as little harmful to individuals as possible or else a cut-throat competition will break out. That is to say, since only nine-tenths of Lancashire's ordinary cotton requirements of cotton are available, it will not do for nine-tenths of the traders to produce their full out^Dut while the remaining tenth remain idle and lose their trade connections and are ruined. Eather than suffer this the latter would be forced to return into the competition and prices would again be forced up to a ruinous figure. The solution has to be absolutely just all round or it could not be successfully carried out. Another condition of its success is the consent of the operatives, who in this industry are well enough educated in trade realities to understand what the exigencies of international competition may be. First, there is a conference between the leaders of masters and of men, in which the trade situation is CONTROL OF SUPPLY 153 discussed, and, provided that a case for its necessity is made out, all the mills controlled by the federations are ordered to go on short time. That is to say, the mills will simultaneously check their output and the loss is equally shared in small quantities by all concerned. Provision is even made for those mills within the combination, who are working on unexpired contracts, and they are permitted to run on as usual on payment of a fine, which is adjusted so as to bring them also fairly within the scale of general contribution to the common welfare. It is an admirable system and, considering that the com- bined working arrangement is carried out often for considerable periods of time between elements which in ordinary circumstances are in fierce competition with each other on more planes than one, I conceive it to be the finest achievement of industrial co-operation that the world can show. They are held together by no cartel, syndicate or trust. The combination is absolutely free from the danger of acquiring an illegitimate control of supply for the simple reason, that the operatives who know trade conditions nearly as well as their masters would never consent to accept losses, while their employers were piling up profits. Lastly, it is an absolutely sound remedy for both the ills from which the trade has simultaneously to suffer. Short time at the mills tends to keep up the price of cotton goods by restricting the supply, and by moderating the competition for raw cotton it prevents undue speculation in cotton and tends to lower cotton prices. It is the great defence that Lancashire manufacturers have against an artificial cotton corner, as distinguished from the stoppage of the supply of cotton, such as they suffered in the early 'sixties. The latter is a disaster for which there is at present no adequate remedy. I ought not to close this chapter without mentioning one 154 THE LAWS OF SUPPLY AND DEMAND form of action to control supply, apart from the action of combinations which are considered in the next, and that is the occasional action of governments in this direction, Joseph's granaries in Egypt are probably the earliest example of this attempt, which has been so seldom followed in modern times that it would be hardly worth while mentioning in an economic work except that it has actually been done in the last few years by the Brazilian Govern- ment. What is oddly called the "valorization" of coffee is really the lending of the support of the State to a body of weak holders of coffee in order to enable them to retain and control supply. It is, of course, an unwarrantably perilous staking of the State's credit on speculative dealings. CHAPTER XIV COMBINATIONS TO CONTROL SUPPLY No one would go so far as to say that all forms of combination to control supply and raise prices are necessarily illegitimate, yet any distinction, which would class some combinations of this kind as essentially different from others, would lack foundation. These bodies do not differ so much in kind as in degree and the motives which guide their policy are exactly the same as those which govern the actions of individuals or private firms. Their history is at first remarkably uniform and they become differentiated later on according to the degree of strength they acquire, the extent and amount of the transactions over which their influence extends and the ultimate aim at which their efforts are directed. We can go no further in characterizing them than to say, as in the last chapter, that, economically speaking, those efforts are legitimate which tend towards establishing and maintaining a stable equilibrium in a market, and those are illegitimate which aim at some other object. Such a conclusion sounds tame and unenlightening, but, as far as terminology goes, it is more scientific than the definition of illegality under the Sherman law in America, where the test offered to determine the character of a combination is laid down to be as to whether or not it is " in restraint of trade." What trade combination is not " in restraint of trade," and what is " trade " that it should not be restrained ? If our as- sumptions are correct that trade is not in its essence 156 THE LAWS OF SUPPLY AND DEMAND self-regulative, that its tendencies are disruptive and swing when uncontrolled from monopoly to glut, and that our developing civilization has worked no greater economic good than the provision of elaborate restraints to counter- act its eccentric forces, then such a criterion of the legality of a combination is, if not impossible, at least absurdly expressed. As to the exact interpretation of this phrase, which lies at the root of the endless discussions of this subject, a good deal turns on what one takes to be the meaning of the word "trade," both absolutely and in the Sherman law. It seems natural to suppose that " trade" includes the whole sphere of commercial transactions, within which com- binations take their share with others, as an individual would, whose efforts may be regulating up to a certain point and disrupting beyond that point. Apparently the Sherman law regards " trade " as a system of traffic between individuals of a certain size, and any group of individuals conspiring to make themselves beyond a certain size, although otherwise acting as individuals, count themselves outside the system. On this assumption only can combinations be held to be " in restraint of trade," that they have conspired to put themselves outside the commercial pale by taking thought to add to their stature. The makers of the Sherman law in effect were striving to emulate the legislation of the White King in " Alice in Wonderland," when he wrote Rule 1 : " All persons more than a mile high to leave the court." Combinations to control supply have generally been unpopular, because the most prominent of them are associated with monopoly and such is supposed to be their universal tendency, a notion wbich is true only with certain limitations. Apart from a certain class, which have been the offspring of foolish or knavish financial operations, it is COMBINATIONS TO CONTROL SUPPLY 157 not difficult to show that their origin was in nearly all cases dictated chiefly by the necessity of self-defence in the face of a glut, that they have had great difficulty in succeeding on those lines owing to the natural weakness of combinations, and that, where the comparatively few, which have weathered these storms, have established themselves with sufficient force to control supply and affect prices, these combinations have then found the next step only too easy, and have followed their own interests in defiance of what other people might consider to be an illegitimate control of prices. After pushing the ball uphill it is easy to push it down on the other side, and not difficult to dominate forces which now in their turn have to undertake the task of pushing up hill. It is important to emphasize, in this definition of what is legitimate in combined action to control supply, that the criterion is not the maintenance of stability of prices but of a condition of stable equilibrium in a market. The distinction is vital. Prices may be stable through the counteraction of a large number of controlled forces, and then the market is in a condition of stable equilibrium ; in other words, competition is within limits allowed free play. Prices may again be stable through the dominance of one supreme controlling force, which can exclude competition or render it negligible, and may remain stable so long as the controlling power has the self-restraint not to exact exorbitant profits for itself. The market is then unstable in spite of stable prices, and is less able to meet outside fluctuations.* Another way of presenting the two opposed cases is to * The danger to a market from outside influences is so great that very few combinations are successfully maintained, unless there is some limitation of area, as by a tariff, within which competition can be crushed and from outside which it is excluded. 158 THE LAWS OF SUPPLY AND DEMAND say that, economicallj^ speaking, the danger to any particular trade and through its influence on finance to trade in general, is much less when the stability of prices depends on many controlled forces, whose opposing interests are alive to check one another, than when the market is in the hands of a single interest, with no check except its own estimate of the possible limit of extortion. Extortion is not necessarily the object of a successful combination, because it is unwise, but some small measure of it is very often the result, wherever the dominant power feels it can safely attempt it. It is the possibility and the fear of this extortion, which has caused mankind universally to regard any large combination to control supply with suspicion and to brand their action, generally, as oppressive. All combinations start by claiming for their object the establish- ment of stability in prices on the assumption that that condition is a good thing in itself. For the capitalist, who has to plan his rate of production and estimate his costs, it undoubtedly is so, but not necessarily so, for the trade in general nor for all capitalists in a country taken together. To ensure stability of prices and secure the suction of demand, some method of controlling output is absolutely essential. In the last chapter we discussed the normal, automatic and half-conscious system of doing this carried out in all trades. We have now to consider cases of greater difficulty, where this system is reinforced by conscious combinations and the various methods of effecting them. This may be done simply and directly by assigning within the body of combining manufacturers certain quantities which each is bound not to exceed, or indirectly, in various ways. The most usual, but not generally the most effective, because it does not directly control output, but only discourages it without sufficient check as to specific performance, is an COMBINATIONS TO CONTROL SUPPLY 159 agreement to maintain minimum prices for various grades of commodities. If faithfully carried out, it would ultimately check output by diminishing demand, but in practice the larger output is continued too long, secret discounts are given to customers by weak members who are overstocked and the combination generally breaks down. One trade, which is in the peculiar position of not being able to reduce its output, except by laying up ships, has successfully followed this method. The steamship lines operating to South Africa or China respectively, unite themselves in temporary agreements, which they call "conferences" and outsiders call "rings," binding each other mutually to minimum rates for passengers and freight. These minimum rates diminish trade, as a whole, but, wherever a close market is to be relied upon, secure heavy profits through the elimination of competition. For instance, the rate on a ton of cotton goods from Liverpool to Shanghai has often been considerably higher than the same lines will quote for delivery from Antwerp. The explanation is that the " conference " has a monopoly of Liverpool freights, while at Antwerp it has to compete with the German lines and others. The Manchester merchant has been held to characterize this as oppressive. Again, a safer device, which is often successfully carried out in a l^rotected country and sometimes between groups of exporting houses in England and the Continent, is the division of territory. This policy will lead indirectly to control of output as each section comes to know with precision what amount of production its own market will absorb without diminishing the suction of demand. The mention of the words " conference " and " ring " brings us on to the interesting and perplexing question of nomenclature. The great public have always had a peculiar hatred of monopolists, regraters or forestallers 160 THE LAWS OF SUPPLY AND DEMAND and they have never hesitated to fix without delay an unpleasant connotation on any term by which great com- binations of traders formed to limit supply have chosen to be called. The consequence is that there is a rapid degenera- tion in terms originally innocent and fair-sounding, and bodies of this kind are driven to discard each iname suc- cessively and invent others. An amusing instance of this is still under discussion in the iron and steel world. At the conference of these trades in Brussels in last June, about which I shall have some more to say later, Judge Gary, president of the United States Steel Corporation, advocated a philanthropic association of all the steel manu- facturers in the world for the pursuit of science, for the maintenance of the stability of steel prices and generally for the benefit of mankind. For a combination of this high class " association " was held to be too opprobrious a term, owing to the delicacy of public opinion in these matters and " institute " was considered to be a better guarantee of high motives. Unfortunately for this purpose the British Iron and Steel Institute, which is an old-established society pursuing only technical and scientific aims, has objected to lending the refiection of a well-established character to a body, whose future is indefinite, and claims a kind of copyright in the title. The dispute was still in the month of August not yet terminated. Of all the words which have gone through the fire of public reprobation in this relation, probably the French term, syndicat or syndicate, has best succeeded in retaining a kind of colourless respectability. This is due, not so much to the fact that it is in general use in a variety of senses, because similar circumstances have not saved the word, trust, from ignominy, but rather because the French genius lacks that imperious passion for universal control, which is almost the disease of Am.Qvican business COMBINATIONS TO CONTROL SUPPLY IGl and is present amongst many able and progressive men in Germany and England. Consequently French syndicates have never been ambitious to j)ress their success too far and some useful little syndicates have been probably instru- mental in saving infant industries from extinction, of which the Aluminium Syndicate is a favourable instance. The old French word, cartel, meaning a flag of truce, was currently used, under the form of kartel, in Germany to denote an association of manufacturers to limit competition and maintain prices, but the term fell under the same suspicion as rings and trusts and fell into disuse. The tendency in Germany is to use common terms denoting association such as the Stahl-Yerband or Steel Union to which no specially offensive meaning is, as yet, attached The Stahl-Verband, whose agreement lapses and has to be renewed next spring, is not a combination of manufacturers in the English sense holding property in common, but an alliance between independents fixing prices, allotting terri- tory and limiting output. This union, with headquarters at Diisseldorf and a membership of thirty firms in Germany, is probably the largest in a country where these associa- tions or modified combinations especially flourish. In the Government return of kartels made in 1906 it was stated that there were then over 400, of which sixty-six existed in the metal trades. Russia alone in Europe can show a large aggregation of the American type for this special pur- pose in the great Metal Union, called the Prodameta, with a capital of £'18,000,000. The Continental combinations are on the whole conservative in their policy and they do not lend themselves so freely to stock-jobbing operations as do the big American trusts. It is only lately in England that the process of amalga- mating or combining rival firms in order to eliminate competition has been attempted and that with almost L.S.D. M 162 THE LAWS OF SUPPLY AND DEMAND uniform unsuccess. The most conspicuous exception was the gradual absorption of the leading thread spinners by the firm of J. & P. Coats, of Glasgow, an example which was distantly followed by the Fine Spinners, Calico Printers, Bleachers, in Lancashire, and others, such as the Bradford Dyers, in Yorkshire. Only in the case of the sewing cotton trade was any control of the market obtained, and it is questionable whether this had not gradually grown up before the amalgamation and cannot be described to be the effect of the latter. Such success as the other combines have had has been due solely to economies in management and better co-operation among the mills constituting the parent firm than was possible before. In all these cases the combinations have been effected by the formation of a parent company with money from the public, and these financial necessities have always been a serious bar to progress. Perhaps the most successful of all these move- ments has been the amalgamation of provincial and private banks into great joint-stock concerns dominated by London. This has contributed to stability of credit, without seriously diminishing competition, but it has been a material loss to the provinces, where the industries of the country are carried on. The financial reins have been drawn a good deal tighter by London partly owing to conservative tradi- tion, but more through ignorance of industry itself and the local conditions under which it is carried on. America is still the happy hunting ground of combina- tions, which suit the American genius for control and receive all the help they require from the Government. Of these in America, as far as I can unravel them, there are three types, which may be called the pool, the merger and the trust. The name, pool, is borrowed from games of chance and is a rough-and-ready way of sharing gains and risks conducted under circumstances where private COMBINATIONS TO CONTROL SUPPLY 163 enrichment at the expense of other members is difficult owing to the return of open accounts and where each is to some extent interested in the gain of all the others. The terms of agreement in each case vary, but they generally include a division of territory and an allotment of output with the paying in of all profits to the central pool. As the central pool is divided among the members according to a fixed proportion it very soon becomes the interest of the ablest and most energetic members to leave the pool unless they can control it in their own interests. The merger, like an English combine, is the coalition of all the constituent members in the hands of a central concern, whose shares are to some extent redistributed to its members and largely sold to the public. Such a combination is immensely powerful in some ways, but the fact, that its origin depends so much on finance and also because speculation in its shares becomes so important a factor of management, renders its conduct quite as much a branch of financial handling as of commercial enterprise. It does not there- fore become such a formidable industrial giant to its com- petitors as mere size would seem to threaten, a conclusion, which we can draw to some extent from the fate which befell similar enterprises in England. The trust is, of course, the peculiar invention of America, and a good early instance of it was Mr. Rockefeller's South Improvement Co., afterwards suppressed by the State of Ohio as illegal. The name, trust, is, of course, as old as the hills and was probably first used in England in connection with public companies to denote companies holding money for purposes of investments in securities of a particular kind, such as mortgages and debentures, or in particular parts of the world where the directors and managers had special knowledge. Its use in these cases was appropriate as describing a fiduciary discretion m2 164 THE LAWS OF SUPPLY AND DEMAND allowed to the managers entitling them to enter a wider field of investment than banks would enjoy. Some were faithfully and competently administered, while others degenerated into mere speculation ; none, so far afe I know, made any astonishing fortunes. In New England there grew np another kind of trust, only superficially similar to its English namesake, which tended on the whole, especi- ally in Boston, to more conservative courses and ended up by being more banking than financial houses. This style of house was largel}' imitated in New York, where a number of trust companies were launched to undertake the duties without incurring the ordinary legal obligations of bankers. These degenerated into a stereotyped abuse, as they became a speculative ring unduly bolstering up each other's credit until the failure of one or two of them in 1907 brought American credit to its lowest ebb since the time of the war. Since 1907 they have been brought under some sort of legal control. The name, however, had stood in America for what, on the whole, used to be considered as conservative finance, and Mr. Eockefeller found his uses for it in binding together his various interests in oil refineries, merchants' houses, pipe lines, railroads and storage companies which he wished safely to weld together. He had always found it economical to buy up 55 per cent, instead of the whole of any business he wanted, and he looked round for a financial device which would enable him to control everything, while he only owned a minor part of it, because the sums required were gigantic and beyond his utmost resources. He there- fore formed tbe Standard Oil Trust, transferring to the new company sufticient of each of the stock of the subsidiary companies to secure control, which were to be held in trust for the use of the management. Ho himself held about a quarter of the stock of the parent company and his actual COMBINATIONS TO CONTEOL SUPPLY 165 working associates who were under his influence, held the necessary complement to prevent any outsiders having any say in the matter. I hardly know whether he actually was the first to employ this device of a trust to hold the con- trolling shares of subsidiary companies, but certainly he raised it to a world-wide significance. Its power and flexibility exceed those of any other conceivable instrument for managing large masses of men. The subsidiary firms kept their individuality and used the local aid and experi- ence of subordinate shareholders. But complete efficiency was exacted from them in management and implicit obedi- ence in all matters of high policy and on all questions of prices. In return they naturally reaped dividends beyond the expectations of any merely private firm. I doubt whether there exists any word in any language, not typifying actual criminal or obscene action, which bas come to signify in many countries and in more languages than are used in Europe anything quite so universally detest- able and abhorrent to mankind as this word " trust " in the special sense invented for it by one of the world's most remarkable men. No corporation, however rich and great, will bear the brand of it willingly. In August of last year, Mr. Charles M. Schwab, giving evidence before the Stanley Committee in Washington, appointed to investigate the affairs of the United States Steel Corporation, ardently dis- claimed for the combination which he had, perhaps, been the chief means of forming, that it was a trust in the usual sense. He claimed that the chief advantage attending the formation of his corporation was in economy of operation. "My definition of a trust," said Mr. Schwab, "is a com- bination for the purpose of limiting the output and fixing prices. That is the evil that lurks in the trust. If there were 100 manufacturers of a commodity in the United States ai:d 95 consolidated and raised the price and 166 THE LAWS OF SUPPLY AND DEMAND sustained it, that is what I would call a trust." The delinition is succinct and seems to approach very much to what we have called a combination stroni:; enough and willing to use its powers illegitimately ; but observe that he has no distinctive test of a " trust " but one of degree, and that there is nothing at the present time except incapacity and the exceptional restraint and benevolence of its leaders to prevent the United States Steel Corporation from degenerating into the unspeakable monstrosity before mentioned. We have had occasion before to examine the history and conduct of the great Standard Oil Trust and recent circum- stances have curiously enough placed before us pretty complete evidence of the inception and formation of an even greater, if not so celebrated or so successful, a com- mercial enterprise. The Stanley Committee in Washington has already published a considerable amount of the evidence taken before it on the great steel merger or United States Steel Corporation. Some of it is authoritative and well- informed and some of it there is no reason to disbelieve. We have also the first instalment of the report of Mr. H. K. Smith, Commissioner of Corporations, upon his investigation of that corporation at the instance of the Bureau of Corporations, an official body, supplemented by Mr. Smith's own evidence before the Stanley Commission. We have, besides, as later history, the reports from the Iron- monger, which I am kindly allowed to quote, of an interesting endeavour on the part of Judge Gary, chairman of the board of directors of the United States Steel Corporation, to induce the leading European steel-makers to come within the scope of a still more gigantic world combination. Although the evidence is not, and possibly never will be, complete enougli to ufTord materials for an authoritative history, there is ample material for a sketch, used by way of COMBINATIONS TO CONTROL SUPPLY 1G7 illustration, o£ the circumstances, which brought about its formation, and a very considerable amount of information as to its subsequent course. According to Mr. H. K. Smith, the United States Steel Corporation " was the culmination and result of a remark- able and even dramatic period in the steel industry. Until about 1898 the bulk of the business was distributed among a very considerable number of concerns. There was sharp competition, modified by frequent pools and price agree- ments of greater or less duration and effectiveness." In other words, there was the usual herald of a combination, aggressive over-production and competition, a glut of products and an inadequate attempt to limit output by mutual consent. This led on to more intimate combinations, and the smaller companies became merged into consolida- tions with capitals of thirty to one hundred million dollars. Competition was not, however, stamped out and took a new and more severe form. The great corporations asj^ired to swallow the smaller and then each other. During the years 1899-1900 a movement began towards " integration," as it was called ; that is, the great companies aspired to control the whole product from start to finish. Hitherto there had been three great steel-producing com- panies — the Carnegie Co., the Federal Steel Co. and the National Steel Co., who may be called the primary group. Another group comprised six large producers of secondary products — the American Steel and Wire Co., the American Tin Plate Co., the American Steel Hoop Co., the American Sheet Steel Co., the National Tube Co. and the American Bridge Co. The two groups were interdependent and no one concern was entirely self-sufficient. This was broken up by a general movement towards integration, which once under- taken by one company had to be attempted by others in self-defence. Apparently the secondary concerns began 168 THE LAWS OF SUPPLY AND DEMAND the contest by attempting to reach back by buying ore supplies and making their own steel, which was planned by the Steel and Wire Co. and the National Tube Co. The Carnegie Co. retaliated by preparing to erect their own tube factory at Cleveland. There was again open war. At this point testimony becomes conflicting, since personal questions were introduced. Mr. J. D. Gates, of the Steel and "Wire Co., represented the formation of the United States Steel Corporation as the only way to get rid of Mr. Carnegie. Mr. Gates is now dead, and his evidence is controverted by Mr. Schwab, who gives a different version of the cause which led to the final result. But the evidence of both are recon- cilable when we recognize that there were two move- ments, which developed independently, towards a merging combination as the only means of averting complete disaster. It must not be forgotten that the end of 1899 saw the outbreak of the South African war, and earl}'- in 1900 the Boer victories had brought a general European war in sight, while trade everywhere went to pieces. But previously to that both the movements towards amalga- mation were well advanced or they could hardly have matured so quickly. The first was a defensive manufactur- ing pool formed by the Carnegie Co., the Steel and Wire Co., Jones & Laughlin and eight others. I mention the first three as parties, who subsequently' followed different policies. The Stanley Committee has not yet unearthed the original evidence about this pool, which is characterized as a " gentle- men's agreement," whose purjjose was to associate "for mutual interest and to enable them (the companies) to pay liberal wages to their workmen." Apparently it was an agreement to limit the output of each to a certain percentage of a fixed amount of which the Carnegie Co. had nearly half, with a specified fine per pound for any excess of the allotted output. Mr. Schwab, who ought to have known the terms, COMBINATIONS TO CONTKOL SUPPLY 169 as the Carnegie manager, seemed to have fogotten all about it the other day. At any rate, this agreement among gentle- men did not last nine months. Meanwhile there had been going on a much more power- ful combination based on finance and the prospect of the control of all the ore and coking coal deposits in the United States. These were together in the hands of a dozen con- cerns and a monopoly seemed within reach. This side argument may have helped Mr. Schwab in approaching the New York bankers, who were now to take a hand in the game, although, as he said in his evidence the other day, his own thoughts were solely fixed on economy of manage- ment. At some time towards the end of 1899 Mr. Schwab was empowered by Mr. Morgan, representing a moneyed group, to ask a price from Mr. Carnegie for his properties, which constituted the most powerful interest in the trade. His price was accepted, a combination of others was formed and the amalgamated businesses resold to the gigantic United States Steel Corporation with an issue of common and preferred stock of $1,018,386,322 and a bond issue of $382,799,838. As for the " gentlemen's agreement," since some of its members were thus absorbed elsewhere, it vanished so com- pletely that no one now seems to recollect anything about it. It was probably breaking up of itself, because Mr. Gates, controlling the American Steel and Wire Co., appears to have taken a prominent part in forming the Steel Corporation? while Jones & Laughlin, on the other hand, were contented or discontented enough to remain out. The Carnegie Co, had its chief shareholder bought out and came within the combination. Thus was formed the largest manufacturing combination ever known. It arose by the coalition of two movements^ the one to limit manufacturing output, the other to control 170 THE LAWS OF SUPPLY AND DEMAND the supplies of all the raw material. As we shall see, any attempt to draw lessons from its inception and operation will be useless without carefully following the development of these two tendencies, even after they have been apparently confused by coalition. I shall hazard the criticism that the manufacturing combination has practically failed, as from its nature it was bound to do, and that such financial success as the Corporation has attained has been due solely to the partial monopoly which it has obtained and held in control- ling supplies of raw material. Whether this partial monopoly may not in future be drawn tighter so as to leave independent manufacturers at the mercy of their great competitor, is one of the problems of the future. The manufacturing siJe has never been free from over- hanging financial considerations, which fortunately for the corporation have been handled in the finest spirit of con- servative foresight. In its flotation there was allowed an underwriting profit of $62,500,000, and the Bureau of Corporations estimates that at this time the tangible value of its assets was about $700,000,000 including ore reserves, about the value of which there was dispute, or not far off half its capitalization. Within a few years of its start the common stock touched $9, in 1910 it reached about $95, while during the summer of 1911 it very nearly came down to $50; so it will be seen that finance has always been rather an anxiety to those who have had to care at the same time for its management, as an industrial concern. On the whole, the physical efficiency of its gigantic plant and organization has been well looked after and most of the water has been squeezed out of the stock by judicious and even lavish depreciation ; yet in competition with independent manufacturers it has been losing rather than gaining ground. In 1901 it produced 43*2 per cent, of the national output of pig iron and 66 per cent, of the steel ; in 1910 its COMBINATIONS TO CONTROL SUPPLY 171 percentage was 43*4 per cent, of one and only 54 per cent, of the other. This is a condition which is sufticiently serious when allowance has been made for its superior facilities and better supplies. To use a common American expression, it has not been a conspicuous success as a manufacturing proposition, because it has not controlled the output and is losing ground in such control as it once had. The same conclusion is borne out by the rather conspicuous attempts made by Judge Gary, supported, we may presume, by his co-directors, to establish an understanding of a friendly kind with European iron and steel manufacturers. At a " series of Gary dinners," as the Ironvionger called them, there was a great deal of brotherly love shed in public, but the sj^ecific business proposals were only made at sittings of the Brussels conference from which the jDress was excluded. But as the German Stahl-Verband and the leading British manufacturers seem to regard the present movement with polite indifference and are careful to minimize its scope, it does not look as if much would come of it. It is only inter- esting to us, as seeming to show a distinct weakness in the United States Steel CorjDoration in the face of competition. There remains the other factor, on which this combina- tion was originally founded, of the control of supplies, a question which, as present information seems to show, remains still unsolved. Steel and iron manufacture lend themselves to partial monopoly, because cheap production requires large quantities of ore, of limestone and of coking coal in near proximity to each other. All these products being bulky will not bear transportation for any distance on account of freight charges, so the carriage of each to one another is a possible heavy and necessary cost. In the United States this question of transj)ortation was long the obstacle to the development of the iron and steel industry. Suitable fuel and fluxing material were side by side at 172 THE LAWS OF SUPPLY AND DEMAND Pittsburg and in the district, but iron was far off, and it was not until a magnificent system of transport with modern economical handling was developed by rail and steamer that the vast reserves of Lake Superior ores were successfully tapped. In Northern Minnesota there are some hills called the Mesabie range, which are prac- tically made of iron, and it was the concentration of these hills in a few hands, which made the organization of the United States Steel Corporation possible. They were in 1900 the only large supplies of iron ore within economic distance of coal and flux. Within a brief period came a dramatic event, which was hailed hysterically as " the act of God to relieve the inde- pendents";* some one discovered large quantities of self - fluxing ores in the South, which developed the open-hearth system and cleared the way for competition by the outsiders with the Bessemer ores of the Lake Superior region, con- trolled by the United States Steel Corporation. Of these new ores about 80 per cent, were controlled by the Tennessee Coal and Iron Co. In 1907 came a reversal of fortune quite as dramatic. The overwhelming financial crisis of November of that year found the Tennessee Coal and Iron Co. practically a derelict with only one possible buyer, the Morgan interests, which were centred in the United States Steel Corporation. So the most important bed of Southern ores passed over to the great combination. It is now estimated to have 75 per cent, of Lake Superior ores and 80 per cent, of Southern ores. In coking coal it has as yet no monopoly.! The old recalcitrants, Jones & Laughlin, and * Vide Mr. Stanlej', at the Stanley Commission, July, 1911. t In connection with the above and showing how rapidly events march in these gigantic deals, I append a cutting from an American trade paper, which has appeared since the above lines were written. COMBINATIONS TO CONTEOL SUPPLY 173 another firm actuall}^ hold more acreage of this coal within the area that makes it available for steel manufacture than the Steel Corporation itself. It is evident that while the independent American manu- facturers have a commercial advantage over their great rival, the latter has recovered himself by the aid of his partial monopoly of supplies and his control of superior financial resources. But the many are perilously near becoming totally dependent on the one for all their supplies, in which case they will have to come to his terms, because any revision of the tariff would be equally unfortunate for both. It is this exactly even balancing of the situation which gives it in the summer of 1911* its peculiar immediate interest, apart from the general lessons which we are entitled to draw from it. It shows that the policy of securing all the supplies of raw material is being steadily pursued by the United States Steel Cori^oration. "The Connellsville Coke Trade has been in an unsatisfactory condition for the past few months, from the standpoint of the operators. This is always the case when the iron industry is not in full blast as the swings in the coke trade, particularly as to prices, are of much greater ampli- tude than the swings in the iron trade. Prompt furnace coke averaged Sl'dO at ovens in the early months of the year, but lately has dropped to ftl'40. Contracts for the second half of the year have generally not been made at under $1-65. The sale of the Pittsburg Coal Co.'s coking coal properties to the Steel Corporation, a trifle over 7,000 acres of unmined coal, and a trifle less than 1,000 ovens, was on the basis of about $1,000 an acre for the coal, less than half what the enthusi- astic coal owners claimed a few years ago the Connellsville seam was worth. The transaction was a good one for both parties, as the Steel Corporation can afford to hold the coal, while the Pittsburg Coal Co. was not in position to develop the coal fast enough to obtain an adequate annual return and besides the market would not have absorbed the increased production." * In the late autumn the United States Government on October 27, 1911, finally decided to take proceedings against the United States Steel Corporation under the Sherman law. The action will probably last two years. 17 i THE LAWS OF SUPPLY AND DEMAND The experience of this great combination in manufac- ture seems to point to the same conckision to which deduc- tive reasoning would naturally take us, and that is, that, without some means of holding back outside supply by withdrawing money or raw material, one gigantic competitor is at a disadvantage in a contest with several smaller ones, provided that the latter are large enough and wealthy enough to be industrially efficient. Under these circumstances there are two reasons, which overlap and reinforce one another, why the large single competitor, who is apparently a monopolist, must necessarily helj) his own rivals by being forced to take on himself the whole weight of certain expenses, of which they would naturally in ordinary cir- cumstances incur a part. It is the result chiefly of his mere size and also of the weight of the general prejudice against him that he has to carry all the burden of surplus stocks on the market and control his supply before any- one else thinks of controlling theirs. He also helps them by taking off their shoulders a large part of their selling costs. Let us take these points separately. In the first case the combination has far more to fear from a glut than have the independents and has conse- quently to employ a far larger proportion of capital to hold back surplus stocks than they do, when the market is weak. So, too, the combination has to be the first to restrict supply. Smaller firms, which under circumstances of free competition would have to take their share of this burden, now recklessly leave this duty to their swollen competitor, knowing that he must perforce undertake it. Thus it happens that during times of bad trade in America the independents often merrily work at their full capacity, •while the United States Steel Corporation has to close a third of its plants at enormous cost. In the second case small firms are largely relieved of COMBINATIONS TO CONTROL SUPPLY 175 the expensive duty of fixing their own grades and getting them launched on the market. Every manufacturer knows that where standard quaHties and grades are not prevalent, in other words, where the most jirofitable business is generally to be done, it is a long and costly thing to establish a reputation for your own specialities. But working under the lea of a great corporation half of this work is done for the small people, who adopt its grades and qualities and offer their own products as guaranteed to equal them at 5 per cent, or 10 per cent, reduction in price. Those who have followed our argument in this book as to the unexpected expense of selling will realize that no economy in management will equal the economy in this particular. Selling costs to the small man are also immensely eased by the general prejudice against the reputed monopolists, so that independent firms always get an easy and favourable hearing for anything they have to offer. It thus results that a combination has often to resign competition with many of its small antagonists and to confine itself to handling chiefly those big lines of goods where the advantage of their great resources is decisive. Economically speaking, combinations to manufacture are at a disadvantage over their rivals, unless they cover the whole field, with some outside protection.* Combinations to control raw material have a very great power, but they are particularly liable to political attack. Combinations which control all the channels of the selling agencies are those which have been most successful, because they are in * In this respect I expressly exclude from consideration some important combinations in America, which owe their prosperity to the protecting arm of a tariff. I have no space to discuss the effects of a tariff in the present work and the general theory of combinations to control supply is not dependent on such a discussion. 176 THE LAAYS OF SUPPLY AND DEMAND a position of great advantage as against outside competi- tion, and they are practically beyond the reach of any action taken by the State. There is one particular respect in which all combinations constitute a great danger in the community in which they are encouraged or permitted to exist, and that is due to the fact that by their very nature and in order that they may secure the profits, which are the final cause of their exist- ence, they tend to drive markets into a condition of unstable equilibrium and to maintain prices at such a high level as to keep them outside the play of the ordinary competitive forces, which would sustain them in natural equilibrium. The consequence is that the stability of prices becomes dependent in times of crisis solely on the withholding power and on the financial resources of the great selling combina- tions. During the crisis it is always a question whether the holding power of the combinations may be too weak and so let prices rush away to nowhere, or whether their hold on financial resources may be strong enough to allow them to make calls to an indefinite extent on the public currency. Either way they constitute a jjublic danger. A combination which has maintained prices for a long time in a condition of unstable equililnium has crushed out healthy competition, and has taken the whole burden of solvency for the trade on its own shoulders. Where there are several combinations acting in union, as in America, their power is greater and the danger of their failure is more imminent. They must either go bankrupt or else make a general drain on public financial resources. Sup- posing, as in times of crisis often happens, that several powerful corporations exercise their power together of drawing from banks, which they own, their own deposits and also those of others and at the same time fri,