EQUILIBRIUM OF DEMAND AND SUPPLY.

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CH. XIV.

Thus when we are taking a broad view of normal value, BOOK V. when we are investigating the causes which determine normal value "in the long run," when we are tracing the "ultimate" effects of economic causes, then the income that is derived from capital in these forms enters into the payments by which the expenses of production of the commodity in question have to be covered, and it directly controls the action of the producers who are on the margin of doubt as to whether to increase the means of production or not. But, on the other hand, when we are considering the causes which determine normal prices for a period which is short relatively to that required for largely increasing the supply of those appliances for production, then their influence on value is chiefly indirect and more or less similar to that exerted by the free gifts of nature. The shorter the period which we are considering, and the slower the process of production of those appliances, the less part will variations in the income derived from them play in checking or increasing the supply of the commodity produced by them, and in raising or lowering its supply price; and the more nearly true will it be that, for the period under discussion, the Net income to be derived from them is to be regarded as a Producer's Surplus or Quasi-rent.

type of a

In passing from the free gifts of nature through the more situation permanent improvements in the soil, to less permanent im- Rent is the provements, to farm and factory buildings, to steam-engines, large class &c., and finally to the less durable and less slowly made. implements, we find a continuous series. And even that part of the rental value of land which is derived from advantages of situation-Situation Rent as it may be called-passes by imperceptible gradations from the character of a pure Rent, in cases in which the owners of the land have had no direct part in improving its environment, to that of a Quasi-rent or even Profits when the conditions of the environment, to which the land owes its Situation value, were deliberately brought about by, and at the expense of, the owners of that land in order to raise its value. Thus the Situation Rent of land presents close analogies to many different classes of income derived from advantages of the environment, from Opportunity, or Conjunctur. Later on we shall find that many of

BOOK V. the most interesting applications of the principle which we CH. XIV. have just discussed are to human agents of production; but in the present Book we confine our attention to the material agents of production.

The supply

In the course of this inquiry we noted that the supply of goods of of factors of production, or goods of the Second Order, is

the Second

Orders is

range over

long

are liable

and higher governed by estimates that reach forward over a longer time, governed and are therefore more liable to error than those which govern by estimates that the immediate adaptation of supply to demand with regard to goods of the First Order. But further, the supply of these periods and goods of the Second Order depends partly on the supply of to error. appliances for making them, that is, of things removed by two Orders from the commodity with which we started: and the adjustment of the supply of these goods of the Third Order to the indirect demand for them, which is derived ultimately from the demand for the finished commodity, is a still more difficult process; it ranges over a still longer period of time, and is still more liable to error: and so on, backwards, without limit.

Chapter XI. The relations

between

This ends for the present our study of the broad outlines of the theory of equilibrium of normal demand and supply. In Book VI. we are to apply them to the broad central problem of Distribution and Exchange; but there remain several topics, partly of a technical character, which are too important to be neglected altogether, and to which the next three chapters are devoted.

§ 4. In Chapter XI. it is argued that the terms “aggregate" and "average" cost of production can have no precise meaning in a world of rapid change such as that in which we and normal live; since the Quasi-rents of the appliances of production, production. both Material and Personal, are governed for short periods

average

expenses of

more by the value of the things they produce, than by their own cost of production. For instance, Machinery of a pattern on which improvements have been made, has its value determined by capitalizing the Quasi-rents it can earn; and to count profits on this value as part of the aggregate Expenses of production of the commodities it produces, is to reason in a circle. In a rigidly Stationary state however in which supply could be perfectly adjusted to demand in every par

EQUILIBRIUM OF DEMAND AND SUPPLY.

535

CH. XIV.

ticular, the normal expenses of production, the marginal BOOK V. expenses, and the average expenses (rent being counted in) would be one and the same thing. This point is dwelt on in order to show more clearly what the normal supply schedule does mean, and what it does not mean.

fluence of

Increasing

tions be

amount

price does

its true

in short

This brings us to consider some difficulties of a rather The intechnical character connected with the marginal expenses of the Law of production of a commodity that obeys the Law of Increasing Return on Return. The difficulties arise from the attempt to represent the rela supply price as dependent on the amount produced, without tween allowing for the length of time that is necessarily occupied produced by each individual business in extending its Internal, and and supply still more its External Organization; and in consequence not show they have been most conspicuous in mathematical and semi- character mathematical discussions of the theory of value. For when periods. changes of supply price and amount produced are regarded as dependent exclusively on one another without any reference to this element of gradual growth, it appears reasonable to argue that the marginal supply price for each individual producer is the addition to his aggregate expenses of production made by producing his last element; that this marginal price is likely in many cases to be diminished by an increase in his output much more than the demand price in the general market would be by the same cause; and that therefore the statical theory of equilibrium is inapplicable to commodities which obey the Law of Increasing Return.

To this argument it was replied that in many industries each producer has a special market in which he is well known, and which he cannot extend quickly; and that therefore, though it might be physically possible for him to increase his output rapidly, he would run the risk of forcing down very much the demand price in his special market, or else of being forced to sell his surplus production outside on less favourable terms. And though there are industries in which each producer has access to the whole of a large market, yet in these there remain but few Internal economies to be got by an increase of output, when the existing plant is already well occupied. No doubt there are industries as to which neither of these statements is true: they are in a transitional

CH. XIV.

BOOK V. state, and it must be conceded that the statical theory of equilibrium of normal demand and supply cannot be profitably applied to them. But such cases are not numerous; and with regard to the great bulk of manufacturing industries, the connection between supply price and amount showed fundamentally different characters for short periods and for long.

Its operation

in long periods.

The pure theory of multiple equili

brium.

Ch. XII.

Changes in normal demand

and supply,

reference

to the doctrine of

For short periods, the difficulties of adjusting the Internal and External organization of a business to rapid changes in output are so great that the supply price must generally be taken to rise with an increase and to fall with a diminution in the amount produced.

But in long periods both the Internal and the External economies of production on a large scale have time to develop themselves; the marginal supply price is not the expenses of production of any particular bale of goods, but it is the whole expenses (including Insurance, and Gross Earnings of Management) of a marginal increment in the aggregate process of production and marketing. This supply price falls generally with an increase in the amount normally produced; if it falls more rapidly than the demand price in the neighbourhood of the position of equilibrium, the equilibrium is unstable, in the opposite case it is stable.

Under certain possible, though rather improbable, conditions there may be two or more positions of equilibrium alternately stable and unstable. But this portion of the theory, though necessary for logical completeness, rests on rigid and artificial assumptions, and has but little practical importance.

§ 5. We then turned to consider the effects of changes in the general conditions of demand and supply; changes which are due to some new event such as a substantive with some invention, or the imposition of a tax, or indeed any changes which for any reason we find it best to regard as lying outmaximum side, and altering the normal conditions of demand or supply. After examining their immediate effects on normal value, we proceeded to inquire provisionally, and so far as might be done by reasoning of a general character, how the public well-being would be effected by such changes.

satisfac.

tion.

EQUILIBRIUM OF DEMAND AND SUPPLY.

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CH. XIV.

And we concluded that, when proper allowance is made for BOOK V, the interests of consumers, in the form of Consumers' Surplus or Rent, there is less prima facie cause than the earlier economists supposed, for the general doctrine, that the free pursuit by each individual of his own immediate interest, will lead producers to turn their capital and labour, and consumers to turn their expenditure into such courses as are most conducive to the general interests; or in other words that the free play of demand and supply in an open market leads to the production of just that amount of each commodity and its sale at just that price which affords the Maximum satisfaction to the community as a whole.

We had nothing to do at that stage of our inquiry, limited as it was to analysis of the most general character, with the important question whether, human nature being constituted as it is at present, collective action is not likely to be much inferior to individualistic action in energy and elasticity, in inventiveness and directness of purpose; and whether it is not therefore likely to waste through practical inefficiency more than it could save by taking account of all the interests affected by any course of action. But we found that even without taking account of the evils arising from the unequal distribution of wealth, there is primâ facie reason for believing that the aggregate Satisfaction, so far from being already a Maximum, could be much increased by collective action in promoting the production and consumption of things in regard to which the law of Increasing Return acts with especial force.

mono

This position was confirmed by the study of the theory of Ch. xi. Monopolies, on which we next entered. We started from Theory the obvious and universally admitted fact that the immediate polies. interest of the monopolist is so to adjust the production and sale of his wares as to obtain for himself the Maximum Net revenue, and that the course which he thus adopts, is unlikely to be that which affords the Aggregate Maximum Satisfaction. We found that the divergence between individual and collective interests was primâ facie less important with regard to those things which obey the law of Diminishing Return, than with regard to those which