Diminishing

increased supply can be raised only at a more than proportionate increase of cost, and the price there- The cases of fore must be permanently higher than before. Increasing and But in the latter case the increased production Return. will gradually develop new economies; and the normal expenses of production, and therefore the normal value of the commodity, will be lower than before. In the former case the advent of new purchasers injures others by Effects on making them buy at a higher price; and lowering Consumers' the Consumers' Rent (See above, Book III. ch. vI.) which they derive from the commodity. In the latter case it benefits others by increasing their Consumers' Rent. And from this it appears that the public wellbeing might conceivably be furthered by promoting the production and consumption of things in regard to which the Law of Increasing Return acts with especial force1.

Rent.

This result is important chiefly because it is the leading type of a great many cases in which the private interests of individuals, even when competing freely, lead them into courses that are not the best that could be contrived in the public interest. And this opposition between public and private interests, becomes more clearly marked in the case of monopolies.

determined.

§ 2. It is indeed a familiar commonplace that the owner of a monopoly is tempted to limit his supply so How a monoas to raise his price very high, and reap benefits poly price is for himself at the expense of the public. His gains are the aggregate excess of his sales over his outgoings; and his immediate interest is so to fix his price (and therefore the amount of his sales) as to make this sum as large as possible. If a small supply can be sold at a very much higher price than a large one, his supply will generally be small; and

1 This is argued at some length, and with the aid of diagrammatic illustrations in Principles, V. XII.

the Consumers' Rent that the public derive from the commodity will be very small.

If however an increase in supply would not raise his aggregate expenses nearly in proportion, if the commodity is one of which increased quantities can be sold without causing a very great fall in price, then he may benefit himself a little, even directly, by increasing his production a great deal and lowering his price a little. And by so doing he will benefit others a great deal: for the Consumers' Rent derived from his commodity will be very much increased.

may cause a great Consumers' gain.

Next suppose that by increasing his supply he will lower A small loss to the selling price of his commodity relatively the Monopolist to his outlay for producing it, so far as to lessen his net income by a little but only by a little. Suppose for instance that he stands to lose £2000 a year by a lowering of price that would increase by £100,000 a year the Consumers' Rent derived from his commodity; then it would be worth while for the community to pay him a sufficient sum to induce him to make the change. Or in such a case he might make the change voluntarily,

The monopolist may lower prices with a view to the growth of his business,

and that for either of two motives.

He might

hope that the lower price would gradually extend the consumption of his commodity, and that a further increase of sales would ere long bring up his net revenue to its old level or beyond it; even if the increased scale of production did not develop new economies of production, in addition to those which he had in view when he calculated that the change would cost him the loss of £2000 a year.

welfare of con

But secondly he might regard the well-being of the conor from a direct sumers as not altogether indifferent to him. interest in the Sometimes the owners of a monopoly are themselves directly or indirectly the chief consumers of its products, as for instance when a local railway is owned by the chief landowners in the neighbourhood; or when the

sumers.

gas supply of a town is the property of the town itself; and in such cases it would always be a wise policy to sacrifice a little of monopoly revenue in order to obtain a great increase of Consumers' Rent. And in some other cases, the owners of a monopoly will take a price that affords them less than the greatest net revenue, because they are willing to sacrifice themselves a little in order to benefit the consumers of their goods much. There are few more pressing studies than those of the relative gains and losses which will accrue to monopolists and the public severally from different courses of action. The problem cannot easily be clearly defined without the aid of diagrams; and it cannot be solved for practical purposes without fuller and more exact statistics than we at present possess1.

1 The problem is treated at length by the aid of diagrams in Principles, V. XIII.

BOOK VI.

VALUE,

OR

DISTRIBUTION AND EXCHANGE.

CHAPTER I.

PRELIMINARY SURVEY OF DISTRIBUTION AND EXCHANGE.

§ 1. THE simplest account of the causes which determine the supply of labour and capital is that given by the French economists who just pre

The Physiocrats.

ceded Adam Smith, and it is based upon the peculiar circumstances of France in the latter half of last century. The taxes, and other exactions levied from the French peasant, were then limited only by his ability to pay; and few of the labouring classes were far from starvation. So the Economists or Physiocrats, as they were called, assumed for the sake of simplicity, that there was a natural law of population according to which the wages of labour were kept at starvation limit. And they assumed, again for the sake of simplicity, that there was something like a natural, or necessary rate of profit, corresponding in some measure to the natural rate of wages; that if the current rate exceeded this necessary level, capital would grow rapidly, till it forced down the rate of profit to that level; and that, if the current rate went below that level, capital would shrink quickly, and the rate would be forced upwards again. Wages and profits being thus fixed by natural laws, they thought that the natural value of every

thing was determined simply as the sum of wages and profits required to remunerate the producers.

Adam Smith.

Adam Smith saw also that labour and capital were not at the verge of starvation in England, as they were in France. In England the wages of a great part of the working classes were sufficient to allow much more than the mere necessaries of existence; and capital had too rich and safe a field of employment there to be likely to go out of existence, or to emigrate. He even insists that the liberal reward of labour "increases the industry of the common people;" that "a plentiful subsistence increases the bodily strength of the labourer; and the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workman more active, diligent and expeditious, than where they are low; in England, for example, than in Scotland; in the neighbourhood of great towns than in remote country places."

Malthus and

Malthus again, in his admirable survey of the course of wages in England from the thirteenth to the eighteenth centuries, showed how their mean Ricardo. level oscillated from century to century, falling sometimes down to about half a peck of corn a day, and rising sometimes up to a peck and a half or even, in the fifteenth century, to about two pecks: a height beyond which they have never passed except in our own day; and he observed that "an inferior mode of living may be a cause as well as a consequence of poverty."

It must however be admitted that neither Adam Smith nor Malthus laid sufficient stress on the influence which habits of living exercise on the efficiency, and therefore on the earning power of the labourer; and that they sometimes fell back into careless ways of speaking which seemed to imply that the mean level of the wages of labour are fixed by an