the normal price for that period is equal to the highest unit expense that must needs be incurred in order to complete, at the end of that period, a rate of output large enough to bring the price down to the level of the aforesaid highest expense.1 This form of statement may not be suited to the popular lecture platform, but it includes all three of the cases above mentioned, in a way that shows conclusively (if there were any doubt in the learner's mind) that the laws governing these cases are not inconsistent nor even disconnected from each other, but phases of one principle.

By "normal price " is meant a price such that if the actual price goes lower than the normal, some one can "make money (or avoid loss) by doing something that will tend to raise it, and if the actual price is higher,

1 The objection might be raised that the above method of formulating the law of price exposes itself unnecessarily to the charge of circular reasoning which arises (mistakenly) out of the undeniable facts that both selling price and marginal expense of production are variable functions of the same third variable, supply; while the direction and rapidity of changes in supply are a function of the difference between the marginal expense of production and the selling price.

To put it mathematically, let P

Then P =

fi (S) and

E

E

fa (S) and also AS = fs (P — E) AT, an expression which we know goes to zero if S increases indefinitely. Or, if we put S1 +AS1 S2, and Ti + AT1 = T2 and substitute for AS1, P and E their functional equivalents, we have S2

=

=

S1 +f3 { f1 (S1) − f2 (S1) } { T2 – T1}.

If that be inviting the charge of circular reasoning, the difficulty is inherent in the facts, and we can gain nothing by shirking the issue under any form of statement. Indeed, if we do evade the issue, we are fleeing from a dragon which may devour other victims. We lose an opportunity to impale a fallacy which may be strong enough to discredit much perfectly valid reasoning.

Here is no more circular reasoning than would be involved in the mechanical explanation of the exact volume of air in the closed end of a curved tube (see diagram) after a given quantity of water has been poured in the open end.

The volume of air depends on the pressure exerted, measured by the height of the column of water A B, which depends in turn

A

on the law governing the manner in which the pressure of the airB

increases in response to a reduction of its volume. But the apparent circularity of this reasoning does not prevent the water in the tube from finding a level, quite definitely determined by forces beyond its own control, a level which a physicist could calculate in advance with perfect accuracy. Nor is the writer aware that the physicists are cutting each other's throats over the rival claims of the column-of-water theory and the elasticity-ofair theory as explanations of the problem.

a similar "economic force" will be set to work whose effect must be to lower it. Therefore we must specify a period of time. Suppose that within a year's time it will be impossible, without producing some cloth that costs 10 cents per yard to weave, to satisfy the demand of those willing to pay that much for the service of weaving. What matter if the best plants can do the work for 7 cents, and what matter if in ten years' time these plants will have been enlarged and others will have copied their methods until the whole demand can be satisfied at the lower price? What matter if there be a further tendency for the expense to fall still lower as the best methods are improved upon? It remains true that if, for any reason, the price be lowered below 10 cents within the year, the forces of economic equilibrium will act at once to raise it again to 10 cents, not to lower it still farther. This price appears to satisfy the requirements of "normal price" so long as the calculations are limited to one year's time. It would seem that in this case the force of competition, tending to bring price down to 7 cents per yard, is not nullified by obstructions, but rather reversed in its effect by the conditions which govern it. With reference to the tenyear period 7 cents per yard is the marginal expense of weaving, while with reference to a period of one year, 10 cents per yard is the marginal expense.

The static state knows no limits of time, and hence differences in costs do not exist for it, so far as they spring from innovations, or can be eliminated by imitation, or by the absorbing of weak enterprises and the extension of strong ones. The only differences to be The

recognized by static theory are permanent ones.1

1 Hence the application of the above law to a static state is much simplified and quite obvious. This is equally true, whether we do or do not choose to count rents and royalties among the expenses of production. Cf. Marshall, "Principles of Economics, Book V, chap. v.

student of actual conditions, however, is dealing with disturbances where time, and the speed with which actions and reactions occur, is of the utmost importance. The rate at which demand can grow, the periods over which it fluctuates, the time needed to enlarge, reduce or improve the facilities of production, and even the speed with which a reduction of price reacts on the amount sold all these facts are grist for his mill. must study everything in terms of time.

FIXED CAPITAL AND JOINT COST

He

The most obstinate cases remaining outside the law of price as thus formulated are those of joint-cost production, either of different articles or of different units of a homogeneous output, especially where the joint outlay represents an investment of highly specialized capital. Are these facts to be treated as mere disturbances and their effects measured as variations from a static norm, or can a law be framed broad enough to include them?

In the first place, the writer doubts if even a stationary state would be free from the effects of such phenomena, if we were to imagine such a state developed out of the present condition by stopping the processes of change and giving the factors of production unlimited time to find their level. Some forms of capital cannot be shifted without loss, no matter how much time is allowed for the piecemeal transfer of the depreciation fund; a railroad embankment, for instance, or a tunnel.

1 The writer does not insist on this extension of the term "joint cost." The reader may, if he chooses, think in terms of prime cost and supplementary costs or of fixed and variable outlays, and the argument will be unaffected. Believing that the same principle governs, whether the product is one thing or many, the writer feels that it would promote clear thinking to let this unity appear in the terms used and so he prefers one word to cover both cases.

This is not just the assumption of the perfect "static state,” though it has been used sometimes for illustrative purposes as a working approximation.

Moreover in any large industrial plant, as well as in a railroad, the depreciation account is managed with reference to keeping the value of the plant undiminished in its original use and in continuous operation - not with reference to scrapping the entire outfit at some time and building new. There is no moment in the normal career of a large manufacturing plant when it goes to pieces like the one-hoss shay, and the depreciation accounts are not accumulated with any such catastrophe in view. As a result, they would not be large enough at any time to rebuild the establishment entire, scrapping the original equipment and getting out without loss. Therefore in such cases producers would find it better to endure even permanently a loss of some part of the usual rate of income on their capital, rather than undergo the loss of a larger part of the value of the capital itself in shifting it to some other enterprise.1

PRICE IS INDETERMINATE

Thus even in the longest of long runs we should be compelled to admit that, in some cases, price would be indeterminate between two levels, one high enough to attract new capital and labor into the business, and another lower level, at which some of what is already in

Exception may be taken to this form of statement by those who hold that capital is nothing other than earning power capitalized. Obviously, if this terminology be adopted the foregoing argument becomes impossible in its present form. But if the relation of expense to price is to have any meaning at all, the term " expense" must have some reference to the actual outlay involved in investment, and the result of changing the definition of capital would only be to shift the real issue over to the question of the normal relation between the earnings of capital and the expenses of reproducing it. And under this terminology, the entire argument of this paper could, if necessary, be restated without losing any of its validity. The question at issue is in part the same that is treated on pp. 285-288 of Professor J. B. Clark's Essentials of Economic Theory.

For the purposes of the present study, which is primarily from the individualistic standpoint, we may assume a rate of interest, and not undertake here the solution of the objection that the cost of reproducing capital includes interest on other capital. This paper is not a study of the theory of interest.

would be forced out. For we must admit that a certain amount of excess producing capacity might continue indefinitely. It is only by virtue of assuming a demand that grows, but never shrinks, that the economist can say that "price tends to equal the expenses of production, including interest on investment."

1

Even Marshall's argument proves no more than this, tho it appears to carry much farther. If we look for an exact definition of the expenses of production which govern normal price, we become involved in a confusion quite foreign to Marshall's usual reasoning. At one point we read "the marginal supply price is that, the expectation of which in the long run just suffices to induce capitalists to invest their material capital." 1 Obviously, it is growing investments to which this statement applies. But two pages farther on we read: "Price must be sufficient to cover the expenses of production of those producers who have no special and exceptional facilities; for if not they will withhold or diminish their productions and the scarcity of the amount supplied, relatively to the demand, will raise the price. Again:2 "Supplementary costs are taken to include standing charges on account of the durable plant... they must be completely covered by it (selling price) in the long run; for if they are not, production will be checked." Apparently these costs are taken as identical with the "marginal supply price of new investments, cited in the preceding paragraph. But farther on we read: "For the capital already invested in improving land and erecting buildings, and in making railways and machinery, has its value determined by the net income (or quasi-rent) which it will produce; and if its prospective income-yielding power