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First Puhllghed. . . . March, 1912. 

Sicond Impression . , . October, 1912. 








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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. 



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 

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 


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 


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 


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. 


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 

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 


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- 


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. 


Watford Old Farm, 

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. 


PEEFACE . ; p. vii. 



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 



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 



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 


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 



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 



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 




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 



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 




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 



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 


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 



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 



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 




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 



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 



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 


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 



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 




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 



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 


— 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 



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 



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 


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 



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 

&u P- ^'6 




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 


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. 


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 


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 " 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 

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. 


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. 


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. 


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 


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 


■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." 


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. 



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 


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. 

"^ ■% 


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. 


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. 


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. 


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. 



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 

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 

Demand is nothing more tangible than a group of valaes, 


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. 




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. 


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. 


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 


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 


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 


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 

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 


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 


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 


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 


result within him of similar mental equations of wants 
and sacrifices, which we have analyzed in the case of his 

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 


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. 



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, 


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 

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 


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 

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 


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 


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. 



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 

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 


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 



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 

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 


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 



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 

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. 


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 


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- 


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. 


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 


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 


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, 


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 


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." 


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.* 


See p. 117. 




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 



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 


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 

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 


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 


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, 


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 

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 


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. 



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 


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 

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 


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 


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 

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. 


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 



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 


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. 


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 

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 


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 


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. 


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 


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 

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<ls for light in large and small quantities — whether, for instance, each 
day in the week has a flxcd demand for a regular (juantity ; and the 
incidenceof demand — whether by day or night and during which hours of 
the night. All these elements are supposed in the above argument to have 
been resolved into expressions for which due allowance has been made by 
Mr. Cowan. The consideration of mere quantities over a long period of 
time is then taken by it.self and their inUuenco is estimated in respect of 
three utilities — light, power, and heat. 



It is at first glance remarkable that of the several depart- 
ments of industry the most complicated should have been 
the earliest developed. The perfection of the machinery 
of exchange antedated a long time the institution of 
rapid methods of production. The use of instruments of 
credit and of a banking system were doubtless known to 
the Greeks and Phoenicians as they certainly were to the 
Romans, and from antiquity onwards up to the beginning 
of the nineteenth century step by step improvements were 
made until we had a full-fledged equipment of exchange 
ready and waiting for the industrial revolution which was 
to be brought about by the rapidity and cheapness of 
modern manufacture. I can call to mind only two institu- 
tions, which may be called inventions in the sphere of 
exchange, the Bankers' Clearing House and the establish- 
ment of joint stock corporations with limited liability to 
their shareholders, whose origin cannot be attributed to the 
period before the Napoleonic wars. 

On the other hand, cast an eye over production then and 
now. What article of common use has not been incredibly 
cheapened in cost of manufacture? How many novel 
rarities and old luxuries are now plentiful which were 
formerly unknown or hardly procurable ! Even sleepy 
agriculture has gone forward to a point where old methods 
of production have been driven out of competition. That is 
not to say, that there was no cheapness then and no luxury. 


But the cheapness of pre-Victorian days was not due to 
plenty, but to restricted markets for selling. Country 
produce was cheap and good in the country because it was 
impossible to carry it far to the great towns escejot at a 
great cost. 

The reversal of this was due solely to physical causes. 
The genie of " power " was unchained and commenced to 
turn out clothes, furniture and, later on, food at a furious 
rate, and not only was freely producing them, but fifty years 
later was carrying them at an incredibly cheap rate every- 
where over land and sea. The world, the economic world, 
which had formerly been a series of microcosms, where 
prices of various commodities were locally governed by alter- 
nate monopolies and gluts within little rings with only 
occasional communications outside, became at once a series 
of national worlds and then rapidly a world-world, using 
one of these two terms in the German adjectival sense. The 
new facts were so alarming that many nations ran to cover, 
so to speak, behind tariff walls, which necessity compelled 
them to build up higher and higher. 

The improvement never stopped , indeed, it may well be 
that we are still only at the beginning of it. The telegraph 
and telephone have perhaps done more to broaden out a 
world market for staj^le commodities than was ever done by 
railway and the steamship. In Manchester they still speak of 
a merchant prince who was caught at the turn of this crisis. 
By perfecting the accepted means of communication and 
securing exclusive early information he had successfully 
cornered the cotton market for one if not for two years. But 
proceeding with his old-fashioned methods he was defeated 
and ruined in another year through underestimating the 
novel utility of telegraphed messages. From being two or 
three days ahead of the market he found himself a fortnight 
behind it and subsided under spectacular circumstances. 


It was just at this time, and principally on account of 
this phenomenal change, that economic science underwent 
its greatest development. The chief fact that stared 
economists in the face was a change for the better in the 
rate of production. What was not so obvious was that 
there was also a retardatory change in the rate of improve- 
ment in the cost of production and marketing. There 
was an imaginary curve of price rapidly approaching 
an imaginary straight line representing the ultimate 
minimum, which consisted of interest, material and wages. 
But while rapidly approaching it, the curve was really 
asymptotic to the straight line, in other words it was 
approaching it at a gradually decreasing rate. On a 
superficial view of the facts it became easy to adopt a 
theory of perfectibility in economic science and to follow it 
up with the further deduction which we examined in the 
last chapter and found to be erroneous, that price tends in 
the long run to approximate to the cost of production. 

It was only by going too far that some of the 
economists went wrong or more exactly by their sanguinely 
assuming that existing tendencies would be extended in the 
same direction. It was an easy mistake to make, not un- 
connected with the moral theories of the time, but it was 
the last mistake they should have made, if they had duly 
preserved the historic sense. To have lived through one 
great change is an a 'priori argument that another is possible, 
if not probable. As a matter of fact, the ever-increasing 
facilities of production, which they only saw in their 
beginning, became the instrument which worked out the 
defeat of their own assumptions. 

The economists of the 'forties were quite right in under- 
standing so much of the change as they actually saw going 
on before them, and they largely explained it in the two 
laws of supply, which were then formulated. The law of 


diminishing return lays it down, that successive equal 
increments of labour and capital applied to an estate or a 
business will yield successively smaller returns in the way 
of interest and profit in certain industries, until finally the 
return falls below the replacement point. This law is 
supposed, and rightly so, especially to apply to agriculture, 
but there are many spheres of its operation. It will apply 
also to manufacture wherever any important necessity of 
the business is or may become restricted. The contrary 
law of increasing return is the exact reverse and operates 
generally in all manufactures where the conditions are not 

Economists have widely remarked that these laws may 
come successively into oi^eration, and, in fact, generally do, 
in nearly all businesses of all kinds. In developing an 
agricultural estate the returns on effort and expenditure 
increase up to a certain time, then rapidly fall awa3^ So 
also the profits on a manufacturing or commercial business 
may expand at a rate quite out of proportion to the suc- 
cessive accretions of capital and may promise to do so 
indefinitely in the future until some restricting circumstance 
comes into play, such as a scarcity or corner of the raw 
material, the exhaustion of a water supply or the loss of a 
market through a tariff. 

Those who follow economists, or rather those who do not 
so much follow economists as repeat the odds and ends 
which they hear from them, have invented a new use for 
these two laws, which has some justification in analogy, yet 
will not bear strict logical examination. It is common to 
hear such a remark with regard to the industry of agricul- 
ture, for instance, as that after having been subject generally 
to the law of diminishing return, it has now become subject 
to the law of increasing return. Something very similar to 
this was said in an important parliamentary debate not long 


ago by one of our leading statesmen. This inaccurate use 
of economic terms conveys quite a definite and reasonable 
meaning, which roughly may be summarized as follows : 
that at present it pays a man to put his money into land 
and agriculture, whereas a short time ago it did not do so. 
The latter form is correct and clear, whereas the former way 
of putting it is wrong and pretentious. 

To be accurate we must distinguish, as in the case of 
Mill's law of value, as to the sphere of operation of these 
two laws of supply. On a small scale they are true. They 
do not apply on the large scale, because they do not come 
into operation, but their place is taken by two very impor- 
tant laws which greatly resemble them in their effect, but 
strictly speaking are different from them. 

Let us pull to pieces this case about agriculture. It is 
still as true as ever it was that agriculture remains pre- 
dominantly under the operation of the law of diminishing 
return. Now, as before, successive increments of capital, 
&c., applied to an estate will only for a short time bring 
in increasing returns until the law is speedily reversed. 
Yet it is equally true to say that the lands of the world 
are being exploited at a still increasing profit. The 
explanation is that one case, the latter, includes ever so 
many more circumstances than the other.* It includes 
the building of railways and steamships, the irrigation 
of deserts, the raising of heavy loans, the promotion of 

* In this connection it may be remai'ked that the above distinction 
effectively disposes of the controversy between Mill and Carey (see 
J. S. Mill, " Principles of Pol. Econ.," Book I., Cap. XII.), where both 
economists were in a sense right, because each was speaking of 
different industries, Mill of agriculture, Carey of the development of 
territory. Carey's deductions from his theory are vitiated by hia not 
recognizing that he was really surveying not agriculture, but some- 
thing greater of which agriculture is only a part. 


emigrant offices and largely also the use of the machinery of 
State Governments. All these conglomerated facts are too 
big to be included within the little laws of increasing and 
diminishing return. These laws have served by way of 
analogy as useful terms for want of a better. The larger 
laws have not yet been formulated, a task which I am 
having the temerity to undertake. 

The two laws which govern supply on the large scale 
may be termed the laws of contracting or expanding 
facilities of production. One is a complement of the other, 
and the statement of one varies only slightly from that of 
the other. 

The Law of Contracting Facilities of Production. 

" When the natural facilities of production in any 
industry are contracting there will be diminishing returns 
on successive increments of capital and labour aj^plied to 
it until these natural facilities are restored." 

The Law of Expanding Facilities of Production. 

" When the natural facilities of production in any 
industry are expanding in one or in more directions, provided 
that there is no contraction in others, successive increments 
of capital and labour applied to that industry will obtain 
increasing returns until this expansion has exhausted itself 
in all directions." 

It is evident that the full statement of these two laws 
includes those formerly known as the laws of diminishing 
and increasing return, the two latter being no more than 
the statement of particular cases, which come under the 
two former. It will also be obvious that expanding and 
shrinking natural facilities in any industry will normally 
Bucceed each other alternately to an indefinite extent. It 


i8 also true, although not so obvious, that natural facilities 
in any industry may be contracting in one direction, while 
they are being rapidly developed in another. Of this peculiar 
case, not so much a rare one as one difficult to analyze, we 
shall examine a most remarkable instance very shortly. 

To return for a moment to the immemorial fluctuations 
of natural facilities in the case of agriculture. Here we 
have on the whole the best instance of the alternating 
operation of these two laws on the world scale. Let us 
take as an imaginary instance some small town in Germany 
during the Middle Ages, large enough to have a municipal 
existence within its fortifications, equipped with some fifteen 
square miles of arable land with doubtful water communi- 
cation with some large town and still more distant and 
expensive water communication with the world outside. 
Such a town in my fancy might have been Dilberg, a 
little walled town about twenty miles above Heidelberg on 
the Neckar, with a small domain of grain-bearing fields set 
in the midst of forest-clothed mountains. The swift-flowing 
river could offer precarious traffic with Heidelberg and the 
Khine still more occasional communication with Westphalia, 
Holland and England at the edge of the world. 

Now the cultivation of grain-foods in the district of 
Dilberg and the supply of food to its present dwindled 
population would be governed in strict alternation by the 
laws of contracting and expanding facilities of production 
In ruder times it might have been fairly easy to ship small 
cargoes down the rapid Neckar, but difficult to bring them 
back. Dilberg would then live on its own domain and 
agriculture would yield a steadily diminishing return. With 
the growth in wealth of Heidelberg under its Protestant 
Electors there would appear a steady market for foodstuffs 
from Dilberg, which would overcome transportation costs 
and agriculture would yield increasing returns. But the 

L.S.D, O 


invasion of the Palatinate by Tilly and the ruin of Heidel- 
berg would induce an opposite reaction. Again, the general 
devastation of Germany in the Thirty Years' War would 
offer a fine field of trade for those communities which 
survived annihilation. As Dilberg, I believe, successfully 
resisted Tilly and obtained good terms, no doubt a moderate 
measure of prosperity returned to it, until the devastation 
of the Palatinate by the French. 

In modern times Dilberg would share the fate of small 
and expensively equipped communities everywhere. Its 
outside markets would be supplied from the rich Rhine- 
land ; its local market would be continuously narrowed by 
improved communications spreading up to its doors. At 
last the conclusion of the Zollverein and the growth cf 
railways shut up Dilberg within itself to be a decaying and 
ruined town. Dilberg can buy wheat or rye cheaper than 
ever, but it has nothing to buy it with. 

The world market has come with railways, and to all 
appearance wheat has settled steadily down to what we 
may call Western prairie prices with a selling margin. But 
the fluctuations, although not so intelligible, still go on. 
Every railway thrown across the Rockies makes rich lands 
available and cheap. Farmers are attracted to settle and 
cultivate, and increasing returns are the motto of the time. 
Then the supply of cheap land narrows down and a reversal 

At the present moment we have seen the best lands in 
the United States already settled and become, so to speak, 
part of the national domain and marked for home use. But 
we are watching new railways creeping across the Argentine 
and up to the Canadian north-north-west.* The finest 

* Writing' on June '40, l'.)[], the Times correspondent in Manitoba 
reports a grand total of 17,OJ3,;jl7 acres under grain in the Canadian 
North-West with about 10,200,000 acres under wheat. The value of 


wheat lands in the workl will be fairly cheap for another 
generation, especially with the modern plan of State and 
Colonial Governments entering into the emigration busi- 
ness and tumbling over each other to get agricultural 
recruits. The reaction will be all the more sharp when 
it comes. 

So we see that at this precise moment Dilberg with its 
fifteen square miles lies under the operation of the law of 
diminishing returns, while the world market for wheat is 
enjoying the benefits of the law of expanding natural 
facilities of production. 

Now let us turn to a novel and still more complicated 
instance of the simultaneous and conflicting operation of 
the two laws of supply in regard to the production of 
the same material from two difi'erent sources of supply, 
these two sources of supply being governed by opposite 
tendencies. In order to make the illustration as realistic 
as possible I have taken the statement of supposed facts, 
past, present and future, from the expert estimates of a 
financial paper which has been hitherto singularly success- 
ful in its judgment of the course of production of rubber. 
And here I have to guard myself against a double danger. 
First, as in a former chapter, no statement of facts must 
be taken as if it were offered in the guise of material for 
inductive proof. The argument stands or falls by itself. 
Secondly, this analysis of the rubber position is not a 
scientific study of known facts, but an estimate of the 

the wheat crop last year was S9 1,350, 000. There remain according to 
his calculation another 340 000,000 acres still available for agricultural 
purposes. He adds that the progress in bringing these remaining 
acres under cultivation will be far more rapid in the next five years 
than it has been in the past as the use of agricultural tractors driven 
by petrol motors has now made possible the successful cultivation of 
iatms as laxge as 10,000 and even 50,000 acres. 


present and future position of the commodity made by an 
expert in the ordinary way of day-to-day criticism of trade. 
Should the forecast of the future turn out to be incorrect, 
it is not to be held to vitiate the argument. 

The rubber trade is now in a very peculiar position, one 
quite unique in my own limited experience and knowledge. 
It deals with a substance which has an absolute monopoly 
for certain specific and valuable uses, and though vast sums 
of money have been spent in order to produce it artificially 
or to obtain a reliable substitute, experts both financial 
and scientific now recognize that neither of these resources 
is yet possible on commercial lines. Synthetic rubber can 
be easily made — friends of mine have made it — but not 
at Is. 6d. a pound. 

The world supply of rubber for 1910 was estimated at 
80,000 tons of which 8,000 tons came from the plantations 
of Malaysia and Ceylon and the balance preponderantly 
from Brazil with a few thousand tons of inferior rubber 
from Africa. It is anticipated that the supply of rubber 
from plantation sources will steadily increase, while that 
of Africa will probably cease on account of its poor quality, 
which will not be able to hold its own in the coming 
severe competition. The supply of rubber from Brazil, as 
from Africa, is wild and cannot be indefinitely increased. 
For the purposes of our present illustration let us take 
the existing supply as 60,000 tons of wild rubber from 
Brazil, 10,000 tons of cultivated rubber, coming mainly 
from the East, and another 10,000 tons of negHgible 
miscellaueouH supplies which need not enter into our 
present consideration. The future of the supply of rubber 
will depend on the competition between the wild rubber of 
Brazil and rubber cultivated under the most favourable 
circumstances elsewhere. 

The production of the 60,000 tons of wild rubber from 


Brazil is at present governed by the law of contracting 
natural facilities of production. The wild rubber trees 
are not being replaced as they are exhausted. Their 
number can only be multiplied by going deeper into the 
forests subject to the limits imposed by transportation, 
limits which have been pretty well reached already. The 
supply of skilled labour is also limited. The native tapper or 
" seringueiro " is to some extent born and only partly made. 
He has not only to collect the rubber and be an expert 
searcher for trees and able to plan an economical tapping 
round, but he must have the traditional knowledge of 
smoking it and manufacturing it into the huge round 
balls of hard Para. Increased demand for his services 
will put up their cost to an extent which the price of rubber 
cannot bear. Add to these rigid restrictions the disadvan- 
tage of a bad financing system, rubber being collected on 
advances made by small capitalists who have to rely unduly 
on banking credit, as well as the heavy taxation of a 
Government which depends on its rubber revenues. 

So serious is this financial side of the question under a 
Government which has discredited itself by " valorising " 
coffee — apparently a pretentious name for going into the 
wholesale grocery trade — that the selling cost of Brazil 
rubber must be put much higher than that of rubber from 
the East. A comparison of two or three estimates puts 
the minimum cost of obtaining Brazil rubber at Is. 9c/. a 
pound and of paying taxation and selling it at not less than 
Is. Sd. a pound, a total of 3s. a pound wholesale. 

During the last five or six years between £40,000,000 
and £50,000,000 has been invested in planting hcvea 
bresiliensis on estates chiefly situated in the British 
Malay peninsula. Not all of this money has been wisely 
spent, but some companies have made colossal profits and 
most of these plantations may reasonably hope to earn a 


living during the near future. The production of ruLher 
under these conditions has been and may be for some 
time subject to the law of expanding facilities of production, 
and if the present f)rice (about 5s. a pound) remained stable, 
would certainl}' continue to do so. But the price will not 
remain stable. 

Plantation rubber can be produced on the best estates at 
6d. per pound and marketed at Is. What is assumed by 
experts to be the average cost of production of rubber on 
those estates, which have been wisely planted and continue 
to be well enough managed in the future to stand the 
stress of competition, is Is. per pound net and Is. 6d. on 
wholesale market. 

Such are the resources of these two variously equipped 
competitors, and it is difficult to forecast the resulting 
prices except that they will be wildly fluctuating. Already 
within three years rubber has been within calling distance 
of 12s. and of 2s. per pound. Assuming the operation of the 
law of increasing facilities of production, plantation rubber 
will come more and more on the market in each succeeding 
year. The supply in sight from the plantations has been 
conservatively estimated at 25,000 tons for 1912, 40,000 
tons for 1913, 70,000 tons in 1915. So long as Brazil 
continues to turn out her 60,000 tons per annum such a 
supply would create a stupendous glut of the market. 

But we have seen already that Brazil will not be able to 
do this. With prices breaking from their present level 
the law of contracting facilities of the production of wild 
rubber will come severely into operation. With 4s. rubber, 
nearly all the remoter tapping rounds up the Amazon 
rivers will have to be deserted and the shortage of labour 
will be relieved. But the planters will not be denied, and 
in a year or two rubber will be driven down to 3s. a pound, 
when perhaps only 50,000 tons of Brazil rubber will be 


collected at a profit. This will be a stable point for a year 
or two when a world supjjly of perhaps 100,000 tons may 
be drawn equally at 3s. per pound from Brazil and from 
the East. 

But it is inevitable that, while the well-managed planta- 
tion can produce rubber, as we are told, at Is. 6d. per pound^ 
the rush of the cultivated supplies must press down the 
price, at any rate temporarily, to 2s., at which point Brazil 
will go out of business except for a paltry 10,000 tons, and 
the trade of a " seringueiro " will be a decaying one and 
finally become a lost art. Brazil will finally have to rely 
on her own plantations, if it is not then too late for her to 
enter that branch of the rubber industry. 

Such a result is apparently inevitable on our present 
data, but no doubt it is still ten to fifteen years off after 
many fluctuations, because every failure of the Brazil 
supply will send the price up and bring in Brazil again 
next year until finally the accumulated experience of the 
wild rubber industry is gradually wrecked and can no more 
be reorganized to meet a temporary demand. 



It is regrettable that there should not be in the English 
language, or for the matter of that, so far as I know, in any 
other, terms specifically describing either the stringency 
caused by a shortage of supplies in any market on the one 
hand or the weakness of prices caused by a plethora of any 
commodity on the other. The words, monopoly and glut, are 
both extreme states of either one or the other, and should not, 
properly speaking, be used to cover tlie infinite gradations 
between the central point of a natural equilibrium of supply 
and demand and the ultimate opposite points on either 
hand. Each word is limited by its unfortunate derivation. 
" Monopoly " presupi^oses one seller and many buyers, but 
this mere numerical statement does not characterize the 
degree of stringency. We are therefore allowed to suppose 
that there are gradations of stringency legitimately covered 
by the word, monopoly. Similarly the word "glut" is an 
ugly metaphor, referring to the possibility of physical 
Batiety in men and animals ; but, since there are degrees 
of satiety and even provision in certain animals for regu- 
lating these degrees, the word, glut, may be held to be a 
term of multitude importing several quantitative degrees of 

Since we are thus without duly representative terms 
covering all the infinite gradatinns of hungering want or of 
growing satisfaction, we are legitimately driven to employ 
these two terms, " monopoly " and "glut," which, properly 


speaking, should be used to cover only rather abnormal 
states, to include also all the minor gradations intermediate 
between the two extremes and the central jDoint of equilibrium. 
For instance, I shall reluctantly use the term, temporary or 
partial monopoly, to cover even so small a dili'erence as 
Id. per pound between the price of new potatoes in the 
week ending May 20 as comj^ared with their price in the 
week ending May 27, 1911, when they are, as a housewife 
would say, " coming in." On the other side, I shall use the 
words, glut or partial glut, in a technical sense, to describe 
the cause of the fall of the price of cotton as soon as 
the United States Government bureau's estimate of the 
cotton crop has been found to be, as it often is, from half 
a million to one million short of the crop in sight. This 
is far from being literally a glut, but economically it is 
the beginning of one, and the degree of it can be precisely 

Used in this precisely defined sense it is correct to say 
that all the markets in the world tend to rush violently 
from glut to monopoly and the degree of violence with 
which they do so depends on their crudity and the extent 
to which they lack the balancing and controlling machinery 
constructed by modern capitalism. This degree of violence 
is also affected by the size of the market and modified by 
the existence of a partial common fluidity with other 
markets. To elaborate this analogy we must imagine the 
small markets as being centres of extreme fluidity in an 
encompassing medium of lesser bat partial fluidity, so that 
local agitations can aftect the slower-moving enveloping 
medium, and carry intermediate vibrations to other local 
centres. So also may many concurrent local agitations 
ultimately bring about a general agitation in the whole mass. 
The task of modern commercial organization has been to 
enlarge the local units, to link them up and to establish 


almost as perfect a fluidity between each of them as they 
have within themselves. 

Let us revert to the supposed situation of a place like 
Dilberg in the Middle Ages, where for grain and wine and 
almost every commodity produced locally alternate plethora 
and scarcity would be the general rule. But on the whole 
scarcity would predominate owing to the poor productive 
power of that period, and, wherever scarcity predominates, 
ai^petites themselves acquire a considerable degree of 
elasticity ; that is to say, after two years of want, one year 
of plenty can be absorbed without exciting satiety. Or to 
put it in another way, we may say that with poor productive 
power the suction of demand in a market remains con- 
siderable even where the fluctuations of supply are great. 
This makes for a comparative steadiness of prices, and is a 
partial but not adequate substitute for the artificial balancing 
power w'hich governs modern markets. And the reason 
why it is only partially and inadequately a substitute is 
because, while prevailing want keeps prices up steadil}' 
against minor fluctuations, it is powerless to deal with 
great ones. The primitive market was not very sensitive 
to small storms, and that is why it was easily wrecked by 
great ones. Without the power of holding reserves four or 
five superlatively good harvests would seriously disturb the 
finances of a primitive agricultural community. In Egypt, 
until Joseph appeared, the Piiaraohs possibly allowed their 
surplus harvests to go to waste. 

But it is otherwise in the world market to-day after the 
industrial revolution of the last century. Productive power 
has outstripped desire, ?'.^., that desire which is economically 
effective and equipped with power to reward the producer. 
AVhereas formerly a balance of unsatisfied want in the con- 
sumer brought a partial stal)ility to prices which could only 
be upset by abnormal conditions, now there is a universal 


glut of all commodities calling for immense resources and 
untiring ingenuity in order to maintain prices at the paying 
level for the producer and the seller. But this position of 
equilibrium, while expensive to maintain, is far more stable 
than that existing in any mediseval or ancient market. Our 
little " slumps " and " booms " are paltry things compared 
with the ups and downs of Mississippi shares or South Sea 
stock, or with the fall in currency after the discovery of the 
New World. We have got the whole world linked up 
in the market for staple commodities, and we have 
every corner ransacked for metals, minerals and good wheat- 
growing territory. Probably nothing could disturb us 
seriously except an attack on the narrow foundation of our 
currency, such as the discovery of a mountain of gold or the 
outbreak of a gigantic war. 

Before attempting to formulate the laws of demand, a 
point which we are rapidly approaching, let us examine 
monopoly and glut seriatim, considering first the extreme 
cases and then the gradations of more normal ones. A 
complete study of this subject would involve a book consti- 
tuting the foundation of a new branch of economics which 
would have to recognize that problems of production are 
now surpassed in interest by those of selhng, as I prefer to 
call them, rather than of distribution.* It has become now 
not so difficult to produce adequately for the world's needs 
as to secure that the producer and his ally the seller should 
be properly paid for their work. 

The vagaries of glut and monopoly have been inadequately 
handled largely owing to the fact that the two words have 
unfortunate connotations, and signify to most people extreme 
states of unusual conditions, but more, perhaps, because the 

* Distribution proper is the mechanical conveyance of commodities 
to the prospective consumer ; selling is the inducing him to give an 
adequate equivalent for them. 


assumption among economists was universal that the 
dwelling of price at or near the equilibrium point, in 
accordance with the law of values, was natural, and that 
the aberrations from it were abnormal. My point, so far 
as I have made it clear, is this, that the natural course of 
prices is a violent oscillation about an unstable equilibrium 
and that the comparative usual stability of prices in practice 
round about the neighbourhood of the equilibrium point 
or points is the result of an elaborate and costly commercial 
system. Very occasionally the system collapses in some 
local area, and disastrous consequences would ensue except 
for the fact that the whole civilized world is now braced 
together to enable markets to render each other mutual 
assistance in balancing and propping up their weakest 
members. The central buffer which receives the ultimate 
shocks and adjusts the balancing of all the markets is, of 
course, finance. Under this view of our commercial system 
the phenomena of monopoly and glut are of primary import- 
ance in all their stages and gradations and it is easily 
recognizable that their essence lies at the basis of value. 

Value, it has been generally said, is compounded of 
utility and restriction of supply. Neither daylight nor 
earthquakes are supposed to have any value, although one 
is indispensable and the other is fortunately rare. But it 
is not generally recognized that there is another condition 
required to give value, and that is the power of calling in 
physical force either in person or through the state for the 
exaction of the required compensation. Mankind has 
always bitterly resented a monopoly and been quick to 
combine against it. Consequently certain invaluable 
commodities have been partially excluded from the area 
of private exploitation, where values are created. Water 
is thus treated in nearly all countries, and its price seldom 
varies from the cost of making it available. Land is being 


gradually withdrawn in the most civilized countries from 
the sphere of private proi^erty, and the means of trans- 
portation also are tending to come into the hands of 
municipalities and states. 

The state, on the other hand, has to intervene to create 
or make possible values in cases, where the utility is 
considerable and the bargaining power of the possessors 
is insufficient to secure their adequate reward. In many 
countries a State Church is maintained, in nearly all 
learning is encouraged and endowed and military abilities 
are fostered and heavily rewarded. An inadequate attempt 
to reward brains is the basis of the state monopolies 
granted to certain intellectual products in the form of 
literary and artistic copyright, patents and trade marks. 
A few pensions come under the same heading. 

An intermediate case, where monopoly is partly permitted 
and partly abolished, can be found in the case of medical 
services. Primitive communities will never permit the 
holding back of these services for an extravagant reward, 
and our own poor indirectly exact similar privileges. They 
are treated free or at low cost, and the specialist is paid by 
the rich, and now this branch also of human endeavour 
seems passing gradually into the service of the state. 

We have a lovely English word, priceless, to denote 
what is the best of everything, which yet has little or no 
commercial value. The power of devotion of many women, 
the disinterested integrity of some men, the spiritual gifts 
of a rare few are of an unsurpassable utility to a nation, 
and they are also restricted in supply. Add to this such 
personal qualities as devotion to duty, the power of 
endurance, habits of industry and perseverance and the 
highest flights of intellectual endeavour, and we have here 
pearls and jewels which mysteriously are part of a nation's 
wealth yet can only occasionally and indirectly bring 


material reward to their possessor. The characteristic of 
such a reward to the individual for the possession of a 
natural monoiDoly of this kind is that it may come to him 
in rare cases wholly or partially, but that it cannot be 
exacted. In other words, property in these exceptional 
gifts and qualities has not been successfully created. 

The exaction of the full profits of a monopoly even under 
strict commercial conditions is rare and difficult. It is 
probably more easily and completely effected in the market 
for stocks and shares than in any other.* Human feeling 
revolts against it, and prejudice and animosity combat it 
with every social and personal influence. Then there 
remains the human reluctance of the seller to exact the 
pound of flesh. Still, it is successfully done once in a way 
by an exceptional man who is determined, far-seeing and 
indifferent to opinion. The analysis of such an operation 
is, putting moral considerations aside, one of the most 
fascinating subjects for intellectual contemplation. 

The only supremely successful practical achievement 
which can compare with the capture and maintenance of 
control over the trade in refined oil throughout half the 
world by Mr, John D. Rockefeller is, in my opinion, 
Frederick the Great's victory over the Austrians at Leuthen. 
The method is exactly similar, and equally overwhelming 
in its result. It will be remembered that Frederick, 
marching triumphantly across Germany after the victory 
of Rosbach, came across the Austrian army of 60,000 men 
stretched composedly over a line six miles long. With 
instant strategy, and by brilliant tactics, he unexpectedly 
placed his 35,000 Prussians, so that they overlapped the 
end of the Austrian line before the Austrians could 
concentrate, and ho thereby could attack them at their 

* For a p^ood illustration of this iu fiction, see the late IlarolJ 
Frederic's " The Market Place." 


extreme flank and roll up their line by having always two 
Prussians to one Austrian at the fighting point. That was, 
as I understand it, similar to Mr. Kockefeller's method. He 
knew at every moment before his opponents, where the 
next point of contest would be, and there he always was 
prepared beforehand with superior financial strength. 

Mr. Eockefeller, generally supposed to be the richest man 
in the world, presents himself to English imaginations as 
one who successfully struck oil somewhere near Pittsburg, 
or, at least, as one who possessed originally consideral)le 
capital to enable him to purchase the control of large 
supplies of it. Mr. Eockefeller never wasted much time 
looking for oil ; he knew there was too much of it in 
Pennsylvania already, and, as for cornering the supplies of 
it, he saw very much earlier than anyone else that such an 
enterprise was impossible. Besides, he started in life with 
no money. His equipment included the strategical insight 
of Napoleon, the persuasive eloquence of an American com- 
mercial traveller and the instincts and feelings of a 
sea-squid. All these qualities were necessary to his 
ultimate success. Although he had no capital, his 
persuasive powers and the soundness of his plans, so far 
as he disclosed them, always enabled him to borrow as 
much as he required for his purposes. 

The dominant feature of the oil situation, when Mr. 
Eockefeller took hold of it, was the glut of crude oil in 
Pennsylvania in the 'sixties. It was too rapidly produced, 
and its rate of production was being rapidly increased. No 
effective combination was possible among the oil men, as 
the owners of the wells were called, because new wells were 
being developed everywhere, which would naturally be 
outside the combining group. There was not among them 
sufficient capital to hold back supplies ; the oil could not be 
left in the earth ; it had to be gathered and packed in 


barrels ; it became impossible to market it at a price 
remunerative to the producers. Under these circumstances 
some general controlling influence \yas an absolute 
necessity, and everyone interested in oil became ipso facto 
an ally, however unwilling, of anyone who showed himself 
capable of governing the situation. The oil men, the 
refiners and the railways, or railroads, as they call them in 
America, all had in their turn to help Mr. Piockefeller in his 
schemes, even though they never ceased to complain later 
on of the share of profit which he ultimately left them. 

Mr. Piockefeller's commanding eye saw that the sluice 
which controlled this flood of production was the manu- 
facturing or refining end of the business* and that of the 
three natural centres of this industry. New York, Pittsburg 
and Cleveland, the latter was by far the best point for 
strategic purposes. 

New York, which otherwise had the advantage of being a 
good selling depot, was put out of competition as a refining 
centre by its distance from the oil fields because crude oil 
was not valuable enough to bear the freight charges over 
the railroads, which were then the only means of trans- 
portation. Pittsburg and Cleveland were almost equally 
distant from the oil fields, but Pittsburg was in the hands of 
the Pennsylvania R.R. both for supplies of crude oil and for 
the carriage of refined oil to its market on the coast. 
Cleveland had two railway lines, if not three, to the Atlantic 
and the alternative of water carriage by the Great Lakes 
and the St. Lawrence to the sea. That was a crucial 

* This was not because of the profit in the maiuifaoture but because 
at first the refiners controlled all the sales. Later on Mr. llockefeller 
saw the power that was coming into the hands of the oil merchants 
and made it his business to acquire predominant control of them too, 
a control still retained by the Standard Oil Trust in spite of its nominal 
dissolution under the ISherman Act. 


advantage in itself, but the decisive superiority of Cleveland 
lay in the fact that it had water-carriage not only to the 
Atlantic, but westward over tbe lakes to the Great West. 
Mr. Eockefeller could put down refined oil at Chicago and 
Duluth at a price which no one in Pittsburg or New York 
could touch. He and his associate Cleveland refiners had 
always a monopoly of this considerable growing western 
trade. It was from this source that he drew his reserve 

In endeavouring to give in brief summary the chief points 
of one of the most complicated commercial struggles which 
have ever taken place, I am forced to compress and group 
facts to a dangerous extent. I shall also have to follow a 
logical rather than a time sequence and to represent, as 
successive, various phases of these bitter struggles, which 
as a matter of fact were often simultaneous. The fights 
between Mr. Rockefeller and his rivals were so prolonged 
that several of them were all going on together about 
various issues. I also assume Mr. Rockefeller's intention, 
as I am entitled to do, wherever results appear to confirm 
it ; so nimble-minded, as well as far-seeing a man would, 
like Napoleon, use every accidental advantage and yet must 
be held to have intended not only the whole, but the parts 
and the consequences of his general policy. 

Mr. Eockefeller took hold of the oil trade, as Americans 
would say, by starting a refinery in Cleveland. His business 
was well managed, but not in so superlative a degree as to 
drive his competitors in Cleveland out of the trade and 
leave him in control of all the refineries. He had to control 
these in another way by forming, with the assistance of the 
Lake Shore R.R. magnates and others and with borrowed 
money, a combination called the South Improvement Co. 
This combination, which was constructed, as I believe, on 
an entirely novel plan, must be considered as the parent of 

L.S.D. H 


all the trusts, and to the credit of its enemies and of the 
State of Ohio it was immediately recognized as such and 
ultimately by legal process supj^ressed. But its dissolution 
left Mr. Eockefeller with his first forged weapon, the 
majority of stock in the chief refineries of Cleveland and 
the control of the oil-refining business on the Great Lakes. 

Entrenched in his central stronghold of Cleveland with 
the western oil trade behind him as a reserve Mr. Piockefeller 
turned his attention to the railroads. "What he wanted 
from them were two things, one a vital necessity, preference 
in rates for crude oil from the fields to his refineries, the 
other a selling advantage in preferential rates for his refined 
oil to New York. As a weapon he could play off the two 
direct lines, the Lake Shore Pi.Pi. with its ally the New 
York Central Pi.Pi. and the Erie R.E. against one another, 
with the Pennsylvania R.E. to be brought in as an out- 
sider to cut rates should the two former combine. Against 
all three he could use the threat of water-carriage down the 
lakes and river to ^fontreal. Besides he had always some 
western traffic to give away which none of his competitors 
could interfere with. 

It is still difficult for us to understand how even such 
great advantages could be pressed home, as they were by 
Mr. Piockefeller to so extreme a length. One has to suppose 
that a certain regular amount of the heavy oil traffic was 
necessary to each railroad to pay working expenses and 
that the threat to ship by river and sea was decisive. But 
even so the terms exacted by Mr, Piockefeller from all the 
railroads are almost incredible, although there is clear record 
of them in correspondence. He not only had his crude oil 
brought to Cleveland and his refined oil carried to New 
York at a secret preferential rate, but he exacted repayment 
from the railroads of 20 cents a Ixirrel on every barrel of 
crude oil sent by his competitors. He thus made a profit 


on his own business and also a profit on theirs. In return 
he divided his traffic equally between the three routes. 

The argument he ostensibly used to secure his secret 
rebates was that being incomparably the largest and most 
regular customer he was entitled to the economies effected 
by handling his traffic in bulk, as compared with the heavy 
charges entailed in bandling small and occasional sliip- 
ments. The real argument, which is not on record, but 
was no doubt used by him and was present in the mind of 
his opponents, was that the oil trade had to be controlled 
by some one to prevent glut and ruin, that no one could 
control the oil trade without the Cleveland refineries and 
no one could control Cleveland without the Standard Oil 
Co. and Mr. Rockefeller. The general necessity was so 
great that a comparatively small advantage gave an opening 
for a pressure that was crushing. 

Crushing and no less must be the word for it. The 
shame and meanness of such terms, secret though they 
were, were not accepted by the railroads without a struggle. 
In Miss Tarbell's book* there is evidence that repeated 
fights were made by the railway magnates, who were nota- 
bilities in their way and claimed to have a decent standard 
of living. But it was of no use ; Mr. Eockefeller enforced 
his own terms. 

These preferential rates were not publicly exposed until 
long afterwards, but they soon became a matter of just 
suspicion to Mr. Rockefeller's enemies, who had become by 
this time an irregular group of AduUamites, composed of 
Philadelphia merchants, Pittsburg refiners and the oil men. 
They knew no more than that they were at a serious dis- 
advantage in cost of transportation as compared with the 
Standard Oil Co. of Cleveland. To turn his flank they set to 

* Miss Ida Tarbeli. " The Standard Oil Co, of New Jersey." 

H 2 


work to convey oil mechanically, both the crude oil in small 
pipe lines to the refineries and later on to convey the refined 
oil in large pipes under pressure in spite of severe engin- 
eering difficulties to the seaboard for sale. Mr. Piockefeller's 
policy in both these cases was exactly the same. Neither 
improvement was of any advantage to him and his group, 
who would lose their secret preferential advantages, or to 
the railroads, who would lose the traffic at remunerative 
rates. So he used the railroads to fight to the bitter end 
against any improvement in mechanical transportation and, 
when at last the new methods became inevitable, he made 
his own lines or secured partial control of theirs. 

Meanwhile Mr. Piockefeller neglected no opportunity of 
extending his hold over all the selling agencies that he 
could buy or combine with both in New York or on the 
coast. He recognized practically thirty years ago, what it 
is one of the objects of this book to bring into the light of 
public discussion, that it is more difficult to sell than to 
produce. He was content with the control of the refineries 
in Cleveland at first, because they gave him the selling 
power in the west and through his control of transportation 
rates gave him a winning advantage in the markets of the 
east. But the advent of the pipe lines annihilated his 
decisive superiority. 

It is here that Mr. Rockefeller's generalship rose from 
the rank of that of Hannibal to equal that of Caesar. I do 
not suppose Mr. Rockefeller had ever read about Dyrrachium. 
That would make him the more original. But he was one 
of those men, whom the rocking of his world cannot divert 
from his desire for decisive dominion. And, like Caesar, he 
was prepared for the catastrophe when it came. "With the 
enormous profits earned by himself and with his modest 
tax of 20 cents a barrel levied on his competitors, he was 
in a position to buy up or amalgamate with the great 


mercantile houses in the oil trade. In this way he took in 
the firms of Charles Pratt & Co., H. L. Taylor Co., 
Lockhart and others, and ultimately formed the larger com- 
bination of the Standard Oil Co. of New Jersey, whose modest 
profits have been £8,000,000 a year for some time past. 

When the transportation question was no longer the 
critical feature of the oil situation the company moved its 
headquarters to New York and its chief depot to Bayou 
Point in New Jersey State. There under the right hand of 
the Statue of Liberty and to the left hand of the spectator 
as he comes through the Narrows into the magnificent 
harbour of New York lie massed the squat round reservoirs 
which hold the wealth of the greatest commercial monopoly 
which has ever been formed or ever may be. 

The story of the Standard Oil Co. illustrates the com- 
pelling effect of a glut, the method of securing a partial and 
ultimately an almost complete monopoly and finally the 
doctrine that in any difference of interests the selling end 
of a business has the whip hand over the producing end, 
because in merchandizing lies the harder task. In this 
connection it is to be observed that neither at the beginning 
of their career nor at the present moment, when the 
Standard Oil group are richer and more powerful than 
ever before, did they completely control the output of 
raw material. They began by being the largest group of 
middlemen in the most favourably situated centre for 
transportation. With all their wealth they never controlled 
at any time more than a bare half of the output of 
Pennsylvania and now that the Californian oil fields have 
sprung into existence the Standard Oil Co. probably controls 
only 30 per cent, of the oil output of America. But by 
holding the selling end of the business, both wholesale and 
retail, the Standard Oil Co. is estimated to control 80 per 
cent, of the oil trade of the country. What that means in 


the way of profit can be seen in the fact that during one or 
two years, when the competition of outside producers brought 
the profits down on ordinary refined petroleum, the company 
continued to sell the ordinary oils at no profit at all, but paid 
handsome dividends on its stock by its monopoly on all the 
high-priced patented and advertised oils, which it had 
acquired through its control of the mercantile houses.* 

The use of tlie word, monopoly, has probably been more 
frequent in discussing the question of land than in any 
other branch of economics. Land, strictly speaking, as a 
whole is not yet the subject of a monopoly and it is still far 
from becoming so, when we regard the immense probable 
development of rich new countries. But it may become a 
monopoly under a variety of special circumstances such as 
those in which England was placed during the Napoleonic 
wars or in a small country with a high tariff on food 
products. Certain grades of land have alwaj^s been trans- 
ferred at monopoly prices and particular town sites are now 
recognized as the most valuable of all forms of propert}'. 

The payment for the use of any kind of land is always 
called rent and rent has been the subject of the most 
famous economic generalization ever made. The term " rent " 
also covers payment for the use of buildings and even of 
machinery and power, all very different forms of property 
from land. The word is also creeping insidiously into 
frequent use in economics to show that annual returns from 
certain forms of property or annual increments of profit 
are by analogy subject to some law which greatly resembles 
Ricardo's.t The use of the words " quasi-rent," "consumer's 

""" I believe these facts are not materially altered by the compulsory 
breaking up of the company, a.s the eubsidiary companies will 
probably continue thoir co-operation under a common policy. 

t On this point see W. S. Jevons, "Theory of Political Economy," 
Preface, p. 56, and J. S. Mill, "Principles of Political Economy," 
Uook VII., Cap. V. 


rent," "rent of superior ability," &c., is not only objection- 
able because it is contrary to common practice and therefore 
likely to degenerate into a technical jargon, but also because 
it is inspired by an idea, which is really unsound. I have 
a suspicion that Eicardo's law, which, by the way, is very 
variously stated, is itself only a particular form of a much 
wider law, which some one may be fortunate enough to 

As it is, Ricardo's law covers only the rent of agricultural 
land in settled countries, where competition is free of 
custom. And even here its influence is diminishing in 
importance, for the capital value of land in many places is 
quite out of relation to its annual value. Only last summer 
the Duke of Bedford sold some of his Devonshire farms 
for something like forty years' purchase, an estimate of value 
quite divorced from mere income-bearing considerations. 

The real criterion as to the value of land is whether it 
is subject to primary or secondary demand, a distinction 
the analysis of which we must leave until a later chapter. * 
But we can say briefly that primary demand for land is 
demand for the purpose of non -commercial use or pleasure 
or mere distinction, that is to say, where the possession of 
the land is desired in itself. In this country there is very 
little agricultural land, where there is not some increment 
of value from this source over and above the capitalized 
value of its annual income. Secondary demand for land is 
where it is used as an instrument and its value is deter- 
mined by its income-bearing power. In the case of town 
sites the line between the two is more clearly and sharply 
drawn for us according to the purpose for which the 
buildings erected on them are to be used, either as 
residential property or as commercial premises. The 

* See Cap. XI. on " Secondary Demand." 


origin of the demand, which creates the value of commercial 
premises, is solely its power of bearing income directly or 
indirectly, whether they are used for manufacturing, trading 
or offices. The origin of value in residential property is 
chiefly a value of taste and choice with utility very much 
in the background. The distinction is a snare to valuers, 
particularly in London, where whole districts are always 
changing from one character to the other, which has 
brought many a good man to grief. There are few things 
so speculative as town sites in most cities; residential 
property going up slowly in value with the possibility of 
coming down quickly ; business premises coming rapidly 
into appreciation and very slowly losing their income- 
bearing power. 

Another form of partial monopoly where the produce is 
seldom or never sold outright except in the form of con- 
tracts for varying periods is the possession of special talents. 
Services,* abilities, talents and even genius are commodities 
with their own market and therefore subject to the laws of 
supply and demand. They are usually paid for under 
contracts by the week, quarter or year. The lower grades 
of labour below trade union level are hardly subject to 
restriction of suppl}^ and their remuneration tends to sink 
to the level of what is in those circles considered a living 
wage. Trade unions introduced partial monopoly into the 
skilled grades of labour ; the need for an expensive educa- 
tion limits competition in supply amongst the professional 
classes ; in the commercial classes general competitive 
talent has sufticiont free play to distribute rewards according 
to abilities to a certain extent. In all the grades partial 
monopoly exists and is more or less enforced by comi)etition 

* This subject is more ehiLoiately iioated in Cap. XYIII. on 
"Tlie Salo of Labour." It is only Ijriefly rofoirod to horo as a con- 
spicuous iuatauco of partial monopoly. 


and the method of its enforcement is approximately 
governed by the following law : — 

The Law of Graduated Returns on Partial Monopoly.* 

" In the case of a commodity, which is naturally limited 
in supply and capable of being supplied in various grades 
of quality, the prices in each grade are the result of a 
double competition, that is to say, of a competition between 
the various grades and also of a competition according to 
the laws of supply and demand between the units of each 
grade. Wherever the grades have become stereotyped the 
competition within the grade is much more influential in 
determining price than the competition between the 

Practice in this case has very much anticipated theory as 
the policy of the trade union leaders has long been directed 
to secure partial monopoly on these lines. Their first care 
was to establish grades of labour and to prevent the overflow 
of men casually from one grade to another, a refinement 
which is being daily improved upon. Then by limiting the 
number of apprentices as they do in certain trades and 
have tried to do in all, they to some extent control the 
amount of selling competition in each grade. 

This law is the sole justification for, or, perhaps it would 
be better to say, the easiest explanation of the comparative 
injustices as between man and man in rewards for services. 
Merit is a subordinate consideration in fixing the scale of 
these rewards, although very few successful men would like 

* I have been tempted to narrow down this law and call it simply 
the law of the rewards of services and talents and I may be wrong in 
not doing so. But I believe at present that this law or something 
like it is essentially of much wider application, and even that Eicardo's 
law may turn out to be a special form of it. I am very much open to 
correction in the matter. 


to think so. The qualities that are the highest paid are 
those which are rarest in their grade, subject to the general 
utihty of the grade to the industry. Thus the modern 
demand for good selHng abihty and the comparatively small 
number of men, who can do it well and like doing it, is 
raising the remuneration of this branch of talent to a 
surprising extent in progressive countries. 

This law accounts for much that appears to the moralist 
and to the socialist to be puzzling and reprehensible in our 
commercial system. Why should one man get iJlOO a year 
and the other £1,000 ? The answer is not the obvious one 
that the labour of one is worth ten times that of the other. 
That may or may not be the case ; in the majority of cases 
it is far from being so. The economic fact underlying the 
difi'erence in reward is this, that the second man, having 
the scarcer talent, can exact in competition with the units 
of his own grade and by and with the joint assistance of 
the units in his own grade in competition with other grades, 
just £900 a year more than the first man, quite independent 
of the absolute degrees of utility of either. There is no 
intrinsic value in talents any more than there is in 

Glut and partial glut have been excellently illustrated in 
the history of the Standard Oil Co. The keynote of 
this mystery lies in the paradox that the part is often 
greater in value than the whole, a truth long ago discovered 
by the Dutch who sometimes destroyed a whole year's pro- 
duce of their spice islands in order to keep up prices, as 
Friedrich List noted. But tbe consideration of glut leads 
us directly on to the laws of demand. 



On the threshold of the centre of our subject we may 
pause to sum up the concUisions at which we have ah-eady 
arrived. First, logically, that is to say, we fiud that the 
rise and fall of prices in the modern world, though not 
independent of other important factors, is chiefly determined 
by demand. Secondly, demand appears to be a group of 
values, and while generally used as a collective term implying 
more usually a large than a small group of values, it may 
quite correctly describe a single value which would be the 
demand of one individual for one single article. The situation 
even arises when the single article may be unique and there 
may be only one possible purchaser for it. Thirdly, since 
demand chiefly determines price and demand is essentially 
a psychological state of one or more individuals,* then the 
science of exchange and the economic science, of which it 
is a part, are themselves no more than a branch of the 
study of psychology and ethics and any attempt to erect a 
barrier between ethics and economics is erroneous in theory 
and leads to fatal results in practice. 

The six laws of demand, which I here put forward as the 
result of my analysis of the state of mind of the prospective 
buyer or buyers, reduce this state of mind to a very simple 
form. In its essence it strikingly resembles the habitual 
rule of life which most of us adopt between the ages of 

* Note that supply has also beeu determined to be the same thing. 
See p. 38. 


eleven and fifteen months, according to our relative preco- 
city, which may be described briefly, as follows : that we 
want most, what we cannot get, and that we cease to want 
or to esteem very much, whatever has come into our posses- 
sion. It is only those things, which appear to come to us, 
as means to further ends, that we continue to cherish. 
Our chief efforts, economically speaking, are therefore not 
so much directed to enjoyment, as to obtain secondary 
objects, which are related to prospective future enjoyments. 

The Law of Eising Demand. — I- 

" Demand,* when unsatisfied, tends to increase to the 
limit of capacity! and desire, these latter being allied 
factors not always present in the same proportion." 

Note. — In this law the caj^acity of the individual for 
providing the equivalent in exchange is the more stable 
of the two determining factors and is of course the mark 
of the ultimate limit of demand ; desire is a variable 
factor owing to the nature of alternative wants, there being 
comparatively few ordinary desires for which some alterna- 
tive satisfaction cannot be procured. When no alternative 
satisfaction can be procured the invariable tendency is for 

* It will be remarked here, and in the statement of Law II., that 
the word "demand" is nsed to signify something short of "efficient 
economic demand," a higher stage, which it may or may not reach. 
At the same time it is something more developed than mere desire, 
because it has come to market with money in its pocket, even if that 
money may not be enough. To make this point clear we must refer 
back to our definition of value (see p. 32), and then we see that 
values, of which demand is composed, have a real existence, even 
where they fall short of price and therefore never become crystallized 
in a transaction of sale and purchase. I have expressed this in the 
definition of demand, by sayinj^ that demand consists of those values, 
which como within the operating field of a market. 

t Capacity hero moans capacity to pay the required price. 


demand to increase up to the limit of capacity. On this 
law is founded monopoly. 

The law of rising demand, as I prefer to call it, is really 
the law of monopoly. That is to say, it covers every case 
of value, which is enhanced or is in the course of being 
enhanced by any degree of scarcity or anticipated scarcity. 
Wherever the supply is kept under sufficient control to 
secure the suction of demand this law comes gently into 
operation, enough to maintain prices in the condition 
which is called firm, that is, under circumstances where 
considerable quantities can be disposed of without lowering 
values. In cases of a naturally restricted supply of pro- 
ducts or properties of the same kind and of varying degrees 
of value, due to the partial influence of monopoly, these 
values are determined in strictly graduated increments by 
custom in accordance with the law of graduated returns on 
partial monopoly. Such custom has long ago over most of 
the globe fixed the larger part of those payments known as 
rent, salaries or wages. 

The critical point in the correct statement of the law of 
rising demand is that the tendency of demand to increase 
indefinitely, until satisfied, is always present. Demand, 
being generally a group of values, but not necessarily 
more than one, is always tending upwards so long as it 
remains unsatisfied. What arrests this tendency is usually 
the disinclination or incapacity of che buyer to pay the 
required price. Where the incapacity is absolute, demand 
is necessarily abortive, but if it be a mere matter of disin- 
clination the arts of the seller may modify or remove the 
barrier. Nothing then remains to protect the seller except 
the satisfaction of an alternative want. 

The doctrine of alternative wants* is something more 
than and quite different from the mere statement that the 

* See Cap. III., p. 21 and Handy Table. 


buyer has generally several sellers offering him goods in 
competition. For the present case we are assuming that 
the selling agencies are combined or limited. By alternative 
wants I mean, that behind his wants every man has a 
purpose, which in matters of material need is flexible and 
can be satisfied in more ways than one. Thus a man in 
buying clothes seeks warmth and decency ; in buying a 
piano he pursues perhaps recreation, perhaps merely peace 
at home, generally improved social status ; and in buying a 
house and land he hopes to obtain security, or isolation or 
a position in the county. In all these cases a severe rebuff 
in the matter of price by the seller will make him reconsider 
his position sufficiently to question whether the denied 
immediate want is really the shortest road to his ulterior 
purpose. His demand will then be extinguished by the 
satisfaction of an alternative want. Owing to this counter- 
acting and limiting tendency of alternative satisfaction, by 
far the greater number of ordinary transactions are removed 
out of the sphere of stringency. But the attraction of 
unsatisfied desire, even if dormant, is normal, steady and 
curiously cumulative in its force, if not diverted. 

De Quincy has given us, and Mill has quoted the classical 
instance of a temporary absolute monopoly. The lavish 
luxury of modern times would have furnished him with 
even more apj)ropriate examples. Money considerations 
are now hardly any limitation to the desires of the very rich, 
and skilful dealers are not slow in l)eing educated up to 
higher levels of extractive power year by year. Doubtless a 
later generation of curio merchants with a finer understand- 
ing of human weakness will look back with pity on the 
moderate fortunes now being amassed in their business. 

The particular luxuries, which command the very highest 
prices and exhibit the extreme operation of this law are 
those where the advantage of natural or artificial rarity i^ 


enhanced by sentimental, historic or artistic attractions. 
Such interlacing of the issues is useful to the purposes of 
the seller, but not essential. What he requires is absolute 
limitation of the supj^ly and the assurance that human 
habit and fashion are setting in his direction and the rest 
is all, not leather, but prunella. Given these conditions a 
good salesman will get his own price for anything you 
please, postage stamps, bulbs, carnations, roses, birds' eggs, 
butterllies, puppies, horses, violins, prima donnas, antique 
books, diamonds, bronzes, enamels or pictures. Merit is 
no bar to high value ; it is surprising how little it adds to 
it. If, for instance, the famous picture, which crossed the 
Atlantic recently for i'100,000, should turn out to be, not 
a historic Rembrandt, but, as some critics thought, one o 
the most beautiful landscapes ever painted by De Koninck 
or Seghers, there would be a terrible shrinkage in its 
dollar value, while the merit of the picture would remain 
as high as ever.* 

The Law of Substituted Demand. — II. 

" Where demand remains unsatisfied through want of 
capacity it commonly becomes efficient demand for any 

* In this connection it is interesting to remark that the United 
States Government, according to credible report, recently assumed, in 
prosecuting a well-known firm of art dealers in New York, that the 
sale price is the right measure of import value. If my theories are 
sound, this is an entirely incorrect assumption whenever the works 
of art are first imported and afterwards sold. The true value of works 
of art imported into America must be something quite different from 
the ultimate price. As the class of customer who pays the very 
highest prices knows probably little of artistic worth and cares 
chiefly for commercial value, the selling cost in this business must be 
necessarily high, and should be taken at not less than 50 per cent, in 
addition to the import value. The price to the buyer should include 
both. It seems possible that injustice was done in this particular 
case through the influence of a mistaken theory. 


colourable substitute for the original object at a lower 

Note. — This law deals with those cases, where desire is 
not quenched by substituting for it the satisfaction of an 
alternative want, but where desire continues to press and 
remains without the capacity to achieve its original end. 
If it is not then put aside by the will, it passes into the 
stage of becoming efficient demand for one of two things, 
either the " next best " or the " just as good." 

Observe that here there are three courses open, of which 
the best is the first but has been so little esteemed by 
mankind for its wisdom as to be the continued object of 
ridicule under the guise of the fable of the fox and the 
grapes. The greater number of us, often unconsciously, 
regulate our pleasurable expenditure by buying colourable 
substitutes for what ^Ye want but cannot get. In this 
pursuit we divide ourselves into two unequal camps. There 
are those who resign a portion of their aspirations, accept 
a second quality and see that they get their money's worth. 
By far the more numerous crowd are willing to accept a 
third or fourth quality, so long as they are persuaded that 
it is really the best. 

Regretful reflection will realize that this law, petty 
in its action as it is, is at the root of the widespread 
insincerity, which colours nearly all those branches of 
business, whose function it is to appeal directly to the 
public. It has perverted the language of advertising and 
the morality of the shopkeeper. Deceit remains a habit 
even where its utility has become doubtful or negative. I 
do not intend here to refer to direct cheating or inten- 
tional misrepresentation, but to a clinging vice which is 
much more subtle and demoralizing. It is, strictly speaking, 
a conspiracy between the customer and the seller for the 
latter to organize a hollow deception for the enchantment 


of the former, for which the victim must chiefly be held 

Beyond this paltry and useless mystification, at which, I 
frankly confess, we all more or less connive, there exists a 
world of intentional misrepresentation in which the capital 
involved beggars the imagination. The rate of profit in 
this business remains high because many decent people do 
not choose to embark in it. Large organizations are built 
up to supply the fraudulent imitation or the quack remedy. 
In this vanity fair it is again curious to note how willingly 
the customer lends himself to perpetuate a deception, which 
a very small amount of investigation on his part would 
break down. There seems to be something in his sub- 
consciousness, which distrusts the probability of any simple 
satisfaction of his want or remedy for his troubles ; perhaps, 
like Naaman, his vanity would be offended by it. 

The trade acquired by large firms under these conditions 
is extraordinarily stable. Wherever the satisfaction of the 
buyer is in the nature of things impossible, the law of 
vanishing demand (law IIL) can never apply. A man will 
buy only two or three boxes of pills, which can and do 
really cure him of an ailment, but he will continue to buy 
for years those remedies which never do him any good. 
This is quite a usual practice. 

The Law of Vanishing Demand. — IIL 

" Demand tends to vanish after every completed trans- 
action and, though after the extinction of demand from 
one source or in the course of it it may reappear from 
another, there is always an underlying and ultimately 
cumulative tendency for successive extinctions of demand 
to diminish the probability of its reappearance." 

Note. — The application of this law is generally obscured 

L.S.D. I 


by the self-restraint or manipulations of the selling agency, 
but, wherever the control of supply gets out of hand, the 
law comes violently and with great suddenness into opera- 
tion, as is shown by the collapse of prices in a market^ 
which has been overfed, before the law of recurring demand 
(law IV.) has had time to be felt. 

The law of vanishing demand is equivalent to the law of 
glut and has a great resemblance in its operation to that of 
the law of rising demand. In each case the tendencies to 
monopoly or glut are permanent and underlying, while 
often prevented in their operation by others more imme- 
diate, if less far-reaching, in their effects. The proof of the 
permanence of these two tendencies of values and prices, 
wherever either scarcity or plenty make themselves visible, 
is the suddenness and violence with which they come into 
operation when not controlled or anticipated. While 
normally exercising only quiet and secret pressure, their 
occasional declared appearances produce phenomena which 
are unusual and therefore seldom properly appreciated. 

The distinctive features of glut do not furnish such 
remarkably picturesque romances of business as the sales 
of great pictures, the rise in value of real estate, or the 
sensational fees obtained for legal and medical services. 
They only attract general attention to themselves when 
they become the basis of an organized monopoly as in the 
case, already cited, of the Pennsylvania oil business or 
the diamond trade in South Africa. But if my view of 
the historic condition of the world's productive power in 
the present century be the true one, tendency to glut covers 
the field of an infinitely greater number of transactions 
at the present moment than does monopoly, using both 
words in the special sense defined in Chapter IX. Modern 
production not only enables us to provide, but requires us 
to have on hand a greater quantity of nearly all commodities 


than can profitably be marketed by what two centuries 
ago would have been called natural methods. 

Where the tendency to glut is most likely to appear and 
make a marked change in prices is in the case of all those 
articles which directly appeal to our lighter enjoyments, 
whose demand therefore is regulated only nominally by the 
semblance of utility, but really by fashion and caprice. The 
enormous sums spent annually on ladies' clothes and 
millinery are of this the most consi:)icuous examples. A 
fashion commands a high price only for the brief moment, 
while it is still new and rare, and in a month or so it has 
glutted its original market. It is then either discarded or, 
according to the law of the stratification of demand (law VI.), 
it charms Kensington as the latest thing from Mayfair and 
so on downwards to Bloomsbury, Brixton, Bethnal Green 
and Mile End. 

Let us now examine the two laws, whose operation arrests 
the imminent consequences of this law, and with the aid of 
an expensive and elaborate commercial structure maintains 
values and prices within easy reach of an intermediate 
equilibrium between the two extremes. 

The Law of Recurring Demand. — IV. 

" Demand after extinction from one source tends to recur 
from the same source after a longer or shorter interval." 

Note. — The action of this law is most important and helps 
in conjunction with the law of anticipated recurrence of 
demand (law V.) to modify the distinctive operation of the 
law of vanishing demand. It is obvious both in the demand 
of one individual and in the demand of a group. It intro- 
duces into all successions of transactions of sale and purchase 
the important element of time as a constituent of value, 
BO that the proper comprehension of the periodicity of 

I 2 


recurrence is the chief requirement of all sellers who would 
maintain a stable market. 

The simplicity of this law hardly needs elaboration. It 
offers the guiding principle for the study of consumption 
and in this connection has been touched upon in Chapter IIL 
in the discussion of human wants. There is a different 
period of recurrence in the demand of a single individual 
for such commodities as food, dress, horses, houses, port- 
manteaux, pictures and wedding rings. Even when many 
individuals are taken together this seasonal influence is not 
abolished. The scientific way of assessing this force is to 
take it as a function of the demand of one individual for 
each single commodity, and that, in effect, is what has to 
be done unconsciously by traders, because, as we shall see 
in considering our next law, recurring demand seldom acts 
directly on a market, but is j)rovided for in advance by the 
trader, who has empirically to discover for himself how the 
periodicity of demand for each article affects the stability of 
its market. 

The Law of Anticipated Recurrence of Demand. — V. 

" Demand after extinction or during the course of extinc- 
tion and before recurrence may be anticipated." 

Note. — The extent of the operation of this law only 
becomes apparent from reflection on the vast majority of 
cases where the laws of vanishing and recurring demand do 
not seem directly to apply. In the majority of cases these 
two laws are latent in their action, and apply only indirectly 
because all the transactions of trading and business are 
systematized to modify their operation. Thus an individual 
or group whose demand is fully satisfied may anticipate his 
or their own future demand by making a reserve, by buying 
for stock or by buying futures. Further, the whole body 
of traders, merchants and exchangers for gain are profes- 


eionally engaged in the occupation of anticipating future 
recurrent demand in order to make a profit by reselling to 
others later on at a higher price when demand recurs in the 
natural course and renews the pressure of immediate desire 
for consumption. 

This law may be said, therefore, to cover those two great 
groups of transactions : (1) buying for reserve, and (2) 
buying for profit. It also leads us to the important con- 
clusion that, from the trader's point of view, every commodity 
has two values, an immediate value and a future value dated 
according to the periodicity of recurrence of demand for the 
article in question. These two values are exchangeable at 
a rate sufiiciently favourable to the former to allow for 
trader's risk, trader's profit and interest on capital for 
the usual period of recurrence. Just as on the London 
Stock Exchange the carry-over rate on Home Eailways 
is smaller than it would be for Mexico Light and Power 
or for the shares of a new rubber company, because the 
market for the former is better and steadier, so we may 
say by analogy that the carry-over rate for a shopful of 
groceries from week to week would be a smaller percentage 
of the immediate value than in the case of diamonds or 
landed estate. This is another way of saying and of 
partly explaining the fact, that very much more capital is 
required in carrying on one of these business than the 

As Professor Bohm-Bawerk* says, writing of goods in 
general : " Present goods possess an * agio ' in future 
goods ; " so also it is true of any particular commodity that 
its present value has a *' periodicity-agio " in its future 
value. The average amount of this " periodicity-agio " and 
the ratio between the period of recurrence of demand for 
and the period of perishability of any commodity is a very 
* Bohm-Bawerk, " Capital and Interest," p. 259. 


considerable factor of the selling cost and therefore of the 
price. It is only in this latter aspect that future values 
of this particular kind have any interests for the consumer. 
This particular future value of a commodity is not of the 
same nature as an ordinary " future," which, though 
nominally a transaction of sale and purchase of goods, 
partakes more really of a financial deal and regards very 
little the life or quality of the goods, which are a mere 

The Law of the Stratification of Demand. — VL 

" Demand, after having been exhausted in one group 
of individuals, may with rapidly falling prices be renewed 
from another group and again perhaj)s from another in 
such a way as to suggest that there are layers or strata of 
demand in any society, capable of absorbing immense 
quantities of commodities, whenever their cost of production 
is sufficiently lowered." 

Note. — This law is to some extent the reversal of the law 
of substituted demand because it shows that, where the 
price has to be lowered as the result of glut or can be 
reduced on account of improved and cheaper manufacture, 
there are hungry markets waiting for it in layers composed 
of people who have hitherto been content with passable 
imitations of the real thing. This is not invariably the 
case because habit in the lower markets has sometimes 
engendered a stable preference for the imitation article. 
But, as a rule, the expectation of widening markets as a 
result of decreasing cost of manufacture is a reasonable 
one. The effect of this law is to counteract the action of 
the law of vanishing demand more quickly than is done by 
the law of recurring demand, whose action is to some extent 
supplanted and perhaps stopped by it. It is especially 
operative in the world of fashion. 


As we noted in considering the law of vanishing demand, 
the expensive fashions are short-lived, but while they are 
costly to sell at first they are cheap to imitate afterwards 
and with every stage of their degradation they find con- 
tinuously wider markets imjDlying diminished selling costs 
and lower prices. While the little fashions have their day, 
they do not necessarily cease to be ; in fact they undergo 
marvellous rejuvenations and every reincarnation helps to 
lessen the cost of production of the whole series. 

While men laugh easily at the vagaries of women's 
fashions in dress, they are generally unobservant of their 
own slavery to the same dull god. Yet they drink their 
wines and smoke their cigars also under the spreading 
branches of the tree of fashion and buy motors cars, pictures, 
furniture, yachts and varied amusements under the same 
interested inspiration. Still, on the whole, between class 
and class, men are much less imitative than women so that 
the stratification of demand is less perfect in their habits of 
expenditure than in the case of women's toys and fashions. 
There is in both cases, however, one universal phenomenon 
accompanying this stratification of demand and that is, 
that the old gaud or plaything is droi)ped like a hot potato 
by the upper set, as soon as the lower set has a chance of 
adopting its use. 

One of the most interesting case of a double demand* in 
a trade has been the bicycle industry in this country. From 
1890 onwards there has been a steadily increasing utility- 
demand for bicycles as a means of exercise and locomotion. 
This has widened steadily with every improvement of 
quality and every lowering of price. But about the year 
1896, there was superimj)osed on this solid demand a society 
craze for taking exercise on a bicycle by a few fashionable 

* Compare this with the opposite phenomenon of a double supply 
in the rubber trade (see p. 84). 


ladies and one remembers fine people of both sexes taking 
their new bicyles as seriously at onetime as the middle-classes 
now do their motor cars. So the bicycle trade underwent 
successive waves of fashion, which almost killed it during 
the years 1900-4, because the utility trade was continually 
being swamped by the failures from the fashionable section. 
It was saved and is now flourishing because artizans and 
domestic servants found that a good machine had come 
within their means of purchase and their demand by its 
quantity w^as sufficient to outweigh in ultimate advantage 
all the profits of a smaller demand at a higher price. 



The influence in determining prices of the six laws of 
demand, which we have examined, is very largely obscured 
by the plain fact that their simple and direct action is 
apparent in only a comparatively small number of cases. 
They are the laws that chiefly govern demand in the last 
instance, whenever any commodity passes finally into the 
hands of the consumer or intentional consumer, because a 
man must be considered as buying an article for consump- 
tion, if that is his purpose at the time, even if he may 
change his mind later. But out of the total number of 
transactions of sale and purchase through which any article 
passes on the way from the producer to the consumer there 
are probably at least four or five before the final transfer 
and these four or five preliminary transfers are indirectly 
affected by the expectation of the final transfer. The 
demand in these four or five preliminary transactions must 
be considered intermediate demand ; that is to say, they are 
not demand for consumption, but trading demand looking 
to a final demand for consumption in the background. 

Again there is a large class of cases, where articles change 
hands for a consumption which is provisional in its nature 
and undertaken for an ulterior purpose, such as the con- 
struction or manufacture or the mere handling and trans- 
port of some other article or articles destined to consumption 
for their own sakes. This demand may be called for want 
of a better name secondary demand, because it is determined 


in its nature by a distant consumj^tive demand which in 
this aspect is the primary demand conditioning the 
existence of the other. Secondary demand covers the 
cases of tools, implements, machinery and of all the 
instruments of production. 

I confess myself here in some difficulty about terminology 
with reference to this point because the characteristics of 
" demand " as considered in the last chaj)ter can be 
described by epithets which, while suitable to its various 
aspects, are apparently contradictory. For instance, the 
" simple demand," to which I here refer, meaning thereby 
the demand for an article by that individual who intends 
to consume it, maj^ be well termed " final demand," when 
regard is had to the order of time, because the consumer is 
the last link in the chain of hands through which the 
article passes. But it may equally well and perhaps even 
more correctly be termed " primary demand," because, in 
the logical order, the demand of the ultimate consumer is 
the evoking cause of the production of the article. Since 
both these terms may legitimately be used, but neither is 
fully descriptive of consumptive demand it is perhaps better 
for the sake of strictness to allow this, the most important 
aspect of demand, to be regarded as " demand," in the 
absolute sense of the term, allotting qualifying epithets 
to other cases or series of cases. 

"Intermediate demand" is the term which covers the \ 
demand of all the buyers in the linked chain from j^roducer 
to consumer except the last, and it is characteristic of inter- 
mediate demand that each buyer in the chain has to attend 
not only to his own business, but also to keep his eye on 
the final consumer, whose desires and wants and capacities 
are the most powerful factor in determining the general pro- 
sperity of the series of markets interested iu the particular 
commodity. While casting about for a common illustration 


with some resemblance to this phenomenon I happened to 
see last summer the unloading of a cargo of strawberry 
baskets from a Guernsey steamer in Southampton docks. 
The cargo hardly called for elaborate appliances, as it was 
small, and the work was done by a string of seven or eight 
men, who stationed themselves in a line between the 
steamer's hold and the railway truck, passing each basket 
from one hand to another up to the packer who stacked 
them in the truck. After the first pass or two each man 
concentrated himself on his two neighbours, as if he were 
buying from one man and selling to the other, exercising a 
mechanical duty until the truck was full. Then they all 
seemed to awake and discover that they were in reality 
packing a truck. It needs but little addition to the picture 
to imagine that each man as he jDassed a basket held the 
financial responsibility for it, and you will have an exact 
parallel to the world's markets, as they are from day to day 
carried on. 

Let us examine more closely the case of the beef from 
Texas, whose course we followed in Chapter VI.* It 
passed from the hands of the ranchman through those of 
the cattle-buyer, stock-raiser, Chicago buyer, Chicago 
butcher, the refrigerating company and the railway, the 
retail butcher in Grantown, Penn., to the consumer. But 
supposing in Chicago it had been packed in tins for the 
European market, then instead of passing to the wholesale 
butcher it would have been taken up by Swift's or Armour's 
and sent to their agent in New York and on to their agent 
in Liverpool, there bought by the wholesale grocer in 
London and sold by him to the retail grocer in Brixton 
and finally to the consumer there or it might have passed 
through yet other pairs of hands to a small town and 
then a small village in Hampshire. That is not a very 

* See p. 56. 


complicated case ; we could easily make it more so by 
re-exporting the beef from London to Denmark or to India, 
but in the first instance there were eight parties to the trans- 
action and in the second there were certainly ten. One or 
two of the links might be mere agents, but most of them 
would be principals buying outright and selling outright for 
bills or cash. 

Out of the two groups which we have selected in one 
instance, six out of seven and in the other eight of nine 
buyers will represent intermediate demand ; that is to say, 
they will be buying not for themselves, but as agents for the 
ultimate consumer. Now if we take any individual in the 
series, say the Chicago butcher or packer, for eleven months 
of the year this individual will be wholly engrossed in 
buying steers cheaply and selling his meat to Liverpool or 
elsewhere as dearly as possible. The two markets he is 
engaged in represent his little world and engross his 
attention. But being a man with a large capital and a large 
trade he will occasionally look further afield and keep his eye 
on the general features of trade in Europe and at home. 
Some paragraph in his paper will warn him that recurring 
strikes in France and England will affect his ultimate 
market and that the influence will not take long in work- 
ing its way back to him. He will at once give orders to 
diminish his buying and press on his selling as much as 
possible. But whether he is an intelligent and provident 
man, who anticipates these influences, or whether he is a 
narrow man of routine, whose only remedy for bad trade is 
a grumble, these backward influences from the consumer 
will inevital)ly affect him and all his fellow buyers along 
the line. That is to say, that intermediate demand is 
subject to all the fluctuations of its own local situation and 
responsive also to the more powerful influences which are 
set going by demand of the consumer. 


To differentiate the effect of the laws of demand on inter- 
mediate demand as contrasted with that on demand, pure 
and simple, I suggest that the following law of intermediate 
demand covers the facts of the case : — 

The Law of Intermediate Demand. 

"In the linked chain of traders through whose hands a 
single commodity passes to the consumer the 'intermediate' 
demand of each trader for the supply of this commodity is 
not only determined directly by the laws of demand as 
between him and the sellers from whom he buys, but at the 
same time it is subject also indirectly to the influence of 
the laws governing the * final demand ' of the consumer." 

It will be noted that the term " final demand " is used here 
to denote simple demand from the point of view of its 
sequence in time. The influence of the consumer's demand 
is exercised by anticipation because in our modern commer- 
cial organization supply comes first and very seldom keeps 
demand waiting. The gradations and complexities of the 
system are the guarantee of its smooth working. Every 
wheel of the machine runs on a centre which can give under 
pressure and react when the pressure is removed. It is as 
if our strawberry baskets were passed along so rapidly that 
a truck was filled every few minutes and during the brief 
interval in which another empty truck was being put in 
place the line of men had to go on handling baskets so that 
every porter came to hold three or four in his arms during 
a temporary plethora of strawberry baskets. In business 
practice it is not every man, who has to hold back large 
reserves of supply when there is a threatened glut. The 
chief share of the task falls on one or two great capitalists, 
who reap the chief profits by doing so. But even the 
pettiest trader has to take some small share in controlling 
supply, perhaps by standing out of his money a little longer 


than usual or by working a good deal harder to get his stock 
off his hands. 

The separate identity of " secondary demand " is somewhat 
harder to grasp than that of intermediate demand. This is 
because secondary demand is, in a way, demand for con- 
sumption, but yet it is not demand for consumption in 
and for itself. The consumption it serves is a consump- 
tion devoted to the creation of further commodities and 
ultimately to further consumption. We do not buy hammers 
and chisels for the pleasure of consuming them nor do we 
acquire orchards in order to consume orchards, but for the 
sake of having apples, cherries and pears. The field 
covered by secondary demand is enormous and certainly 
exceeds in variety of articles the field covered by simple 
demand itself. It becomes, therefore, increasingly difficult 
to establish it as a fact that secondary demand is, like inter- 
mediate demand, but a creature and a follower of simple 
primary demand. Yet such is the case. 

Let us again recur to an instance brought forward in 
Chapter VIL of a class of goods, which are especially the 
subject of secondary demand, machine tools, which are used 
in the construction of iron and steel machinery of all kinds. 
The demand for machine tools is absolutely secondary, 
because it can in no sense be primary, as their consumption 
cannot directly serve the pleasure or immediate needs of 
an individual. It may, on the other hand, be secondary 
demand to the third degree as would be the case where 
machine tools were bought by a foundry in Sheffield in 
order to make a rolling-mill; the rolling-mill would turn 
out plates for a ship to be built in Birkenhead ; the ship 
would be engaged in the trade of carrying miscellaneous 
manufactures from Liverpool to New Y'^ork, bringing back 
grain, cattle and other necessaries of life. Owing to the 
immensely wide range of utility of these machine tools they 


become the subject of secondary demand in a vast nnml)er 
of trades, whose fortunes may each have their separate ebb 
and flow at widely different periods. The secondary demand 
for machine tools should therefore be as stable as any kind 
of demand can be. The trade in machine tools, however, 
has its fluctuations, its good and bad times, very much the 
same as any other. If we examine these fluctuations in 
spite of the peculiar complexities of this trade we find that 
they resolve themselves as due to two causes, which act 
with equal force. First, the accidents of the trade itself due 
to temporary loss of balance between the productions and 
efforts of the sellers on the one hand and the calculated 
resistance of the bu3'ers on the other. Secondly, there is 
the general poll of the industries, which require machine 
tools for their own use, of which the number is so considera- 
ble that only perhaps two, shipbuilding and the manufacture 
of motor cars, stand out sufficiently by themselves to be 
recognizable by their effects. To be inside this trade is to 
be engaged in a daily struggle between seller on one side 
and buyer on the other with a momentary halt during a 
time of stress for all to hold up stocks against a threatened 
oversupply and depreciation. 

An even more complex case is presented by the demand 
for land. This may be primary for housing or pleasure or 
secondary for agriculture or industry. Both these demands 
are steadily concurrent and competing. But in so far as 
the demand for land is secondary it is affected by all that 
influences the primary demand caused by the purpose for 
which the land is acquired. There is much personal 
demand for commodities, that is on the margin between 
primary and secondary, as, for instance, for the house and 
establishment of a doctor, the equipment and adornment of 
women in a good position, the use of motor cars for pleasure 
and business. 


The case of secondary is not so simple as that of inter- 
mediate demand and the dependence of secondary demand 
on primary is not so separate nor complete. We can get no 
nearer to formulating a general law than as follows : — 

The Law of Secondary Demand. 

"Demand for a commodity may be considered 'secondary,' 
where it is primarily conditioned by the demand for one 
or more other commodities. Secondary demand for any 
commodity is therefore not only governed directly by the 
laws of demand in the transactions between the sellers 
and purchasers of this commodity, but also indirectly by 
the laws of demand, which affect the ' primary demand ' 
for the other commodities in the construction, manufacture 
or manipulation of which the first-named commodity is 

Note here, as before, that the term " primary demand " is 
used to indicate only another aspect of simple demand. The 
law seems a very cumbrous way of stating the obvious truth 
that the demand for bootbrushes will be affected by the demand 
for boots. But what is quite a simple statement of fact when 
confined to one series of transactions has to be more cum- 
brously framed, when it is a generalization that covers three- 
quarters of all the transactions of sale or purchase that are 
carried on on the globe. When to this number is added at 
least four-fifths of the remaining transactions of this kind, 
which come under the operation of the law of intermediate 
demand, it is approximately safe to say that the simple and 
direct operation of the laws of demand, as formulated in the 
last chapter, is confhiod to not more than the remaining one- 
twentieth of these cases. Yet the laws that govern directly 
this small number of transactions govern also through them 
indirectly all transactions of all kinds. 


The reader must good-naturedly accept from me an apology 
for having laboured this matter at rather a wearisome 
length. I have been forced into it by my reflection on the 
apparently paradoxical nature of these laws of demand 
themselves. If these things be really so, how is it that we 
see their unbiassed operation so seldom and then chiefly 
in cases which have generally been considered abnormal ? 
The only reply to this question is to ascertain, what are the 
limits of the field of their pure operation and careful investi- 
gation discovers it to be extremely small, probably even 
smaller than I have stated. It is equally true to say that 
the field of their indirect operation is universal and that is the 
real basis of their importance. 

We may now consider it demonstrated, that the whole 
field of all commercial transactions, some directly and some 
both directly and indirectly, come within the operation of 
the laws of demand. We begin to perceive the universally 
compelling attraction of the consumer's demand through 
all the complexity of the organization of trade. However 
distant the ultimate consumer of the finished commodity 
may be from the sources of supply and however long and 
involved the way to him is with the aid of countless inter- 
mediaries, through all these channels, where the streams 
of goods flow, he and his fellow consumers exercise a 
steadfast suction, which must be of approximately equal 
pressure through the whole system. A market, a complete 
world market, has only one pressure throughout its extent. 
That equal pressure is obtained by the fluctuations of price 
continually kept in motion by the eagerness of gain. The 
price in the world market of cotton goods must tend to be 
equal everywhere for the same quantities and qualities 
subject to the special increment for local expenses which 
have to be added on, including freights, duties and special 
selling costs. 

L.S.D. K 


So we find that the amount of cotton-seed used in the 
Mississii)pi valley is settled every year by a rude un- 
conscious calculation of the amount of grey, bleached 
and 2)rinted goods to be used in America, Europe, tropical 
Africa, India and up over the remotest "likin"* barrier on 
the Yang-tse-kiang. It may be called unconscious, because 
the whole calculation very seldom comes into a single mind, 
but it is the outcome of the automatic hint and instruction 
given by each link in the chain to the other. The vehicle 
of that automatic hint is price, which is very different from 
and often directly opposed to the verbal information, which 
the buyer may give to the seller. The Manchester merchant 
may talk of a threatened glut of cotton goods at Shanghai 
and Canton, yet, should he be all the while buying steadily 
for the Eastern trade with cotton at Id. a pound, there 
will be an apparent contradiction between his theory 
and practice, which the experienced man of business will 
not be slow to detect. 

One of the results of our present study we may take to be 
the right appreciation of the enormous and costly selling 
machinery required in all trades and the vital utility of the 
information thus expensively obtained by the linked chain 
of intermediaries from the consumer and handed on to the 
producer. The result is the simplification of function by 
the elaboration and perfection of the instruments. Looked 
at as organized human machinery the system is more 
complex than any other product of our civilization and 
vastly more so than our ineflicient and calculated institu- 
tions for the purpose of war or government. It is directed 
automatically by a subconscious intelligence, which, as a 
whole, is greater than the most highly perfected mental 
factor in the long series of its parts. The final purpose of 

* Chinese provincial duties. 


this intelligence, which it pursues with an intense energy 
and tenacity with only occasional faltering from success, is 
the maintenance of the balance between the sacrifices of the 
producer or seller and those of the buyer or consumer, a 
purpose, which it carries out by a double method, by the 
control of supply and by the manipulation of demand. 




Having now come to the crowning point of our argument, 
before we begin to examine the elaborate seUing machinery 
of the commercial world let us recapitulate what we have 
ascertained to be the true function, the necessity and the 
field of operation of this balancing power. Taking these in 
reverse order, the field of operation covers all transactions 
of sale and purchase whether governed by simple, secondary 
or intermediate demand. The necessity for its exercise is the 
erratic and often incalculable nature of the laws of demand, 
which in a preponderating number of cases check and 
balance each other, but in a large minority of them require 
to be controlled by professional agencies. The function of 
this machinery is the maintenance of the terms of the great 
bargain between the sacrifice of the producer and the sacri- 
fice of the consumer within such limits as are supposed to be 
covered by the ordinary law of value, as stated by Mill. 

We have to picture our present situation as growing both 
logically and historically from the direct bargain between 
one and one. Each individual then exchanged great 
exertions for little satisfaction and the process waa 
psychologically complex. Afterwards the mental process 
became simplified by the elaboration of the mechanism. 
Formerly one man would exchange a spade for the sheep 
of another and neither had many choices. Nowadays a 
working man will exchange two hours' work over a lathe for 
a couple of pounds of beef-steak, or a seat at the theatre or 


a month's insurance. A banker can exchange three hours 
in an office for a motor car or a summer's hoHday or a 
thousand other things. The evolution of our civiHzed 
industrial and commercial system imports increased satis- 
faction in consumption, diminished exertion in production 
and greater stability. 

But the stability is not absolute. It is usual and we 
are accustomed to see it, and we have very little apprecia- 
tion of the forces arranged to preserve it. Commercially 
we are in a condition of stable equilibrium within certain 
limits and unstable equilibrium beyond them. Our system 
resembles those natural phenomena called rocking stones 
which can be swayed by the hand of a child until they 
topple over, when it would require immense mechanical 
force to restore them to their original position. Continual 
fluctuations are the law of our economic being in order to 
meet the characteristic requirements of human nature* and 
these perpetual changes have to be watched by powerful 
and untiring agencies to guard against their accidental 
coalescence in any direction toward a fatal tendency to 

Over the area of these fluctuations something like Mill's 
law of value presides, so long as fair weather continues, 
but when storms arise its influence vanishes and more 
natural and more violent conditions prevail. It describes 
the operation of what has become a commercial habit, 
which is not simple and due to natural causes, but is 
essentially complex and maintained only with the aid of 
outside artificial support. Its terms are rightf neither in 
letter nor in spirit. The economic theory, of which it is 

* See Cap. I., p. 10, and also the law of final bargaining -Handy 
Table, p. 276. 

t I cannot here interrupt my argument in the text, which tends to 
show what are the limitations of Mill's law of value. But it is 


the central point, posits competition as universal and 
regulative, whereas the latter is often disrupting and 
artificially limited in many directions. In short, its 
fundamental principles presuppose an economic perfecti- 
bility based on purely theoretic grounds, they predict by 
implication a tendency, which historically is not being 
realized, and they logically assume, as universal, an 
apparent order of things the true description of which 
requires much deeper analysis. As I find myself forced by 
the argument into an attack on what has been for long 
the corner-stone of English political economy, I must at 
least restate it for consideration. Mill's law of value 
declares, that " demand and supply, the quantity demanded 
and the quantity supplied, will be made equal. If unequal 
at any time competition equalizes them." The process of 
competition is further described as being one that brings 
fresh buyers, as prices fall, and brings fresh sellers, as 

equally true that the law itself is a self-proved absurdity, as it is 
stated. Take the crucial statement that demand and supply will be 
made equal. By implication, therefore, they maj' be unequal, and 
this supposition is made immediately afterwards. The law also 
defines demand as being the quantity demanded. Now, it is a well- 
known maxim of economics that economic demand is not mere want, 
but effective demand — that is, demand with money in its pocket. 
Further, at any given moment economic demand, in so far as it is a 
quantity, must be equal to the quantity of supply, otherwise it is no 
longer effective. Mill's proposition, therefore, amounts to this : two 
things are so defiiiod that they are necessarily equal, but are also 
presumed to be sometimes unequal ; when the eventuality so defined, 
as impossible, occurs, it must be rectified by a process which, as 
described, is contrary to general experience in a large number of 
cases. There is no definition of demand .jiossible, which does not 
ultimately make it e([Uiil to sujjply, and therefore the same as supply, 
unless the fact is recognized, that demand is not a quantity, but a 
psychological state of miml in the buyer or buyers. AVhen demand 
is properly defined, MiU'-i law becomes valid within the limits, as 
stated in the text. 


prices rise. If this means anything, it means that to get 
more buyers you must continue to lower prices and to get 
more sellers you must continue to raise prices. 

Now every business man knows without thinking that 
these propositions are true within limits. But we may say 
further, that every business man has it bred in his bones> 
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 


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. 


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 


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 

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." 


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 


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. 



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 


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 

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 


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. 


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 

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. 


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 


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 

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 


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." 



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 


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. 


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 


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 


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 


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 


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. 



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 


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 

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 


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 

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. 


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 

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 


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 


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 


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 


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 


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 



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 


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 


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 

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 


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 


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, 


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 

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 

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 


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 


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 


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. 


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. 


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 


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 

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. 


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,<j;hten by 
their action a whole community of weak speculators, who 


are dependent on the same banks for loans on call, the 
result may be a frightful drain on currency, having results 
far and away beyond the mere immediate need of money 
required by those who set in motion the machinery of 
exhaustion. There are many people who believe that some- 
thing similar was the cause of the disastrous crisis in 
November, 1907. which started in New York. 




The doctrine of business procedure evolved from our 
argument is this, that with the advance of the world 
towards ever greater and cheaper productiveness, requiring 
always larger aggregates of capital, the initiative in exchange 
has to be taken more and more by the seller. This is true 
whether the initiative is taken by producing goods, as in 
agriculture and the textile trades, or whether, as in ship- 
building and engineering, there are immense plants and 
highly trained mental and manual operatives kept waiting 
for orders, or again, as in the learned professions, the pro- 
duct of able and expensively trained brains is offered for 
sale. Under all circumstances the seller has to take the 
risk and wait cap in hand to be employed or to dispose of 
his goods. It is quite characteristic of our world that 
appearances should be often the reverse. Everywhere the 
sellers are consciously or unconsciously organized together 
to conceal their natural weakness ; they have to be. The 
consumers, on the other hand, secure in their confidence 
that the other players will have ultimately to lead up to 
their teiiace, remain with exceedingly few exceptions 
unorganized in their masses ; they are the general public. 

We have considered in the last two chapters that part of 
the sellers' task which consists in holding back stocks or 
checking supply either by automatic and half-conscious 
co-operation or by avowed combination. We have now to 
consider a part of their duty which is not independent of, but 


is supplementary to the other, and when well done renders 
it to a great extent less necessary. This duty is the 
scientific study of and solicitation of demand. In Chapter II. 
I had occasion to remark that " if demand were left to itself, 
supply in business could be undertaken only by very rich 
individuals or by powerful corporations." By that I meant 
that although control of supply is the most effective and in 
any crisis the only effective way of stimulating demand and 
maintaining prices, yet the method is often so expensive, 
and the capital required so large, that without some power 
of influencing demand the small producer, except perhaps 
in agriculture, would be extinguished. The small producer 
is always to some extent being, and in many trades has 
been entirely, superseded by large corporations, yet he still 
holds his own in others, and will continue to do so from the 
fact that he is able more easily to follow the minor vagaries 
of demand and to maintain the personal touch with his 
customers, which the large firm can never do. In fact, 
there are many industries requiring considerable capital in 
the aggregate, where the large producer is at a disadvan- 
tage, and sometimes cannot maintain his footing, such as 
photography, millinery, market and nursery gardening, 
high-class tailoring and shoemaking, and many others. 
It is in these trades especially that the art of understand- 
ing the customer's wants and of soliciting his attention has 
been raised to what would be considered, if it were a liberal 
study, to be a high level of psychological analysis. 

One of the causes why scientific economics seem so unreal 
to the practical man, apart from errors in theory, which he 
might not himself be able to correct, although he might 
suspect their existence, is the strangeness of an atmosphere, 
where selling things is taken for granted. In the imagined 
world of the books, goods which are produced pass to the con- 
sumer without comment. In the practical world of commerce 

N 2 


the prevailing impression conveyed by the perpetual efforts 
of everyone is that goods are everywhere and that cus- 
tomers have hidden themselves. Take, for instance, the 
universally current expression of " getting business " ; that 
does not mean making shoes or marble clocks or cocoa, but 
finding customers for shoes, clocks and cocoa. It shows the 
prevailing mental pre-occupation of everyone that a man 
who is reputed to be "good at getting business" has ipso 
facto a ready market for his services in any line of commerce 
that he cares to undertake. The man who has that capacity 
and can plan to make production subservient to it has an 
easy road to fortune before him. It is the most valued 
talent in business and no one can be entirely without it who 
wishes to avoid failure. A few have the talent inborn in 
them,* but most of us have to train our judgment painfully 
by experience to recognize where, when and how to sell the 
things we find it easy to make. A manufacturer starting a 
mill or extending his plant has to rely on this faculty in 
another form, because if he commits himself largely to 
capital expenditure in producing for a market, which will 
not be able to absorb his goods, ruin and no less is inevitable. 
I imagine that the financiers who formed the United States 
Steel Corporation, which we considered in the last chapter, 
•would have made a much better bargain if they could 
have bought Mr. Carnegie instead of buying from him his 

The ability to judge a good market and to supply it 
judiciously is, however, a higher order of this talent and can 
hardly be included within the phrase " the manipulation of 

* A humorous exaggeration of this is contained in a story related 
very likely untruly, of a man who made a large fortune. He is 
supposed to have said of himself: "Some peoj)lo think me not very 
bright ; and I can not make a good speech, nor tell a good story, but 
I can sell a man u bad i)icture, which ho doesn't want." 


demand." This term should appropriately be applied to 
the more common mechanism of securing, retaining and 
humouring customers. One can classify the methods of 
doing this as three. The first is to live with your customers, 
make them your friends and build up a personal connection 
by exchange of favours, custom and hospitality. This was 
probably at one time the universal and sole way of doing 
business and largely prevails still in old-fashioned countries 
and small communities; but it is being rapidly broken 
down by the abundance of modern production and the vast 
sphere of exchange which is required by the modern system. 
Another method is to seek out your customer, wherever he 
be, either personally or by means of an agent or employe. 
The third is to use all the known arts of inducing him to 
come to you. 

Seeking out the customer is generally adopted, when the 
individual transaction brings a profit, which makes it worth 
while, and such a method, therefore, can be employed only 
to sell high-priced articles such as ships, engines, guns, 
advertising, &c., or in the case of goods ordered in large 
quantities by wholesale houses. It used to be called com- 
mercial travelling, canvassing or drumming, but these terms 
have become vulgarized, so that the higher branches of the 
occupation, where high salaries and commissions are earned, 
choose non-committal titles such as " representative " or 
very commonly work on their own private cards. The call- 
ing is an unpleasant and laborious one and requires more 
pertinacity than any regular occupation that I know of, but 
it is the backbone of wholesale lines of business and of all 
the richer trades. At the present moment there is no 
respect in which Great Britain is at such a disadvantage 
with her two aggressive competitors, America and Germany, 
than in her comparative lack of highly educated adaptable 
young men to open up new industries for new markets and 


to extend the old ones. Li the case of Germany there is a 
large supply of well-taught semi-cosmopolitan young men 
ready to work laboriously for moderate salaries. In the 
case of America eminence in this occupation is lavishly 
rewarded and attracts a class of superior talent such as 
would not for a moment undertake such work in this 
country. Besides it is one for which our present university 
education is peculiarly unfitted. 

Attracting the customer to the seller certainly absorbs 
annually more expenditure that can be conceived possible 
by the uninitiated. I have myself made various estimates 
from data open to all men in the newspaper business, but 
found none which satisfied me as covering the whole ground. 
The art of advertising is not confined only to newspapers, it 
embraces countless forms of printing — the poster, the leaflet 
the pamphlet and the catalogue. It does not shrink from 
using hoardings, walls, rocks, trees, the scenes of theatres, 
the interiors of our books, houses and travelling carriages. 
It often appeals through the ear as well as through the eye, 
so that to track down the immense sums regularly spent 
every year in each branch of advertising is simply 
impossible. I can say no more than that it is difficult to 
over-estimate it. Taking only tbe daily newspapers in 
London, of which there are about twenty, I have calculated 
that their advertising revenue was at least i;'l,000,000 a 
year, and from separate figures, which I have seen, of 
advertising space used in Chicago dailies I think the 
revenue there is very much the same. In New York the 
revenue would be still more than in either. The revenue 
of the weekly papers in all three cities would be larger still, 
as there are an immense number of them and trade and 
technical organs, as well, have revenues that sometimes 
nearly equal those of the richest daily papers. As I should 
calculate the whole annual newspaper advertising revenue 


of London publications to be not far short of £10,000,000, 
I am quite prepared to believe that Mr. Thomas Russell, 
president of the Incorporated Society of Advertisement 
Consultants, was not very wide of the mark in estimating 
that a hundred millions sterling are spent annually on 
advertising in this country. That is a very considerable 
figure and it appears still larger when we note that the total 
engineering industries of this country, including shipbuilding 
and motor factories, had an output for 1909 in round figures 
of i; 150,000,000, of which ^70,000,000 was due to the cost 
of material. Their net output of £80,000,000 is less than 
the advertising bill of the United Kingdom. 

It is probable that the United States and Canada together, 
with more than double our population, an immense area to 
cover and a pronounced aggressiveness in business methods, 
would spend at least £250,000,000* ; and taking Germany, 
with Switzerland and industrial Austria, as one unit about 
equal to this country, and the rest of Europe as another unit 
of the same size, we may reckon a gross total of £550,000,000 
per annum as expenditure in advertising for Europe and 
North America alone. As I should consider the amount 
spent in advertising pure and simple to be probably less 
than half the total selling costs on the average — because we 
must remember that many articles are only lightly, if at all, 
advertised, which yet have considerable selling costs — we 
arrive at a minimum of £1,200,000,000 as the annual 
selling costs of the manufactures of the predominantly 
producing part of the globe. Of that part of the world 
^Yhich we have left out of our reckoning only South Africa, 
Australia, parts of Japan and South America can be con- 
sidered to be organized commercially after the modern 

* On this point I have been able, since writing the above, to consult 
two American advertising experts on this figure and they told me that 
they would put the amount much higher. 


fashion with great productive power and free modern habits 
of exchange. 

Beyond putting forward this rough guess at a gross 
figure, we need not now go back to consider other selling 
costs, which have been dealt with elsewhere, but turn to 
ascertain, if possible, the meaning and aim of the six or 
seven hundred millions a year which the world spends in 
advertising its productions to itself. It is the greatest 
mystery in business. It would surprise the ordinary lay- 
man to know the immense amount of thought and pains, 
which are steadily given to this great industry, an industry 
which is carried on under similar conditions in all the 
countries of the globe. Why is it necessary ? he would be 
inclined to ask, if he knew only the outside of the facts ; 
or again, could not some central organization be contrived 
which would do the work for far less cost ? He would sus- 
pect, and quite rightly, that a large amount of money 
spent in this way had gone to waste, and yet he would 
be surprised to learn that those best entitled to an opinion 
on the value of this product or commodity of publicity 
would reckon that though millions of pounds are annually 
wasted through bad handling, yet the net gain obtained by 
this expenditure was of great benefit to all. Even the 
bunglers make something out of it, and, if their own adver- 
tising does not help them much to sell their goods, they are 
continually being helped by the advertising of their rivals. 

Let us consider a case that we often hear put forward on 
this question, and that is, that advertising is only a bad 
habit which has grown up unnecessarily through the greed 
of individuals attempting to overreach one another, that 
it is a disease which has created its own want and that 
there would be a great gain of wealth to the state, if by one 
sweep it were abolished and all buying and selling should be 
done through immense official catalogues issued by the Board 


of Trade or some state department in each country. My 
reply to this would be that no state department could 
undertake so complex a work efficiently, and that during 
the first fortnight in which it was attempted indirect and 
direct advertising would rise up right and left in the teeth 
of any enactments or even of penal legislation. Even if 
we all of us acquired our goods from state-producing 
agencies, we should begin exchanging them in a week; 
for successful exchange persuasion is needed, and advertis- 
ing is nothing more than an extremely artistic form of 
persuasion. How paradoxically successful it is anyone can 
realize, if he likes to ascertain how many articles he is using 
habitually at home, whose names he has long learned to 
detest from odious advertisements. Let him try to stop 
using them once for all, and see how long the effort will be 

What may be called the philosophy of publicity is a very 
difficult thing to grasp. Its power is not confined to busi- 
ness, as it is the essential requirement of a public career, 
and it exercises immense influence in politics, literature, 
the arts and the learned professions. With regard to its 
influence on business, which is obviously immense, it is 
rather puzzling to see how comparatively modern an orga- 
nized system of securing publicity appears to be. It seems 
to have grown to great dimensions rather later than the 
development of the factory system of production, and to be 
therefore not necessarily connected with it. My own incli- 
nation is to regard advertising in its modern extent as an 
outcome of the increased cost of selling, which came not 
immediately after great producing developments but in the 
next generation. It is the accomjDaniment rather of our 
second stage of development, when vastly improved com- 
munications brought together all the markets of the great 
staple products in the world. Then began the days when 


a glut was not an occasional and unintelligible accident, 
but a daily present danger, which had to be met and 

Abundant production did not at first exhaust the absorp- 
tive power of the world. The world was still hungry. Even 
when the civilized centres of the old countries came to be 
satiated there were de^^endent centres still hungry and after 
Europe was no longer responsive to the productive flood, 
eager exploiters had some pleasant years chasing the 
remaining hunger of the world and its attendant security 
of profit for themselves into odd corners of the East. 
Those were the great days for the Manchester merchants. 
In that distant time a yard of calico was still a yard of 
cloth, something not too familiar to be valuable, nor too new 
and strange for the peasant to appreciate, but quite good 
enough to remind him of what was worn by kings and 
princes. Those were the days when, as Turgenieff said of 
his own country, if two and two did not exactly make five, 
still they made four more magnificently than they did in the 
sophisticated West. 

Modern advertising was probably less valuable and almost 
useless in the golden days, when there were still hungry 
markets. Goods found their advertisements waiting for 
them. The necessaries and mild luxuries of life were scarce 
enough for any moderate supply of them to be a sensation, 
which was carried from village to village even more quickly 
than the eager traders could go. The profits of this early 
trading were enough to override duties and likins and all 
the uncertainties of fluctuating currency. But all good 
things have an end, and competition began to reach the 
remote as well as the nearer East. Home markets were 
already supplied, and then the struggle began between the 
producers themselves for what custom they could get from 
the inadequate markets of the world. How this difliculty 


was solved in its severer stage we have seen in the last 
chapter : it was met by the control and restriction of supply. 
But side by side with the schemes for control grew up all 
the devices of advertising, an art which has steadily increased 
in importance, and absorbed greater capital and greater 
annual expenditure in every year since modern industry has 
become what it is. I see no limit to the amount of money 
that can be spent in advertising, so long as the world 
continues to grow richer. While it seems to be costing 
more and more to sell things, it is equally true that the 
more that is spent in selling them the more profit is 

Advertising began by aiming at mere publicity ; then it 
became combative and assertive of individual superiority 
over rivals ; as this grew stale it assumed blandishing and 
seductive methods, flattering the customer and appealing to 
his intelligence, as if this would be likely to reach any one 
who had any. Later it grew to trust largely to bulk, mass 
and the impetus of astonishment. I wish I could stop 
here in the catalogue of doubtful devices, but it is undeni- 
ably true that, with the customer's connivance and largely 
in order to suit his natural weakness, misrepresentation has 
become a chief part of the advertiser's stock-in-trade. 
While, however, I use a term with a disreputable connota- 
tion, I expressly exclude from present consideration all dis- 
honest advertising, of which there is unfortunately a good 
deal, and regard only those forms of misrepresentation 
which the customer himself invites and habitually assists in 
carrying out. With the name and brand of the article 
known, with curiosity aroused, desire must be stimulated 
and a quite innocent form of misrepresentation is employed, 
which is nothing worse than vulgar, and would seem to be 
stupid, if one could not perceive the psychological process 
behind it. The article must be described as " the best." 


Now about the real thing, which can correctly be described 
as " the best " of everything, it is obvious that in every case 
it is limited in quantity and could not possibly be served 
out to all customers. It is not so obvious, but still in 
nearly all cases true, that the majority of customers do 
not need or want " the best " of everything. Their circum- 
stances have never enabled them to be educated up to appre- 
ciate or even to tolerate it. What they require is something 
quite different : a sound and reliable quality of goods, to 
which they have become accustomed. But many of them 
will throw away their money rather than admit that they 
wanted anything but " the best," * thus inverting the real 
proposition, which is at the bottom of their minds in every 
case, that the kind and quality of any article which they 
themselves want is necessarily the best. It is the con- 
tinued statement of this proposition, without the qualifica- 
tions which could make it absolutely instead of relatively 
true, that the customer requires from the trade. 

And in that way nearly all trade is from a psychological 
necessity dependent on a habit of misrepresentation, 
which is both absurd and dangerous. It opens a door 
to an insincerity which, properly understood, is quite 
harmless, but misunderstood becomes the own sister to 
cheating and dishonesty. It gives a rank flavour to the 
forms of business and is one of the reasons why, when 
we meet anyone connected in the most vague way with 

♦ This is painfully true of the poor. Wheuever they go outside 
their own routine of expenditure, where tliey can judge goods for 
themselves, their wilful extravagance is only explained by their 
pathetic desire to be sure that, if they risk money on luxuries which 
they do not understand, nothing less than the best is good enough for 
them. In America, where the skilled artizan rises rapidly to comfort 
and more, his extravagance, when he spends, is amazing. A common 
phrase on his lips is : " The best is good enough for me." But the 
ai-ticle is rarer than the expression. 


a name well advertised in trade, we summarily convict 
him of vulgarity, until at least we know him better. 

It is the same natural human weakness, which I have 
touched upon already in considering the law of substituted 
demand,* but it affects many more transactions than those 
which are covered by that law. In the case of substituted 
demand the buyer is himself dimly conscious that through 
want of means he has already missed " the best," but 
he swallows the fable that he is able to buy more cheaply 
the " just as good." In quite a number of cases, however, 
the buyer holds firmly the braver illusion, that what he 
is procuring is "the best" without qualification, and he 
will look upon those who buy more expensive and delicate 
qualities as the victims of their own vanity or of mere 

Economically speaking, the function of all advertising 
and of all solicitation of demand is to maintain suction 
during the lapses between periods of natural recurrence of 
demand. It induces demand at a pressure, which is more 
or less even, instead of permitting it to come fitfully at 
moments when the organization of supply is ill prepared 
to meet it. It is therefore a very valuable part of the pro- 
ductive machinery of the world, and if not so completely 
effective in maintaining or raising prices as a combination 
to control supply, it is more steady in its action, and is less 
liable to gross abuse. But it cannot be denied that, like 
the control of supply, it has its own dangers, and while 
doing a beneficent work within limits, is also the parent of 
much humbug and even of fraud. 

This necessarily brief and very summary review of adver- 
tising would be incomplete without taking note of a strong 
and growing tendency for the element of misrepresentation 
in advertising to become stereotyped and conventional to a 

* See Cap. X., p. 112. 


point where, with sensible people, it is almost harmless. 
Such congealed phrases as " this highly desirable residence," 
" valuable and unique furniture," or " alarming sacrifice," 
have so lost their power to deceive that they have acquired 
instead a kind of antiquarian charm, which we could now 
hardly do without. There is growing up a fresher ten- 
dency to be instructive in a fatherly manner, especially 
in technical journals, and to undertake the free educa- 
tion of the prospective customer in the general interests 
of science and industry. Much of this advertising in the 
hands of able people with newer methods has a high educa- 
tional value, but ia dealing with the ignorant or lazy customer 
the same opening for misrepresentation remains to the seller 
as before. A good advertisement writer can be employed 
by a bad soapmaker, and it is odds that as far as advertising 
goes and from the point of view of starting a new trade, he 
will make a better show than the expert in soap who neglects 
his own advertising. But such a snatch success cannot be 
depended upon to last. The great regulating influence in 
business is the solid fact that sound and steady service to 
the public will gain the public confidence, provided that the 
supply of capital will suffice for the time in which it is neces- 
sary to gain that confidence. For this purpose a certain 
amount of advertising is necessary and will diminish the 
period of waiting, and when this advertising is judiciously, 
and perhaps brilliantly, done, very great rewards are 

In progressive communities it remains to a certain extent 
a reproach against a firm or individual who does not adver- 
tise through the ordinary channels, whatever they may be. 
Not only does his particular public and circle of customers 
remain without the necessary information about any new 
departure of the silent trader, but the latter misses the 
necessary influx of new customers, and, besides, loses caste 


to some extent in the small world of buyers and sellers of 
his particular trade. The chief proof of the value of adver- 
tising is that it pays a high rate of profit when extremely 
well done, and that those who neglect it entirely cannot 
hold their ground permanently against their competitors. 

There is one odd thing about advertising in business 
which advertisers themselves are only beginning to under- 
stand, and that is, that although the practice grew up as 
the result of individual attempts to gain an advantage over 
immediate competitors, the general consequence has been 
actual increase of trade to all. Enterprise of this kind has 
been found to act like yeast in enlivening the whole trade, 
besides improving the prospects of the particular firms who 
undertake it. Tbis fact is the nearest thing to proof that 
we can urge against the frequently expressed opinion that 
all advertising is a waste of money. Consequently it is of 
the greatest advantage to a particular trade to be well 
represented by a press of its own, sufficiently wealthy to be 
independent of interested pressure and to maintain a high 
level of technical excellence. Such a press, while having a 
valuable educative influence inside the trade, is not a mere 
parasite as regards advertisements, but really assists the 
development of its clients. This fact is now recognized as 
a cardinal truth. 

In the same way it is of material importance to a country 
and a community that its daily press should be prosperous 
enough to be moderately disinterested. At one time in this 
country, especially in the provinces, the daily papers were 
sufficiently wealthy and well-established to afibrd to main- 
tain old-fashioned standards of disinterestedness, which 
were very much superior to the general level of the com- 
mercial conventional code. They were thus often enabled 
to exert an efi"ective opposition to encroaching charlatanry 
and dexterous ambiguity of malpractice, which was much 


more effective than the influence, not to be despised, of a 
private example of personal integrity and rigorous honour. 
But time and commercial pressure has changed all that, 
and it is questionable now whether it is not true in this 
country, as it has long been true in America, that if ordinary 
private commercial enterprise is at all behindhand in recog- 
nizing the proper scale of equivocal blandishment required, 
as essential to progressive methods, it will be able easily to 
find suitable instruction in what is lacking from many 
members of an energetic up-to-date daily press. 



The laborious and concerted efforts of the selling agencies 
of our commercial system are not always equal to their 
exacting task. They break down temporarily, first in one 
direction and then in another. At occasional intervals they 
are not quite up to their work all along the line. Under 
such circumstances, although our nexus of trade relations 
is now too widely and perfectly organized to suffer a general 
paralysis, yet there ensue, sometimes over a limited and 
sometimes over a wide area, periods of sluggishness and 
hesitation in its mechanical grinding out of sacrifice and 
reward, of risk and profit, which amounts to much the same 
thing as a partial failure, while at the same time appearances 
of loss are skilfully concealed and treated as non-existent. 
These periods are always characterized quite shortly by 
manufacturers and traders, in current language, as periods 
of over-production. Now, I recollect that some twenty to 
twenty-five years ago, when I learnt political economy at 
school and college, there was a phrase, still current in the 
books, that such a thing as general over-production was 
impossible, and that the term itself was an abuse of language. 
Production meant the production of goods ; it followed that 
there could not be too many goods, and that, to use another 
phrase equally current, since goods in the long run can 
only be exchanged for goods, all that was wrong with the 
world was only a temporary break-down in the machinery 
of exchange, which a little common-sense would soon put 
right without any real loss. 



There is an appearance of philosophic finality about such 
a phrase as " goods can only be exchanged for goods " which 
has kept this venerable fallacy alive in academic circles in 
spite of the renewed and ever more emphatic teachings of 
experience. The actual and literal exchange of goods has 
been dead since the days of barter. The real and philo- 
sophical exchange of goods for goods is, fortunately for 
most of us, a rare thing, even by means of money, because 
only a small fraction of the population of the world are 
really producers of goods and therefore solely entitled, under 
this theory, to receive goods in exchange. What we all have 
to make, in one way or another, are sacrifices, the sacrifices 
of the producer, of the exchanger, of the subordinate helper, 
and of the capitalist and organizer in exchange for similar 
sacrifices by another group of similar people. The philo- 
sophic difference imported between the selection of the right 
and the wrong unit as the basis of the theory of exchange is 
immense. In the one case we have a concrete article, a 
single commodity, professing to embody and supposed to 
possess an intrinsic value, which, as long as deterioration 
has not set in, remains a fixed quantity prepared to wait 
an indefinite period of time for the occasion of a suitable 
exchange with any other commodity possessing a similar 
amount of the same immutable characteristics. Philo- 
sophically here we see no room for the influence of the 
element of time. In practice it is far different ; time is of 
the essence of the contract in any system of exchange. If, 
in the other case, we select as our essential unit of exchange, 
as we have done in our chapter on " Wants and Sacrifices," 
not goods but sacrifices, we here import time into our unit, 
as a function of value, and we see at once that a bargain 
completed at the end of May may be profitable to both sides, 
while the same bargain effected early in August may be to 
each a loss. Selecting, for instance, two such comparatively 


imperishable things as a file and a book on political economy, 
each worth a shilling, it may at first sight seem economically 
a matter of indifference as to when that magic shilling shall 
first buy the file and then the first guide to wealth, but look- 
ing behind these humble objects at the sacrifices enshrined 
in each we become aware that the filemaker * is eager for 
knowledge, while the author is hungry for bread. In either 
case to wait three months is a clear appreciable loss. Now 
general over-production means that all those who made the 
sacrifices involved in the producing and marketing of all 
kinds of goods have to wait a little while longer than they 
counted on doing before they realize the rewards which they 
expect and which custom has taught them to insist upon as 
their due. Some cannot wait and have to let go their profit 
and even something more. 

A telling illustration of the unfortunate and absurd 
dominion of the false doctrine of the impossibility of general 
over-production is supplied in an able bookt published last 
year by Mr. Beveridge, which is devoted entirely to the study 

* The filemaker and the author ai'e here not individuals, but 
representatives of sacrifices made by groups of people on each side. 
I have had to give the illustration in a kind of shorthand, so as not to 
interrupt the argument. Of course, in a single case neither one 
nor the other will get the whole shilling, but only a fragment of it ; 
nor will the same shilling probably be a sufficient instrument for both 
exchanges. But the essential principle remains the same. If files 
are sold too slowly, the filemaker will be thrown out of his job. If 
books on political economy are a drug on the market, the author may 
starve for want of his royalties. This illustration also tends to show 
that, even if goods were ultimately exchanged only for goods, which 
is not the case, delay would still import a loss on both sides. Suppose 
that two imperishables, such as gold and platinum, are to be exchanged 
for one another, the delay of a day might be a barely appreciable loss, 
but extend the period to five months or five years and the loss becomes 

t " Unemployment," by W. H. Beveridge. 



of this very question of over-production with reference to 
its relation to the allied question of unemployment. It is 
necessary to quote the whole extraordinary passage in order 
to demonstrate how some people are forced still to bow in 
the house of Pvimmon, even though their reason resents it. 
I must further explain that the quotation is not an isolated 
and accidental dictum having no relation to the general argu- 
ment in which it occurs, but is organically embedded in a 
prolonged discussion of several theories as to the causes of 
" general over-production," a term which recurs in one form 
or another throughout the argument. Mr. Beveridge, in 
closing his criticism of a specific theory of the causes of 
over-production, concludes : " Though, however, the theory 
just propounded does not in itself completely explain simul- 
taneous over-production followed by stagnation in practically 
all industries, it makes such a result probable. At the same 
time it in no way offends economic doctrine as to the impos- 
sibility of general over-production. It is no doubt true in the 
abstract, since commodities are only produced to exchange, 
and since ultimately they exchange for one another, that 
there cannot as a permanent state of affairs be over-produc- 
tion of all the good things of life, while any single want 
remains unsatisfied." 

I have already dealt above with the point as to whether 
commodities do ultimately exchange for one another, and 
it is unnecessary to do more than repeat that this is not the 
case; but referring back to Mr. Beveridge's original first 
two sentences in the passage I have quoted, it is plain that, 
unless " simultaneous over-production ... in practically 
all industries" differs in some mystic way from " general 
over-production," one cannot be probable, while the other 
remains impossible. As a mere matter of words, Mr. 
Beveridge contradicts himself in two consecutive sentences. 
The explanation is that in the first sentence he uses the 


common word, over-production, in the ordinary sense that 
we all do in conversation and in business, and in the other 
he employs what he considers to be an economic term with 
a special meaning, attributed to it without rhyme or reason, 
which he has failed to analyze. It is one of the traps which 
economists have laid for themselves by not observing that 
experience in business will ultimately lead to a compre- 
hension of the true validity of reasoning that underlies the 
use of many terms in current use. 

In an earlier chapter I observed with reference to another 
current economic phrase : " price tends in the long run to 
approximate to cost of production," that this might be 
brought within the limits of truth and elevated to the 
dignity of a platitude by limiting all the operating conditions 
in one direction and by stretching the definition of the 
terms involved in the other. But such allowance cannot 
be made for the absurd dictum that general over-production 
is impossible. This is not only contrary to ordinary 
experience and repugnant to the common use of language, but 
it is philosophically wrong as embodying two economic 
theories, neither of which will hold water. The first is that 
what are ultimately exchanged are goods and not sacrifices, 
and the second is that goods have intrinsic value, ignoring 
the element of time as a function of value. 

The point is so important that we must examine another 
concrete case. Let us suppose a factory of boots with a 
normal rate of output and a chain of traders and a market 
absorbing normally a production of 5,000 pairs per month. 
If an unfavourable fluctuation of demand strikes this market, 
so that in a given month only 4,000 pairs of boots are 
absorbed at the customary price of 8s. 6d. a pair, there 
remain on the hands of the retailers 1,000 pairs unsold at 
the end of the month. The remedy for this unfortunate 
circumstance, for it must be considered an unfortunate 


circumstance, is either to lower the price in order to increase 
the demand and sell the boots off at once or to carry over 
the 1,000 pairs as stock into the next month. The first 
remedy is called cutting a loss and is really equivalent to a 
depreciation of the goods. But in practice it is seldom 
attempted in the retail trades, where final demand has to 
be met and controlled, for two reasons. The first is that 
the retailer is too poor, as a rule, to bear all the loss him- 
self, and secondly he dare not spoil his future market for 
boots by lowering the price to 7s. Qd. or 7s. When he is 
driven to such a course, as he is sometimes, he covers up 
his real action by a host of devices such as privately 
reselling at a loss to traders with a cheap connection or 
advertising mammoth bargains and alarming sacrifices and 
employing all the arts of tbe manipulation of demand. His 
more usual practice is to hold the goods over for sale during 
the next month, at the same time cutting down his orders 
for future delivery to his wholesaler B., the next link in the 
chain. Similarly B. holds his own stocks and cuts down 
his orders to C, who hands on his share of the loss 
down the line to the producer G., who, if necessary, cuts 
down production. That is temporary over-production in 
that trade. 

Now supposing, as is probable, that the retailer or 
retailers succeed in selling their balance of 1,000 pairs of 
boots witliin the next fortnight and then renew their usual 
orders, while trade renews its briskness. What has 
happened to the value of those 5,000 pairs of boots ? 
The stock was as good as ever ; therefore they had not 
deteriorated. They were sold for 8s. Gd. a pair as usual ; 
the stock was therefore not depreciated. But the value of 
5,000 pairs of boots, sold over six weeks, is less than 
the value of 5,000 pairs sold over one month, as every 
trader knows. What happened to those 5,000 pairs of boots 



during those six weeks was " devaluation "—I coin the word 
in strict analogy with deterioration and depreciation todenote 
something not covered by these terms but economically 
more important than either. The delay of a fortnight in 
their sale is the exact measure in a time-equivalent of their 
fall in value. In other words, from the price of the goods 
sold in six weeks there must be deducted a time-agio of two 
weeks to show the fall in value of these goods as compared 
with the same quantity of similar goods sold within a 
month. The rate of this time-agio varies with the circum- 
stances of the trade, the period of recurrence of demand, 
the volume of output and the amount of capital employed 
in the selling agencies. Generally speaking, where the 
output of production is large, a small delay in time involves 
a serious loss ; but on the other hand, this loss is diminished, 
where large capital is employed in controlling and regulat- 
ing supply. 

We come then to see that the fundamental fact underly- 
ing over-production is the time-element in value and we 
are helped to an economic definition of it. It depends on 
the difference between the rate of output and the rate of 
sale and it is caused by the impossibility of always adjusting 
production to the fluctuations of demand. 

Over-production in one industry, in many or in all 
together is an acceleration of the rate of production over 
and above the rate of absorption of the market, where the 
demand follows its usual course, or a retardation of the 
rate of absorption of demand, while the rate of production 
temains constant, resulting in either case in a fall in 
values,* which may either be liquidated by immediate 
depreciation or be carried over at former prices for future 

* As we saw in Cap. V., p. 44, that there might be a general rise in 
values, so also there may be a general fall in values, which would be 
the result of general over-production. 


liquidation. General over-production involves at least a 
universal time-loss to all producers before the usual 
exchanges are effected, a time-loss that can be largely 
measured in the medium of exchange. 

Exchange being the adjustment of two variables, a mal- 
adjustment may occur by either varying, while the other 
remains constant. The particular kind of mal-adjustment 
called over-production can therefore be brought about by 
the acceleration of supply, while demand remains constant, 
or by the retardation of demand, while supply remains 
constant. In most cases of over-production in any single 
industry the mal-adjustment of exchange passes from one 
of these conditions to the other ; that is to say, over-supply 
has always the tendency very rapidly to satiate the market 
and bring into operation the law of vanishing demand, thus 
tending to cause a retardation of demand just at the time 
when supply has been got under control, so that the condi- 
tion of a depression in trade is apt to continue even after 
its original operating cause of over-supply has been 

The argument we have pursued so far must have utterly 
failed, if it is not now clear, that, while the causes of limited 
or general over-production are as above mentioned, the 
occasion of them is a temporary failure of effectiveness in 
the immense machinery of our commercial system for con- 
trolling supply and regulating demand. It is to be noted, 
however, that apart from one special occasional cause, to be 
dealt with in our next chapter on " Trade Crises," a condition 
of general over-production is extremely rare and by no means 
the inevitably recurring phenomenon which some people 
repute it to be. What happens in actual business is some- 
thing quite different, although from the limited point of 
view of most of us the effect appears to be more general 
than it is. Although over-production is universally com 


pared to fluctuation, the waves, which it resembles, are not 
the regular synchronous waves of the tides of the coast but 
the waves of mid-ocean in a varying wind. A local cause 
starts the movement almost accidentally and through the 
operation of the law of intermediate demand allied and 
dependent trades are immediately affected, so that the move- 
ment seems to spread with alarming rapidity. But long 
before it has gone far the compensating and controlling 
balances of our organization for exchange have tracked down 
the fatal cause and begun to remedy it. We may therefore 
have several co-existing storms in trade without their 
necessarily combining and eventuating in a complete general 
depression. We shall later on see in what way they do 
sometimes coalesce through the contraction of credit and 
financial stringency, where circumstances, which strictly 
speaking do not arise from the course of trade itself, such as 
a war or a change in the value of currency, come in from 
outside to affect the central nervous system of trade and 
industry. In the meanwhile we may examine the chief 
causes of occasional and local over-production in the hope that 
by traversing patiently enough that, which is obvious, we 
may stumble upon something that is possibly new. 

Over-production in any trade is sometimes due to mistakes 
in investment and sometimes to an inevitable internal in- 
clination towards efficiency rather than a scramble for 
profits. The former may very well be the misdirection of 
energy by capital from outside or equally also quite possibly 
due to over-trading from within. Over-trading and over- 
supply from within the trade, that is by producers whose 
capital is already committed to production, is a mistake 
sometimes almost forced on manufacturers by the modern 
necessity of cheap production. When costs per unit of the 
whole output can be lowered by one-quarter by adding 
no more than an increment of one-fifth to the total 


output, a not impossible condition of things in modern 
factories, it seems only a question of simple arithmetic 
to see where the profit comes in. But when a brilliant 
idea of this kind occurs to one manufacturer it quite often 
happens to occur to several others as well at the same time, 
and the resulting over-production takes prices below the 
point where any profit can be made out of the new 

Mistakes in investment by outside capital are an increas- 
ingly rarer cause of over-production, because capital has grown 
very wise, perhaps on the whole too wise, in avoiding the 
risks of production and the losses caused by over-production. 
Probably at the present moment in England the chief 
underlying cause of the Tariff Reform agitation is the diffi- 
culty of getting large aggregates of capital invested in 
industrial enterprises on a large scale. It is, probably, just 
now easier to raise capital for any other purpose than that of 
a new manufacturing industry. The distrust of the fluctua- 
tions of prices and the uncertainty of demand are the bogey 
of the rich man, who desires the security of a part at least 
of his capital and will not risk its total destruction under 
any circumstances whatever. Besides, he has a well-founded 
belief that the really able men in any industry will have no 
difiiculty in financing their own additions to production out 
of profits and that any application for outside capital is in 
itself a proof of weakness. Such a cautious view of indus- 
trial investments in this country has been strongly impressed 
on capital by the ultimate result of the extensive industrial 
flotations in IS'.H) and 1897. 

The timidity of capital about industrial investments is so 
well known among men of business, who have ever been 
concerned to attack this stronghold for this purpose, that it 
would not be worth while dwelling upon it if a contrary 
opinion had not ol)tained considerable currency in theory 


One of the causes of over-production has been supposed to be 
the pressure of mere money savings, whose only outlet is 
further production. Ever since the time of Lassalle the 
enforced abstinence of the rich has been the object of ridicule 
among Socialists and not altogether unjustly. But to sup- 
pose that the only channel of relief for their hoards lies in 
production is to betray an elementary ignorance of business. 
In the first place for every pound of capital that is directly 
used in production, at least three pounds are required for 
the exchanging and adjusting functions of commerce, and I 
have a suspicion that I am underestimating the latter's 
superiority. In the second place the money that does fmd 
its way to finance production gets there only through devious 
channels and generally on hard terms. The greater part of 
the new capital engaged in production in this country is 
raised out of the realized profits of the industry or in 
bankers' loans advanced on the security of an ample proved 
margin of profit, loans which have to be repaid out of the 
profits earned by the loans themselves. In protected 
countries there is an apparently greater security for large 
increments of capital in industry, so that financial aid in 
starting a new industrial enterprise is easier to obtain. It 
is in these protected countries, however, that the amount of 
capital in industry is most efficiently checked and limited 
by combination, so that any idea of an unlimited overflow 
of capital into production is severely negatived. 

That there is a certain pressure in every industry towards 
over-production I admit, but it is not the pressure of idle 
outside capital desiring to be employed, I have known 
intimately and have had extended business relations with 
two successful producers, who have risen to great fortune 
from humble beginnings, but they have never complained to 
me of funds having been eagerly thrust upon them at any 
time. On the contrary, their experience was exactly what I 


have found everywhere to be the common one : they had 
first to make large profits on a small scale and then to 
finance their extensions piecemeal out of their own earnings. 
What outside help they had was generally obtained only at 
a risk that for any ordinary people would have been out- 
rageous, until finally they got to a degree of prosperity, 
which entitled them to be considered moneyed people and 
enabled them to raise loans on their personal security. The 
experiences that I am relating cover more than one country. 
Such superabundant energy as leads to over-production is 
not thrust on an industry from the outside but comes from 
within. But it is not only mistaken speculation or over- 
trading, things which are in themselves, even when inno- 
cent, pernicious, that leads to temporary undue expansion 
and 80 to over-production. It is the natural and inevitable 
tendency to superior efficiency, which, where trade is not 
hampered by restrictions, is the unavoidable result of brains 
working their way to the top, that brings about additional 
cheapness of production and a struggle between the new 
and the old forces in an industry. In this struggle there is 
rather an odd characteristic, which exhibits a natural diver- 
gence between two types of mind. It is generally observable 
that the originating and inventive type of mind, which 
naturally succeeds first in developing new processes of 
manufacture and in reducing costs, is at the opposite point 
of the compass from that type of mind which has grown 
old and wary in dealing with the public and understands 
its customers better than they do themselves. In other 
words, the productive genius is essentially different in its 
nature and often instinctively antagonistic to that quality 
of mind which is most fertile in selling capacity. It is only 
in very rare cases, such as that of the great Krupp, that the 
capacity to sell well is joined with the capacity to rise also 
to extreme heights of efiiciency in production. 


The process of developing any important and radical 
change in an industry is generally the joint work of these 
opposite characters, working as a rule not as allies but as 
opponents. The new methods of production have generally 
as a necessary condition of existence to develope great 
advantages of cheapness in manufacture. An old hand at 
selling would probably take his profit in his extra margin of 
cheapness in production and keep supply down and prices 
up. Only gradually wcyild he encroach on the markets of 
others and never would he run the risk of flooding the 
market. But that is not usually the way an eager inventor 
goes to work. Confident in his power of cheap production, 
he will increase his output recklessly and endeavour to drive 
his opponents out of business. But the old and experienced 
trader knows that his own confirmed selling connections 
will probably balance his rival's extra cheapness, and as he 
is probably tied to his own trade by his fixed investments 
of capital he is driven to wage desperately a losing war and 
has to be content with a small return on his output and 
very likely no more than 1 or 1|^ per cent, interest on his 
fixed capital. On the other hand, the innovator has on his 
hands a greatly increased output to sell which his standing 
connections cannot absorb. He will probably find that the 
cost of advertising and selling his surplus stock will eat up 
all and more than the profit provided by his extra margin of 
cheapness. If we suppose that the two individuals we have 
instanced stand in real life for two groups of manufacturers, 
those making at a profit and selling at a loss and those 
making a loss but selling at a profit, and with both together 
having an output pressing always on the limit of the power 
of absorption of the market, it will become clear that certain 
industries going through this stage of development may 
remain for long periods in a state of continued depression 
without relief. 


It may be asked, how can an industry remain for long in 
a state of depression which yields less than the average rate 
of profit without the occurrence of a shake-out of the weaker 
competitors? The solution of this problem is to be found 
in the nature of fixed capital. Large sums invested in land, 
buildings and plant cannot be taken out again and become 
liquid ; they have to remain physically locked up and 
depreciated and yet they can be used for purposes of pro- 
duction practically without any reward. As a matter of 
account, their plant should be depreciated off the books, the 
capital written down to correspond with this loss, while pro- 
duction can continue to be carried on so long as price will 
offer the smallest margin of reward over the cost of material, 
management and labour. 

A friend of mine recently advanced the amusing paradox 
that since there were in nearly all industries water-logged 
and derelict firms of this kind, who worked on capital on 
which there was virtually no return, therefore on the 
margin of every industry goods were being steadily sold at 
prices less than the cost of production. It was one of those 
paradoxes to which it is difficult to find an immediate 
answer and shows that if one can juggle with words in one 
direction, one can juggle equally well with them in another. 
Should one so define " cost of production " as to make it 
equal to price, which was the practice among the old 
economists, one can also define the marginal cost of pro- 
duction so as to prove that in nearly all trades always it 
exceeds price. Common-sense tells us that price must 
generally exceed average cost of production, or men will 
cease to work and make sacrifices for less than the average 
reward. Yet in these special cases of half-bankrupt firms, 
who continue in business, the capitalist has to sacrifice the 
larger part of his reward in order to obtain some frag- 
mentary part of it or else in order to sell his business in 


the case of recurring good times. Tlie explanation of 
the paradox in these cases is, that owing to want of 
efiiciency in production or want of the best equipment 
working costs exceed by so much the average working costs 
in the trade that no margin is left to pay interest or profits, 
and, as material must be bought and labour must be paid, 
the capitalist finds that it is his turn to go to the wall. 
This phenomenon of the water-logged concern continuing 
to do business is always a serious one in any trade, as the 
competition of its products tends to spoil the market, and 
it is always too weak to hold back its stocks. So until they 
are finally forced out of competition by increased pressure 
they tend to delay the normal recurrence of hopefulness 
and prosperity. 

Though there are now considerable industries in this 
country which have been for a prolonged period in the 
unfortunate condition I have described, yet such a condition 
of things is exceptional. As a general rule, the newer 
methods of production drive out the old, if the latter cannot 
bring themselves to change their habits, and so after a 
period of rather painful pressure the industry rights itself 
again. This process of internal improvement is normal 
and healthy, and it is more generally the cause of a period 
of over-production and depression than is over-trading or 
mistaken speculation. 

No study of over-production, however brief, would be 
complete which made no mention of the seasonal fluctua- 
tions of trade, entailing regularly a curtailment of output 
and a discharge of workmen to avoid over-production at 
certain periods of the year in certain trades. But as there 
is nothing in this phenomenon which is not fully accounted 
for by the law of recurring demand, to mention it is 
sufficient. It entails a very real practical problem for 
legislators and business men in the question of dealing 


with the regular seasonal unemployment which results in 
those trades. 

The only serious theoretical problem which I feel quite 
unable to solve is as to whether limited fluctuations of 
over-production in various trades following repetitive cycles 
of their own ever come to coalesce of their own accord in 
one period of general depression, or whether such a period 
of general depression is not the result of financial stringency, 
which itself is produced by some cause external to trade 
and commerce. In other words, is financial stringency a 
symptom of simultaneous bad trade and a safety-valve of 
accumulated mistakes, or is it not rather the immediate 
cause of general bad trade bringing this result about by 
choking up and hampering the selling agencies of our 
system, withdrawing their supplies of capital and forcing 
them to part with goods, which in normal times they would 
hold up in order to strengthen the market ? The question 
is a deeply important one for business men and financiers. 
If bad finance or some public catastrophe affecting finance 
is as a rule responsible for general bad trade, the remedy 
is not unattainable as we develop greater financial experience. 
But if general bad trade is cyclical owing to obscure causes 
arising out of trade itself and resembling the causes affecting 
bad trade in a single industry, then we are much further 
off the chances of a solution. I confess I see no evidence 
that trade itself does evolve the causes of a general 
depression, and I do not believe that any theory yet 
advanced, proving cycles of general over-production, has 
been successfully maintained. I should be inclined to 
infer on a priori grounds that the recurrence of good and 
bad trade in separate industries at varying and not syn- 
chronous periods was the best safeguard against any period 
of general depression. The deduction would then follow 
that trade crises or occasions of acute general depression 


arise originally from financial causes, and will prove there- 
fore to be susceptible to special treatment. 

Before considering the special case of trade crises there 
is only one remark to be made on the question of over- 
production. No one has failed to see that it is a compara- 
tively new problem, which did not trouble the world so 
obviously before the rise of the factory system. Production 
in those days was not obliged to anticipate demand by so 
much in time nor by such a vast output as is now required 
of it by the mere necessity of securing cheap costs. But 
if we remark a progression in this direction it is a serious 
practical problem whether this tendency is likely to be 
continued or reversed. Supposing that production becomes 
more highly organized still in order to secure the lowest 
costs, will not stocks indefinitely increase? In that case 
either the danger of over-production will become more fre- 
quently recurring and more dangerous or the selling 
machinery of the world will have to be adequately 
developed to meet and absorb greater and greater quan- 
tities of goods and dispose of them at the proper rate. 
If the latter alternative be more hkely, it would account 
for the curious coincidence that some people seem to 
observe in the growing cheapness of production and the 
steady increase of prices. Perhaps the seUing agencies 
of the world are doing their work too expensively, and 
they are in need of greater amounts of capital and more 
complete organization. 




The trade crises we have here to consider are practically 
equivalent to financial crises, but it is only in their 
relation to trade that they have any importance for us, as 
affecting the laws of supply and demand. When they 
come, from whatever cause, they have all the appearance 
and effect of a period of general over-production, but this 
appearance I believe to be deceptive. Their real origin is 
more probably the withdrawal of a considerable amount of 
currency either on account of some tremendous material 
disaster, such as a war or a large failure of crops, or more 
commonly, but more obscurel}', owing to some internal 
disturbance and disarrangement in the mechanism of 
finance itself, causing a restriction of credit and keen com- 
petition for the free stock of gold in the world. The trade 
depression in England which accompanied the drain of the 
South African war is an instance of the first case; the 
much more severe shock to American credit in 1907 is the 
best instance of the second. There is still much con- 
troversy over the real causes of this last and worst of all 
trade crises, whose effects were felt all over the world, 
and the best explanation seems to be that, while several 
disturbing causes, such as the New York insurance scandals, 
the bank failures in October, Mr. Roosevelt's speeches and 
the general weakness of American financial organization * 
contributed to bring it about, what made its severity over- 
whelming was the condition of unstable equilibrium of 

• I quote Mr. Conant, " History of Moderu Banks of Issue," p. 698. 


prices, where markets were controlled by many powerful 
corporations all interested in maintaining a partial monopoly 
in their own trades. The necessity such corporations are 
under during periods of stress of making great demands on 
the money market in order to hold their immense stocks of 
goods and guard their speculations introduces an element 
which enormously increases the virulence of a crisis and 
intensifies the weakness of a position which otherwise might 
have continued to be of ordinary proportions. 

How does it come about that mere money stringency is 
capable of producing in a moment a condition of things 
which is equivalent to general over-production? The 
answer is that in one sense general over-production of all 
goods is a permanent necessity of modern production ; in 
other words, there are always huge stocks of all goods, 
much more in fact than can be sold in the next fortnight 
or the next month. These goods are held back from the 
market by means of immense supplies of capital until the 
market is ready to absorb them at such prices as will give 
a just reward to producers and sellers. It is obvious that 
any curtailment of these supplies of capital lessens the 
holding power of the sellers and throws goods on the 
market before their time. It is, strictly speaking, often 
a crisis of over-selling rather than of over-production, but 
of course the two go together, and, as the effect of either 
is the same, it is as well to follow the usual practice and 
call it the latter. For that reason both phenomena are 
included in the definition of over-production.* 

The argument of those, who doubt or deny the 
power of mere financial stringency to bring about results 
so widely spreading, as a general trade crisis, is usually 
based on the contention that the supjiosed cause is not 
capable of exercising an influence admittedly so great. 

* See Cap. XVI., p. 199, and Handy Table, p. 276. 



Since the gold in the world, which is the basis of currency 
in most states, amounts to well over £2,000,000,000, they 
cannot believe that a small cause making an immediate call 
for at most i'40,000,000 or £50,000,000 of gold over a 
short period can possibly affect the whole volume of gold 
and the much vaster volume of credit that is above it. 
That is, I think, because they do not properly grasp the 
functions of gold, currency and credit in our trade trans- 

If we analyze the habits of the gold-using countries, who 
are infinitely the richest countries of the world, we see that 
their medium of exchange consists of gold, a note issue and 
various instruments of credit. Now the note issue is based 
on the gold and the instruments of credit are based on both 
the other two : that implies that any diminution in one 
will effect a proportionate diminution in both the others. 
It is also true that in a financial crisis all credit is naturally 
contracted, which results in the natural consequence, that 
there is a lower proportion of instruments of credit based 
on gold and notes in hard times than in good. Let us sup- 
pose for the sake of example that such a ratio of credit to 
actual currency is about 7 to 1 in a normal state of 
trade, sinking as low as only 5 to 1 in times of stringency. 
The fall might possibly be much greater. However, on 
that hypothesis and in order to see the immense effect of 
the drain of a small amount of gold we muy assume a 
sudden withdrawal from general use for temporary purposes 
of £50,000,000 in gold out of a supposed world stock of 
£2,000,000,000. Out of these £2,000,000,000 not more 
than £1,000,000,000 will presumbly be near enough to the 
source of the initial disturbance to be susceptible to the 
first sudden shock. The remaining £1,000,000,000 are 
therefore by hypothesis considered to be far enough away 
to be quiescent; because no shock is groat enough 


actually to affect the whole world at one moment even 
though the ultimate effects of the shock will spread every- 
where. Let us also assume a ratio of 2 to 1 for notes 
based on gold. The whole stock of money before the shock, 
say in October, within the affected area is then supposed to 
consist of i: 1,000,000,000 of gold, of i;2,000,000,000 of 
notes and of £21,000,000,000 of credit* embodied in paper, 
such as bills, cheques and drafts. This last figure is esti- 
mated at the favourable ratio of 7 to 1 based on the 
combined currency of gold and notes together. 

Now the sudden and unannounced withdrawal of 
£50,000,000 of gold in November, if it caused, as it 
certainly would, a temporary stringency and a panic, would 
compel the immediate hoarding and retention of at least 
an equivalent amount of gold and of a proportionate amount 
of notes by bankers and financial houses, resulting in an 
abstraction from use of at least £100,000,000 of gold and 
£200,000,000 of notes. At the same time the proportion of 
private paper credit would shrink rapidly to the panic 
ratio of 5 to 1 on the reduced currency. The total 
available medium of exchange, using the term in its widest 
sense, at the end of November would have fallen to 
£900,000,000 of gold, £1,800,000,000 of notes, provided that 
there had been no fresh issues by the states involved, and 
£13,500,000,000 of paper credit. In other words, the total 
available money within the area of disturbance would have 
been £24,000,000,000 in October and £16,200,000,000 in 
November, a shrinkage in the real medium of exchange in 
current use over that area of £7,800,000,000 due to the 
sudden abstraction of only £50,000,000 of gold. I am not 
asserting that my figures or ratios are the correct ones or 
even approximately true, but the illustration is, I think, 

* What Mons. Horn calls "or suppose." See "La Liberty dos 
Bauques," p. 264. 


sufficient to show that the basis of our credit is bo narrow, 
and our credit itself so sensitive, that a small further 
narrowing of the basis is equivalent to the temporary 
destruction of an immense amount of credit. Credit rests 
on currency, and as a rule instead of rising to meet 
deficiencies of currency, it falls with it and at an acclerat- 
ing diminution of ratio unless measures are taken to check it. 
Any drain on the supply of money has a paralyzing effect 
on trade, particularly any demand for gold, because this is 
subject, as we have seen, to a multiplying power, but an 
assault on the credit part of our monetary system alone has 
a depressing, if not quite an equally demoralizing result. 
An inflation of credit leading to speculation will be followed 
by a reaction of equal force, and this, if it were allowed to 
have its way unchecked, would cause the same constriction 
of capital and retardation of industry as a drain of gold, but 
(and this is rather an interesting fact to remember) unless 
there is an actual shortage of gold accompanying it, the mere 
psychological state of panic is not enduring and can be 
counteracted by the ordinary balancing mechanism of the 
financial world. As Mr. Conant says in his learned treatise 
on banking, the world has learnt a great deal about finance 
during the nineteenth century and the pendulum swing from 
over-speculation to panic is not allowed to have its old power. 
"When any important speculative centre gets into financial 
trouble even its enomios now hasten to help it over its 
difficulties, if only for a time, because the solidarity of the 
commercial and financial world is at last so well under- 
stood that now everyone is aware that the disasters of his 
neighbour not only may, but will be, his own, if they are 
allowed to run their full course. But the final disaster 
comes upon us when the over-narrow basis of our currency 
is drained by some purely mechanical operation such as 
paying for the wages and the food of soldiery in a great 


war. In this class of cases there can be no exchange of 
cheques or bills for commodities, leaving the gold safely in 
the banks. Cash, cold cash is a necessity ; in other words, 
gold. And as we have seen above, although the amount of 
loss may remain small, its extraction in actual specie has a 
cumulative and incalculably far-reaching effect of disaster. 

To admit the financial origin of most trade crises is to 
accept the quantitative theory of money, a sadly contro- 
versial subject, which cannot be avoided. Theoretically 
the quantitative theory of money is incontrovertible and 
its opponents content themselves with pointing to facts, as 
not supporting the results deducible by reasoning. Yet it 
is possible that a theory may be true and yet not be sup- 
ported by facts in cases where the ultimate facts are con- 
ditioned by other causes as well as by those which are 
taken into account in the theory. This happens to be the 
exact explanation of the present controversy. Prices are 
primarily conditioned by the ratio between the quantity of 
money as compared with the quantity of commodities in 
accordance with the laws of supply and demand, which apply 
as much to gold and money as to any other commodity, 
but prices are not conditioned only by money, nor is money 
always the same as gold, although gold may be the basis of it. 

Let us take the last point first. In any definite quota- 
tion of price there are two declarations of fact, which are 
inseparable ; namely, the price of a named commodity in 
money, a word, which we will take as meaning any current 
medium of exchange, and the price of money in that named 
commodity. Now those who have accepted my statement 
of the laws of demand will admit that a great factor of price 
is not only the quantity offered, but the rate of absorption 
prevailing in the market in which it is offered. Conse- 
quently there are four chief determinants of the ratio, which 
is embodied in any price ; the quantity of money and the rate 


at which it is being absorbed in the market at the moment ; 
also the quantity of the priced commodity and its rate of 
absorption. To eliminate complications let us suppose that 
we are dealing with prices in gold-using countries and that 
we are sj)eaking of general prices of all staple commodities, 
such as are indicated by the well-known index numbers. 
We then see that the quantity of money and the demand 
for money, the quantity of commodities and the demand for 
commodities are the determining factors of general prices. 

Now money, whose quantity is first in question, is in 
gold-using countries a flexible function of gold. That is to 
say, an increase of the quantity of gold will tend to increase 
the quantity of money, but not always in the same pro- 
portion. When the demand for gold remains steady, fresh 
supplies of gold will cause an enormous increase of money 
by their influence on credit ; but, on the other hand, the rise 
and fall of credit may cause great variations in the total supply 
of money, even though the amount of gold in the world 
remains unaltered. Supposing that in time of peace there 
is a comparatively small but steady supply of gold and 
credit is continually improving there will be an increase of 
real money quite out of proportion to the mere increase in 
the supply of gold and prices will rise. 

This increase of prices, however, will be checked by a 
fall in the rate of absorption of money and in the rate of 
absorption of gold. There may be something approaching 
the nature of a glut, even in gold, which will show itself in 
the demand becoming less brisk and ultimately causing a 
fall in the average rate of interest. That is factor No. 2. 

Factor No. 3 may be taken with factor No. 4, because they 
are interdependent and tend to check one another alternately, 
as do factors one and two. One is at its highest when the 
other is at its lowest. Tliafc is to say, a period of brisk and 
active production under high prices will increase the stocks 


of goods to a point where demand for them threatens to be 
satiated and prices have to be reduced. So these two 
factors tend also to balance one another. 

With these four varying factors affecting the level of 
general prices it is possible, as is indeed often the case, 
that the quantitative theory of money may be true, while 
its operation is in practice obscured by conflicting con- 
ditions. It emerges into prominence as the governing 
theory of money chiefly during quiet times, when general 
trade runs neither to monopoly nor glut, when money is 
wanted for the steady development of sound opportunities 
and credit remains normal. During these periods of 
peaceful progress any increase of the basis of currency has 
a remarkable effect. By raising prices too quickly it may 
act as a violent stimulant to the commercial world, leading 
to grotesque and fraudulent speculation or merely inducing 
a dangerous tendency to over-trade and over-produce, thus 
leading ultimately to a natural reaction. 

It is important to distinguish between the two ways in 
which depressions of trade on a large scale are determined 
in their origin by financial stringency, because in any 
general trade crisis either cause, if not checked, immedi- 
ately superinduces the other and they become inextricably 
mixed. Yet theoretically and in fact they are distinguish- 
able ; one being an artificial shortage of currency, generally 
produced suddenly by some outside material cause ; the 
other being a rapid rise in the rate of demand for currency 
and ultimately for gold, brought about by disarrangement of 
the internal mechanism of finance such as over-speculation 
or bad banking. The latter alternative is the more common 
cause, but it is the one which the world is steadily educating 
itself to understand and to prevent. Consequently any 
local or temporary blow to credit is hushed up and tided 
over ; otherwise it will turn from a run on money to a run 


on the basis of currency, which in most civilized countries 
is gold. The first alternative is usually unavoidable by our 
commercial or financial systems because it generally arises 
suddenly from some unforeseen material cause such as 
the necessity for the daily feeding of many thousands of 
unproductive men in a war, the destruction of property in 
an earthquake, the failure of the cotton crop in America 
or the cereal crops in Europe. The safeguards against any 
of these possibilities are daily increasing, but they are still 
weak. No financial measures could isolate the commercial 
disaster of a great war. The smaller disasters are now 
dealt with by skilled finance, which is another way of 
saying that the bankers and brokers use their expert brains 
to secure great transfers of real wealth from one party to 
another, using in the operation the maximum of credit and 
the minimum of gold.* Whenever they fail to arrest a drain 
of gold, the collapse of credit follows as a matter of course, 
and there is widespread disturbance of industry and trade. | 
In a general review of all the causes which succeed in 

* An early instance of the actual operation of such precautionary 
measures occurred during the financing of the great railway enter- 
prizes in England in the last century. The mania was going to such 
lengths that Parliament in 1846 required all railwaj'^ companies intend- 
ing to apply for incorporation to lodge 10 per cent, of their capital 
within fifteen days after the beginning of the Parliamentary session. 
But even so the rush continued and so many parliamentary bills were 
pressed forward that there was an actual dearth of currency wherewith 
to make the deposits, showing that the world of commerce could not 
spare so much gold and notes as would bo locked up temporarily out 
of common use. So a device was found whereby the sum of £14,000,000, 
which was roquii'cd together at ono time, was obtained by paying in 
daily sums in the Bank of England, which wore immediately lent out 
again for further payments. The smallness of the sum whose 
abstraction was sufRciont to threaten the stability of credit also illus- 
trates my point above as to the effect of small withdrawals of cash on 
the total amount of real money. See Conant, " Uistory of Modern 
Banks of Issue," p. 633. 


determining a general fall in prices, whether this result be 
either a prolonged depression or a trade crisis, we can see 
that two of them are a question of industry and two of 
finance, and that they are exactly equivalent to the four 
factors which determine the general level of prices. These 
we have seen above to be the quantity of goods and the 
quantity of currency and the rates at which either are 
being absorbed at any moment in their own markets. A 
severe fall in prices may therefore be caused either by 
over-production of goods at any time, or under-demand 
for goods at any time, the latter being technically 
within our definition of over-production,* but in origin 
different from it ; or equally by a sudden drain of gold or a 
gradual contraction of credit. Each cause tends to super- 
induce all the others when it is first felt. It is the business 
of the commercial world to guard against the oncoming of 
the first two causes, and of the financial world to prevent 
and minimize the effect of either of the others. The 
tendency of the argument of this book, although I am far 
from saying that it is proved, is to show that of the per- 
manent causes the most potent is a slackening of the desire 
for goods, a failure of hope and effort, the fall of the suction 
of demand. The most potent of the temporary agencies is 
a drain of the basis of currency. The lowering in the suction 
of demand is possibly periodical and cyclical and due to 
obscure fluctuations in the human spirit. A drain of gold 
may be due to a dozen accidents. 

The problem of the opposite eventuality, a marked rise 
in prices, is more difficult to determine. It is made more 
difficult at the outset by the want of a criterion whereby it 
can be distinguished. When prices are falling all the danger 
signals of trade are there to warn us of coming distress. 

•* See Cap. XVI., p. 190, also Handy Table, p. 276. 


But are prices ever too high, and if so, when ? Traders 
Hke rising prices because of the stimulating effect of hope 
and optimism, inducing a general increase of effort and 
efficiency.* Besides, their instincts are not trained to distin- 
guish between the rise in prices caused by improved trade 
and another brought about by inflation of currency. Yet 
there comes a time when the consumer faintly makes him- 
self heard. A few write to the papers, a large number vote 
against the government of the day, and a great many more 
go out on strike for higher wages. Only obscurely do they 
recognize that in trade any extreme is dangerous, and each 
individual generally realizes it first through having his 
particular foot pinched. The pressure of high prices is 
being now felt in countries so differently situated as America 
and the United Kingdom, although it was felt first in the 
former. More than a year ago the Evening Post of New 
York, the leading financial daily paper in America, expressed 
the universal feeling on this question in words so brief that 
I can quote them : 

"Abundant evidence exists that the people are stirred by the 
pressure of high prices for necessaries of life. President Taft, 
in his recent message (January, 1910) to Congress, referred 
to this cost-of-living problem as the most serious drawback 
to the prosperity of the day. Bills have been introduced 
in Congress for commissions to inquire into the cause and 
meaning of the phenomenon. State legislatures are moving 
in the same direction. The department of agriculture has 
intimated its purpose to have an investigation on its own 
account. Still more recently, high cost of living, as a 
practical problem with practical consequences, has taken a 
prominent place in Wall Street controversy." 

In a later issue the Evening Post attempts to give a 

* See Cup. v., p. 44. 


partial explanation of the cause of this general increase of 
prices in America at any rate. Being itself recognized as 
an organ ever ready to attack the abuses of trusts, it yet 
acknowledges that there are other sellers grouped with the 
monopolists quite as prepared as they to draw any advantage 
from prevailing high prices, " In this oppression of the 
consumer shall the retail dealer be without blame ? One 
of our readers presents in brief compass concrete proof that 
the grocer, the butcher or the ' delicatessen ' man is quite 
as ready to over-charge and combine with his fellows for the 
purpose of over-charging as any wicked trust. The charge 
is largely true, and yet it does not shift the main burden of 
guilt from the shoulders of the men who control the main 
sources of our food supply. This is aside from the practical 
question that the law can deal more readily with three or 
four beef magnates than with tens of thousands of retailers 
the country over. The main point is that the evil impetus 
comes from above. A penny increase at the stockyards is 
the signal for more than penny increases right along the 
line. A 5 per cent, increase in duty on an imported article 
becomes the exc.use for a 10 or 20 per cent, increase by 
jobber, wholesaler, retailer down to the corner peddler. 
This is a phenomenon of the psychology of trade that we 
must recognize, just as we must recognize the principle of 
sympathetic increases in the price of commodities. Eggs and 
tea will go up in price for no other reason than that beef 
and wheat go up. And every business man will try to make 
an extra profit when he finds the example set from above." 
Compare with this account a passage from a leading 
article in the London Times in the month of October, 
1911, on the same subject. " It is the paradox of modern 
civilization that the more commodities are cheapened the 
dearer living becomes, and that the greater our command 
of natural forces and the ingenuity of our machines for 


utilizing them, the severer do the conditions of labour grow. 
The explanation probably is that in a thousand unnoticed 
ways we all, from the highest to the lowest, promptly live 
up to and beyond every addition to the means of enjoyment. 
We all expect more and more from life and we are all taking 
more, whether through individual expenditure or through 
State and municipal expenditure does not matter. The 
nation as a whole is living high in comparison with former 
periods and the increase of expenditure is greater than the 
economy of production can meet." 

Now it is remarkable that both these authorities state the 
same general fact, as if it were incontrovertible, and both 
try to explain it by psychological analysis, the one of the 
mind of the seller and the other of that of the buyer. 
Though each is treating of the state of things in his own 
country, where conditions are still very different owing to 
the prevalence in one of a high tariff, yet they are to a large 
extent on common ground in respect of all those articles of 
food whose prices are not marked up by a tariff in either, so 
that any inquiry into the effect of a tariff on prices need not 
come into our present discussion. We are dealing at present 
with underlying conditions of production and distribution, 
extending probably, not only to England and America, but 
to all countries within the civilized ring. For this purpose 
elimination of outside influences and simplification of our 
own problem, difficult enough as it is, are of primary import- 
ance. The chief doubt that may arise at this point in con- 
nection with a prevailing condition of high prices is as to 
whether such a question should strictly speaking be con- 
sidered under the heading of " Trade Crises." To this I have 
no hesitation in answering that although this term is in 
general applied to periods of prevailing or acute low prices, 
yet a period of high prices, boing an exact converse of the 
other and largely governed by the same conditions, is in 


every sense of the word a trade crisis of supreme importance. 
Only its causes are more difficult to disentangle. 

The first probability that occurs to the inquirer is that 
since one condition is a reversal of the other its causes are 
also probably the opposite of those we have discovered for 
the other. In other words, since there are four causes of a 
condition of prevailing low prices, there are four converse 
causes of prevailing high prices. But this obvious explana- 
tion does not cover the whole case. It is true that abundant 
money and a slack demand for currency and also a short 
supply of goods and great hunger for them •will each of 
them tend to beget and maintain high prices. But there is 
in addition one j^eculiar condition whereby high prices may 
be kept up without any of these special causes, although 
not in the face of any severe reversal of any of them. The 
secret of this circumstance lies in the natural relations 
between the buyer and the seller. We have seen above, 
passim, that the two opposing parties in a bargain do 
not come into the market under equal conditions ; one 
comes into the market with his sacrifices already made, the 
other comes carelessly prepared to question and reject. 
That is to say, that naturally the seller is in the weaker and 
the buyer in the stronger position. But this is reversed by 
the organization of our commercial world ; everywhere the 
sellers are watchful, reticent and prepared to organize 
themselves wherever they can. It is very rare to find any 
combination of buyers. 

Bearing in mind this special circumstance, which is the 
efifect of our organized commercial system, let us examine 
as far as we can the causes of the prevailing high range of 
prices during the years 1910 and 1911 in Europe and 
North America. It is probable that there are many contri- 
butory causes, in which a steady increase in the world's 
supply of gold may have its share, There is one convincing 


proof, however, that high prices are not caused alone by 
low gold values, because when the latter condition is 
established there is a fall in the average rate of interest and 
a steady appreciation of gilt-edged securities such as return 
a fixed income on invested capital. Now the prevailing low 
price of Consols and other first-class securities is a clear 
proof* that the supply of gold has not yet exceeded the 
normal suction of demand for it in investments. Taking 
these two balancing elements together, we may consider it 
established that there is no plethora of gold above the uses 
waiting for it, which is the necessary condition of proving 
that high prices are due to low gold values. This eliminates 
the two financial causes of prevailing high prices. 

Take the two commercial factors tending to cause high 
prices. Has production fallen far behind human require- 
ments or has the suction of demand for goods risen to the 
hungry stage? Either of these or both together would 
take prices up with a sweep. But there is no sign of either. 
While there is no serious over-production there are plenty 
of goods to sell and while demand is steady it is not 
insistent. In fact, in a good many trades the condition of 

* It is difficult to lay one's hand on any comprehensive proof of so 
wide a general statement ; but I find in the published accounts of a 
very wealthy and conservative insurance company — the Clerical, 
Medical and General Assurance Society— some interesting evidence 
of a steady increase in the average rate of interest. The invested 
funds of this society amount to well over £5,000,000; their class of 
investments is entirely gilt-edged, and, as many of their existing 
investments were made a long while ago under different conditions, 
the rise of the general rate of interest would be felt more slowly by 
them than in a case where only new investments wore made. For 
three successive quinquenniums ending on June 30 in the years 
1901, 1906 and 1911, the average rate of interest earned on tlie whole 
fund.s has advanced from £3 IGs. 8(/. to £3 17s. 6<l., and now to 
£3 19s. lOd. Thi.s points to very general and stable iufluouces all 
working in one dii'ection. 


over-production through which they have been passing is 
as yet hardly left behind as the comparatively high figures 
of unemployment last winter in various countries suffice to 
show. We may, therefore, say that among the four 
ordinary factors tending to raise the gold prices of com- 
modities there prevails an unusual and comparatively 
long-lived equilibrium, which gives a temporary opportunity 
for an artificial cause to operate, and here by " artificial " I 
mean not only an unconsciously acting tendency, but a 
consciously organised effort on the part of traders to main- 
tain prices by the carefully arranged retention and control 
of the markets. In other words, the sellers organized as a 
group are getting the best of it in their perpetual contest 
with unorganized buyers. The profits of selling are steadily 
growing and the costs of selling are going up.* Of this 
benefit the mere producer gets little or no share, so that the 
ordinary tendency of inflated prices to bring about an 
increase of production has been temporarily eliminated. 

I am not describing a condition of things which I believe 
likely to be permanent, in fact a reversal is inevitable. 
But in what way it will come no one can possibly predict. 
While it continues the effects of general distress which it 
causes are almost worse to a large number of people, whose 
salaries and wages are fixed, than what are called bad times 
when prices tend to fall. The one advantage to the com- 
munity which this kind of trade crisis has over periods of 
prevailing low prices is that more people are in employment 

* The point made in the Times article is practically the increasing 
waywardness of demand, which arises from general prosperity. This 
would increase selling costs. The point made by the New York 
Evening Post is the combination of sellers to protect themselves 
against this waywardness of demand, thereby not only seciuing pro- 
tection, but enabling them for the time to secure a little extra profit. 
Both points are good, and I believe that together they are the real 
cause of existing high prices. 

L.S.D. Q 


and more people are therefore in receipt of incomes 
which must insensibly reinforce demand for commodities. 
Above all, unless strikes and labour troubles intervene, 
general high prices lead to peaceful and not unhealthy 
development and to an even distribution of incomes among 
the commercial classes. 

But we are not living, as we are beginning to realize, in 
a period of general contentment. In every country the 
masses of population, w^ho live on fixed wages and salaries, 
are beginning to resent a curtailment of their luxuries, and 
instead of taking the real course of relief open to them by 
banding themselves together as consumers, so as to make 
their bargains collectively with the organized sellers, they 
are turning by preference to political action * or endeavour- 
ing by strikes to get their money wages raised. Undoubtedly 
considerable numbers of them have been lately successful 
in this aim, but a larger number will probably fail, and 
ultimately the general balance of trade will be disturbed 
and we shall pass naturally into a period of general 
depression. The cycle of human effort and slackness will 
fulfil itself and the best that our commercial and financial 
organizations can do will be to become more expert in 
modifying its extremer aberrations. 

* This is conspicuously true at the present moment of the United 
States and Germany, but as the agitation in both countries takes the 
form of an attack on the tariff, I shall purposely neglect it. The 
subject of a tariff is a wido one in itself, and is a question of the 
action of governments. It does not in any special way affect the laws 
of supply and demand. 



There is one thing in this world more frequently bought 
and sold than any other to which however the term com- 
modity is not applied : human exertion. The chief reason 
for its segregation in terminology from all other things 
freely bought and sold is probablj^ from a sense of human 
dignity, denying a similarity in essence of what costs us 
most in sacrifice with mere material objects. But the dis- 
tinction can be justified by a deeper fundamental difference 
than any indicated by sentiment. The services of men are 
not always a commodity like material goods : they have the 
peculiarity of sometimes being a commodity and sometimes 
not. In other words, we habitually jjut forth exertion for 
objects other than pecuniary or economic reward yet 
indirectly obtain the same result ; more peculiarly still we 
frequently exert ourselves partly for reward and partly for 
pleasure, health or moral discipline ; with equal peculiarity 
some of us work habitually for mere diversion and after a 
time discover ourselves equipped with a highly saleable 
talent. There is no commodity of anything like equivalent 
value, which is more often freely given away, sometimes 
intentionally, sometimes in mere ignorance. There is no 
commodity which resembles it in being sold habitually and 
by large classes of people for sums considerably below what 
would be its value, if the market were properly exploited. 

It is worth while examining concrete cases of these 
paradoxes in order to understand under what differing 



conditions the market for human labour is carried on from 
those under which ordinary goods are exchanged for gain. 
Taking the case of labour undertaken without expectation 
or with only distant expectation of pecuniary reward, which 
yet has a high economic value, we have not to look far to see 
it in the devotion and labour of our wives and mothers in 
the exertion and discipline of training private character in 
ourselves and others. A man gardening for his pleasure 
and selling the produce or eating it is exerting himself 
primarily for objects outside the economic reward which he 
still is willing to accept. A village lad may play himself 
into becoming a cricket professional and an author, painter 
or musician may find himself able to cross over the border- 
line and cease being the amateur, which once was his only 
ambition. Gentlemen-riders have become jockeys and great 
talkers have undergone a natural transition in becoming 
rising politicians or successful commercial travellers. 

The most interesting cases are those services, generally 
specially skilled, which are given away either for nothing or 
for an equivalent, which the world now recognizes to be 
inappreciable in comparison with their present value. This 
is very often involuntary as in the case of great artists like 
Millet, Meryon, Milton or Wagner, where recognition of 
merit has come too late to endow their products with what 
should have l)ccn in more fortunate circumstances their 
value. But perhaps it does not occur to most of us that 
cases of this class actually occur in business life itself in the 
very middle of the exchanging whirlpool. Men with keen 
energies and great capacities are driven to expend them by 
the force of their own character or by mere enthusiasm for 
efficiency in return for rewards far less than they could 
certainly exact, if they were crafty enough or eager enough 
to bargain for them. The most striking instance that I 
have heard of in this respect was told me by a LaucashirQ 


man, who was old enough to remember the pioneers of the 
co-operative movement. They were men who expended for 
trifling rewards organizing abihty, which could easily have 
brought them to personal fortune. They were urged by 
general enthusiasm for the movement and filled places 
which, as one by one these giants died off, could not be filled 
from the generation which succeeded them. 

The last case, which is the most interesting we have to 
discuss, is the large quantity of labour sold habitually below 
the price which market conditions, if properly established, 
would enable the sellers to exact. Of this the best instance 
is what is generally called the underpaid labour of large 
classes of women. In one sense, of course, it is not under- 
paid, because the sellers accept the price offered, but the 
misuse of the word shows luminously that the conditions of 
bargaining are not considered fair. Class for class, task 
for task, the wages and salaries of women are not much 
more than two-thirds of those paid to men for the same 
work and may often be less. The reason is simple. It is 
because a large proportion of women of all ranks who seek 
employment do not need, do not expect and do not exact 
the full amount of wages, salaries or reward which is neces- 
sary to keep them alive. They can often draw upon other 
sources for part or perhaps the whole of their necessary 
expenses, and all that most of them seek in employment is 
temporary assistance until marriage or else a margin for 
additional comforts. 

The instance of women's labour is the most conspicuous 
in this respect, but it is not really so strong a case for com- 
passion as that of others, to which no attention is drawn. 
The hardest case is that of authors. In our present world, 
where more reading is done and we are all of us more 
dependent on books for our recreation and knowledge than 
ever before, it is safe to say that of all living authors not 


more than a tenth part make their living by the writing of 
books, and of that tenth three-quarters at least earn their 
income from fiction. Literature, scientific and educative 
works, are produced for the world's benefit at far below mere 
cost price. They are produced either by rich men or women, 
fearful lest their energy and brains should go to seed, by 
journalists, schoolmasters or professional men earning 
incomes elsewhere and anxious to make a mark and advance 
themselves, and in a large number of cases by people who 
must write for the pleasure or necessity of self-expression. 
Other arts suffer from a similar overcrowding, but none so 
much as literature. 

Economically speaking, the case resolves itself into this. 
We have here something which is a full commodity subject to 
the ordinary laws of supply and demand sold side by side and 
in competition with something which is only partly treated 
as a commodity. In the first case the buyers and sellers are 
keener to take advantage than in any other form of trans- 
action because the stakes are life and death, in the second 
case the buyers only are keen while the sellers are indifferent. 
Yet the articles sold in the two cases resemble each other 
sufficiently to establish a certain parity of price between 
them ; happily they are not entirely the same, for the 
efficiency of the semi-amateur is never equal, ceteris 2)anhus, 
to that of men who are working for their bread.* The result 

* I have sometimes reflected, and I find it confirmed by the frequent 
experience of others as well as by my own, that the causes usually 
alleged to account for the permanent low wages of women, namely, 
their want of combination and the competition of subsidized women's 
labour, are not entirely sufficient to meet the case, although, as I 
say in the text, they are largely responsible for it. Women are keen 
and good bargainers, and there is no reason why they should not 
combine as well as men. As for subsidized labour, it is very frequent 
also among nion in the clerkly class ; but it does not bring the price 
of men's labour down to uuy groat extent, except in a few special 


is that in certain kinds of work prices remain below the 
proper level of remuneration for those who are wholly 
dependent on it, and in other cases the professional is 
driven out of the market except when he can show himself 
as possessed of transcendent ability. The difficulty is some- 
times spoken of as the competition of subsidised with help- 
less labour, but that does not cover the whole extent of the 
subject, as in many instances the case is worse where labour 
is given away for nothing in competition with paid labour, 
this very much adding to the weakness which the latter has 
in making its bargain. 

But there is another characteristic of labour which makes 
it different from ordinary commodities and that is that, 
while without capital it has no means of holding back 
supply, capital is as a rule only in the hands of the buyer 
of labour and thus it tends more rapidly than with supply 
in general to run into a condition of glut. This fact is the 
cardinal feature of labour, as distinguishing it from other 
things which are bought and sold, and we shall return to it 
when we have to consider those problems which are con- 
sidered specifically to be labour questions, such as the 
function of trade unions and the proper provision for the 

We must first, however, distinguish as clearly as possible 
between those members of the community who are pre- 
dominantly buyers, and those who are sellers of combined 

cases such as that of authors mentioned in the text, or of officers in 
the army, where the poor professional is practically eliminated. No, 
there raust be some additional reason, which lies deeper and consists 
of something especially feminine, and I believe it to be, that women 
in employment very seldom rise to that professional standard, which 
would exclude the amateur or relegate hiin to an inferior level. 
I have known one or two cases of it, but they are too few to raise the 
general standard of regular remuneration. 


skill and personal services or of mere labour. The mercan- 
tile and trading classes from the City merchant down to the 
greengrocer in the Mile End Road are not employed them- 
selves, but they are to a considerable extent employers of 
the salaried and clerkly classes, their own profits being 
obtained by margins between buying and reselling. In 
production proper there is a small class of employers with 
capital and a large class of employed earning either salaries 
or wages. The distinction between those who are paid by 
salaries and those who are paid by wages is not primarily a 
matter of economic importance, but it has become a matter 
of so much social importance that consequences are reflected 
from this latter circumstance which have considerable 
influence on the economic conditions of either class. The 
business of selling personal exertions is conducted under 
quite a different set of habits in one case than in the other. 
What are called labour problems or wage-earning problems 
hardly occur in the salaried middle classes. Outside the 
salaried and wage-paid earners there is a numerous highly 
skilled and infinitely graded group, who sell their skill and 
exertions not to specific employers but to the general public. 
These again have only an outside interest in specific labour 

We cannot leave these miscellaneous servants of the 
public without recalling what we suggested to be the law 
under which they receive remuneration for their services.* 
The basis of all their special earnings, some of which are 
occasionally very high, is the establishment within their 
grades of a partial monopoly and the firmness or weakness 
with which each grade holds to its level of fees, in other 
words to the minimum bargaining price, which has been 
established within that grade, decides and maintains the 

* See Cap. IX., p. IOj, aud iiaudy Table, p. 278. 


genercal level of its rewards. Within the grade competition 
among buyers for the use of the services of specially skilled 
individuals raises individual rewards to a further level of 
monopoly. The process has been fully described in general 
terms in the law of graduated returns on partial monopoly. 
The methods by which each grade endeavours to maintain 
its own general level of reward by controlling supply, in 
other words by Hmiting their own numbers, is especially 
interesting in the learned professions. It consists of two 
weapons. The first is a moderately high educational test, 
not sufficiently high to exclude a considerable number of 
entries. The second is more effectual, a rigid professional 
etiquette limiting the methods of rivalry among members 
and resulting in a chance selection of a favoured few for 
high rewards and the failure of a large number of men of 
moderate means and moderate talents. This policy makes 
the selling costs of professional services very high in this 
country and is possibly not altogether for the good of the 
community. Professional services are probably as good, if 
not better than here, in Germany, where a more liberal 
method is followed ; but the results in income are not so 
dazzling. A peculiar instance of this method of exclusive 
privilege in the professional classes, which curiously enough 
seems to operate less harmfully to the interests of financial 
business in France, than, a priori, we should be inclined 
to believe possible, is the monopoly of all official transac- 
tions in the exchange of stocks and shares in the hands of 
only seventy agents de change in Paris. 

The position of the salaried section of the middle class is 
rather exceptional in the economic world. Their material 
interests are largely dominated and obscured by social ones. 
In this country they are peculiarly subject to mild social 
ambitions, which they are far from realizing and therefore 
cling to all the more strongly. They offer a convalescent 


home to all dying prejudices. They observe social distinc- 
tions with incredible minuteness, much more so than the 
trading class with which they are naturally allied. All this 
futile ambition is paid for by economic loss and leaves them 
in their lower ranks the worst paid of all classes of the com- 
munity in proportion to their sacrifices. Their hours are 
long, their work more tiresome than manual labour, their 
unavoidable expenses very burdensome, their chance of 
rising, except by speculation or a rare opportunity of getting 
into the employers' class, on the whole no better than that 
of the class nominally below them. When any members of 
the clerk class fall into prolonged unemployment they are 
subject to a degradation, which all their ideals unfit them to 
support, and probably suffer more severely than do even 
those who fall from a greater social height. There is almost 
no combination among them to secure better remuneration 
or easier conditions of work. 

What are called, with unnecessary flattery, the working 
classes are roughly divided, but by no certainly ascertain- 
able hne, into skilled and unskilled labour. Skilled labour 
is on the whole dominated by trade unions, the benefit of 
whose organization within their own trades extends widely 
beyond their own membership. Unskilled labour has also 
its trade unions, but these are bodies of men aggregated for 
occasional ends and not dominated by the permanent policy 
enforced by accumulated relief funds such as are the proud 
possession of the aristocratic unions of skilled labour in this 
country. These are the classes to which the problems 
specifically called " labour problems " entirely apply, and 
though the interests of the two divisions of labour are not 
entirely on all fours there is a growing solidarity of interest 
between them, which leads in the direction of greatly 
increased political and economic advantage. The establish- 
ment of an organized Labour Party in the United Kingdom 


has clinched a community of interests, which was rather 
unaccountably slow in being developed. 

Next to the vast improvement of communications in the 
middle of the last century the rise of trade unions is the 
greatest economic event in the modern world, that is, in 
the world since modern methods of wholesale production 
have been established. Their full importance I venture to 
believe has never yet been realized, because they have been 
regarded solely from the point of view of only one of their 
two chief functions, and I am not sure that essentially the 
function, that is least noticed, is not the more important. 
They are usually considered to be associations founded to 
control the supply of labour and therewith to bargain for 
its price with the employer and, as they have energetically 
performed this duty for their members, it is undeniably 
true that their work in this respect is of the very 
highest importance. But this is not logically, even if it 
was historically, their primary cause of origin. If 
these associations had been tumultuous combinations 
arising out of strikes or, as Adam Smith implies that they 
are, "conspiracies against the public " or a " contrivance to 
raise prices," they could never have had the principles of 
cohesion and permanence which have raised them to the 
mighty power that they now prove to be. Philosophically 
speaking, their final azid necessary cause was the maintenance 
of the reserves of labour, which are required by the system 
of modern production. 

If we reflect on the necessary ingredients of modern 
industry, they are a directing mind or minds : land, buildings 
and machinery, raw material, floating capital and a supply 
of labour. Now this book has been written in vain if it is 
not by this time clear that fluctuations in the rate and out- 
put of supply are essential to the conduct of modern 
industry and to the proper disposal of its products. It 


follows logically that in order to deal with fluctuations reserve 
power is necessary. The plant and equipment must be 
larger than that sufficient for an average output, capital 
has to be in reserve to hold back stocks and prevent the 
glut of the market and there has to be a reserve of labour. 

Under these circumstances is it not also clear that 
capital is the only power that can effectively hold these 
reserves of labour or that ought to hold them ? Was it not 
the duty of capital, in whichever sense the word, duty, can 
be used, both the moral duty and the duty imposed by 
business efficiency, to provide for the reserves of labour ? 
The essential weakness of labour is that it comes empty- 
handed into the arena of commercial struggle and therefore 
is unable to keep itself during the natural hiatuses of 
industry without artificial assistance. Yet on these help- 
less people, uncombined as they were in those days of early 
industrial development, was thrown the burden of supporting 
themselves during periods of inevitable unemployment and 
of maintaining their own skill for the benefit of their 
masters. They were allotted a task which physically was 
impossible and years of unnecessary misery were forced 
upon them and endless waste of life and the highest 
industrial skill took place before the working men themselves 
solved the problem in a haphazard way by constructing 
their own organizations, which still perform this task with 
great and manifest lapses. 

One has a right to blame the employers of those early 
days both as men of heart and men of business, because 
they were still near enough to the time of the old system to 
remember their former paternal relations with their men 
and to allow their feelings of humanity to dictate to them 
the course, which it was really to their own advantage to 
pursue. Still men were making money so easily in that 
time of rapid expansion that they were easily blinded, and 


the frequent rising up of new men from the ranks, always 
the hardest masters, set up a breathless pace and restless 
exploitation. But what shall we say of the pretentious 
body of economic doctrine, calling itself scientific, which rose 
up at that time to stamp the hall-mark of intellectual 
superiority on greed and crown ruthlessness with a halo ? 
Of all the crimes committed in the name of knowledge this 
was perhaps the worst. It has done more harm over a 
century than all the wars of the period. Intellectually, it 
was more impious than the condemnation of Abelard, the 
muzzling of Gahleo or the hounding of Semmelweiss to 
madness. It is no wonder that men who kept their senses 
called political economy the cruel science, but how is it that 
people were so slow to see that its theories were stupid ? 

The successful development of the trade unions during 
the last century was a great triumph for labour, how great 
we are only beginning to see. Having to some extent 
successfully and with infinite pains and patience taken on 
themselves the burden rightly belonging to capital, the 
unions came at once to a position of command in bargaining 
for the sale of their labour, which otherwise they could 
never have obtained. The backbone of unionism lies in the 
benefit-fund. Without their benefits the associations would 
not hold together for more than a few months, and the great 
powers they now wield of dictating to the management of 
their trades, of interposing the obstacles which they freely 
offer to progress, are the outcome of the shortsighted selfish- 
ness of the early Victorian employer, versed in his new 
science of political economy. When employers of to-day 
complain, as we often have to do, of petty and sometimes 
absurd restrictions, of interference right and left with the 
progress of our work itself, of the protection afforded to in- 
competence, of " ca'canny," of the boycotting or penalizing 
of new machinery, of the stupid and harmful apprentice 


regulations in some trades and a thousand other vexations 
and injuries to business, which we daily suffer at the hands 
of unionism, let us remember that their fulfilment of the 
duties formerly neglected by our own class has put in their 
hands the weapon which it is now too late to take from them. 
In some of the more skilled trades of this country it is only 
the moderation and the acquired experience of the unions 
and their leaders which prevents the destruction of the 
industries themselves. The unions in some cases have now 
learnt the meaning and effect of foreign competition and 
have become the colleagues of their employers in perhaps 
the most delicate of all combined operations for the control 
of supply that the world can show. I have given an instance 
of this above* in the Lancashire cotton industry. 

A convincing proof of the power grasped by the trade 
unions, as well as of its true origin, was apparent at the 
time of the passing of the Trades Disputes Bill in the House 
of Lords. The point of this Bill turned on the dual posi- 
tion of the trade unions as benefit societies and fighting 
organizations. As the latter they had to run the risks, like 
any individual or corporation, of being responsible under the 
common law for any injury they might inflict on private 
persons or other corporations. This was established as the 
law by the famous Taff Vale decision. Not for a moment did 
the trade unions hesitate in bringing political pressure to 
bear to remedy their weak point. Although numbering 
only 1,500,000 men out of 8,000,000 workers and in a total 
population of 40,000,000, they claimed to be above the law, 
and by basing their claim on moral grounds they carried 
their point triumphantly to the infinite detriment of their 
country's trade. What was the strength of their case ? It 
can be said in two woid^. As bodies performing two 

♦ SeeCap. XIII., p. 151. 


functions, they have yet only one set of funds. Out of these 
funds they fulfil the obligations of insurance companies or 
friendly societies and they have also to carry on belUgerent 
operations against employers. They know that if these 
funds are subject to the full liabilities of belligerent funds 
they can not also liquidate their philanthropic obligations to 
their members. On these grounds, mainly sentimental, but 
based also essentially on their function of maintaining the 
reserves of labour, they gained the support of the country 
for a measure which put them above and beyond the law 
not only in matters of property but also in far more 
important matters of the security of the person. 

Over this question of the security of the person the 
privileged position of trade unions is not so much a matter 
of special legal exemption as of cold fact. Legally the 
special mention in the Trades Disputes Act of peaceful 
picketing as a permissible and sanctioned practice did not 
alter the operation of the common law, which protects 
great and small against violence and terrorism, by one jot 
or tittle, yet every business man knows that the practical 
effect of the inclusion of those two words in the Act was 
of vital importance. Why include a legalization of peaceful 
picketing in a statute, if the practice is already legal ? 
There must have been some sinister reality behind the 
film of appearance. Common-sense told us before that 
there was, we know by the bitter experience of the general 
transport strike during the summer of 1911 that there is. 
Before the express legalization of peaceful picketing the 
ordinary pickets of trade unions during a strike were, in 
the circumstances under which they exercised their func- 
tions, no more nor less in the eyes of the police than 
ordinary loafers. As loafers in public places they were 
subject to be moved and disturbed by the police at any 
moment when disorder could be anticipated. Formerly 


they had no local &tanding, physicaDy speaking, nor rights 
in the eye of the law. Now they have. The presumption 
of possible disorder caused by their presence is removed. 

The practical effect of these two magical words in the 
statute is astounding. The power of terrorism, which lies 
in large masses of unknown men, is a relentless force, and 
it has been unchained and legally secured. With a few 
men of bad character the police are able to deal ; they are 
marked men and traceable men ; their habits and motives 
can be followed by reason. But what force can cope with 
hundreds and perhaps thousands of men of hitherto high 
character wrought up by special passions to offer violence 
and commit injustice? The community needs special pro- 
tection against so formidable a combination and, purely 
from sentimental promptings, it has granted them special 
immunities. It was only as pickets that the sentinels of 
the terrorists could be interfered with and interrupted. 
The unions now do no more than place a ring of quiet 
men, chewing pencils, round a certain locality during a 
strike, and the private freedom and perhaps personal safety 
of no man who enters that ring against their will is secure. 
No one does enter it without their consent except under 
military or police protection. 

But after this digression on the power of trade unions, 
acquired, let us acknowledge frankly, more by the mistakes 
of their opponents and the sentimental acquiescence of 
outsiders than even by their own efforts, it is essential not 
to forget that the economic fact on which their existence 
and power is founded is the special service which they 
steadily perform in maintaining the reserves of labour for 
industry. No group of men could hold the power which 
they do, except in return for great services. They constitute 
for industry a regulative force, which benefits not only their 
1,500,000 members, but probably at least half of the total 


8,000,000 workers in this country. None of the measures 
they take for their own safety and benefit exceed the pre- 
cautions and restrictions which are self-imposed on the 
members of the learned professions of this country, who 
also are interested in selling their own labour to the public. 
When one speaks of trade unions as a possible public 
danger, it is because one is painfully aware of their size 
and power. They are no more unjust than smaller bodies 
and corporations ; as in the case of the overwhelming trusts 
in America, who act as other individuals and corporations 
would do, if they could, they are menacing, because it ia 
not safe to allow even small injustices to be perpetrated on 
a large scale. 

It is too late for employers to recapture the sole control 
of their businesses by resuming their neglected duties of 
maintaining reserves of labour. The trade unions would 
now listen to no proposals for partition of their authority 
and responsibility. But when insurance against sickness 
and unemployment with state assistance becomes an accom- 
plished fact, much may be done by those employers, who 
recognize what powers they have lost and what they may 
still regain.* Some have already consciousness of this, 

• I know of only one firm who follow a settled policy of paying 
higher wages than they need, in order to secure a better reserve of 
laboxir, and their name should be honourably mentioned. Messrs. 
Taylor, Garnett, Evans & Co., Ltd., printers, of Stockport and 
Manchester, have their chief works situated in the first place, where 
hours are long and wages are low, yet they intentionally pay their 
men Manchester wages and work Manchester hours, in order to be 
able to call on the Manchester waiting list, which is larger and 
better, whenever they have to increase their staff to fill a special 
order or to deal with a rush of work. The difference between 
Manchester and Stockport wages is, strictly speaking, an extra pay- 
ment in aid of the maintenance of a reserve of labour. 1 daresay 
there are other firms who follow the same practice. 

L.S.D. S 


but much remains to be done in drawing public attention 
to the true aspect of the question. After all, theory has its 
uses, especially if it has the courage to combat prevailing 
prejudices instead of patting them on the back. A vast 
field for help and control remains in remedying the unem- 
ployment of non-unionists. It is true that the employer 
is not very directly interested in securing reserves of 
unskilled labour, to which class most non-unionists belong, 
but the leadership of non-unionists might at least in this 
fashion be disputed by the employer with the trade unions. 
If employers continue to wait until all labour goes over to 
the trade union banner, they are preparing future trouble 
for themselves, to which their present difficulties are mere 
child's play. 

It is more than twenty years since I perpetrated an 
article on the part trade unions might play in leading 
industry. My theory was perfectly correct in saying that 
it was open to them to level up efficiency in their own 
trades by imposing conditions which would eliminate bad 
employers. I am not altogether ashamed of these views, 
which I no longer hold. It takes about twenty years to 
see that to sell an article is as difficult a task as to make 
it, and, since in those days I had never come into any 
relations with a trade union, I could not be expected to 
know that the experience of their leaders covers production 
pretty fully, but that their ideas about selling can usually be 
covered with a round cipher. My expectation of a hege- 
mony of industry by labour through trade unions has been 

It seems probable that the constructive work of trade 
unions is at an end. Their tendency to become a destruc- 
tive force is already beginning, largely through the pre- 
dominance of mistaken economic theory ; it is possible that 
more extended knowledge of economics will educate their 


leaders up to more intelligent and more possible aims. 
What remains still doubtful is whether they will carry their 
followers with them in a more enlightened policy. Want 
of discipline is clearly the greatest danger of trade unions. 
As it spreads, it will make a far-sighted policy impossible. 
Trade unions in their early days were always inspired by 
a certain measure of altruism in their best members, and 
this leaven was very powerful in raising the tone of their 
public work. The strong never forgot to help the weak 
and general effort was directed to improve the conditions 
of labour, where they were at the worst, regardless of any 
immediate profit to the stronger centres. This again was 
a public service. The existence of underpaid or oppressed 
labour is a matter, which concerns not only the public 
conscience but the public interest. As long as it is allowed 
to continue, not only does it directly injure the local 
population, but indirectly it tends to undercut the security 
of those working under better conditions ; less obviously, 
from the trade union point of view, it allows the bad 
employer to have a market advantage in selling his pro- 
duct against those who pay the union wages and work the 
union hours. 

The friends of unionism see with the greatest regret that 
with the growing strength of the Labour Party in politics 
the weight of effort is not thrown any longer in the direction 
of reinforcing the line where it is weak, but in redoubling 
the advantage of those who are placed where the line is 
strong. The modern motto is " to him that hath ; to him 
shall be given" rather than the older "the meek shall 
inherit the earth." It is a not unnatural consequence of the 
mere increase in numbers of trade union members that the 
average of individual intellect should go down rapidly and 
the average habits of self-control should suffer in the same 
way. It is not only the fall in personal self-control of its 



members that affects the public policy of trade unions ; but 
the habit of corporate self-control, inherited, as a fine ideal, 
from men, who might rightly be called the aristocrats of 
labour, is something already lost to unionism, already buried 
in the graves of a few forgotten leaders, already despised 
by the new Cleons and Chaumettes, who are the clever 
followers of their own following. 

There is a characteristic phrase in the mouth of modern 
unionism — " the right to strike." Why this assertion? No 
one has controverted, or for the matter of that could contro- 
vert, such a right. The right to be idle instead of working is 
inherent in human nature. We only hear this frequent 
phrase now on account of an implied connotation : the 
right to strike means the right to strike at any moment or 
the special right of labour to break contracts at the moment 
when such breach of contract will do the most harm to the 
employer. As a weapon it has the same power and weakness 
as all other breaches of faith. The consequences to the 
injured party for the first time may be terrible and fatal, a 
recurrence of them is discounted. One may believe in a 
liar twice, but probably the second time will be on an 
occasion when one's interests are not deeply involved. 

The right to break faith is also supplemented by the right 
to break faith with everyone at once and to force them to 
break faith also with each other. This policy is also self- 
condemned by its futility. The only way to affect capital 
is to hold back one section of it, while the other gains an 
advantage. A member of the commercial classes, with 
whom the capitalist producer is to some extent allied, fears 
above all things an event which will damage his own con- 
nection and give a rival some crucial superiority. A disaster, 
which strikes them both equally, is something which their 
combined resources are prepared to meet, and when it is over 
it is only a question of time when the loss shall be repaired 


by an extra profit on some future transaction. The capi- 
talist is nearly always in a position to hand on his loss 
ultimately to the class, which is economically his inferior, 
and in the end all expenses come to be paid by the non- 
capitalist producer. Any general injury to the trade of 
the kingdom is improbable from these brief outbursts of 
spasmodic violence, but if it did occur it is practically 
certain that only the workers would in the end pay for it. 
Of the commercial classes a certain proportion would move 
away to some more favourable centre with little or no 
loss to themselves. The real injury to the nation is a 
moral one arising from the disturbance of all contracts, 
weakening the elements of stability in industry and 
encouraging weak speculative enterprize. 

A general strike affects all competitors equally, hurts the 
exchangers not at all, the capitalist producers very little and 
the working producers very much. It is the last word in 
imbecility. Those who were annoyed by the general rail- 
way strike in England last summer and feared its conse- 
quences, as some of my friends did, were surprised to note 
that, when it was all over, among the commercial classes 
everybody had been equally inconvenienced and no one was 
seriously the worse. It was like a wave a foot high passing 
over a group of summer bathers. There is a little spitting 
out of salt water and a feeling that one is henceforward safe 
from a death by drowning. 



Side by side with the question of the maintenance of the 
reserves of skilled labour, which we found in the last chapter 
to be to some imperfect extent solved by the men themselves, 
in an economic fashion, and also perhaps to a very much 
smaller extent with the aid of non-economic charities 
founded by the employing class, we have the very much 
more difficult problem of the maintenance of reserves of the 
common unskilled labour, whose assistance is necessary to 
supplement skilled labour in a hundred varied occupations. 
This is the problem of dealing with the resourceless unem- 
ployed, undoubtedly the most insistent and difficult moral 
and political problem of our time. But our first interest, 
before dealing with it here, is to inquire whether there is any 
economic question involved, because, while it is clear that the 
preservation of skill in a reserve body of men during 
unemployment is an economic duty apart from whether it 
may be a moral one or not, there may be no economic 
necessity for keeping together a reserve of unskilled labour, 
when it is sure to be there at the beck and call of the 
employer at any time. In other words, are we economically 
entitled or obliged to look upon the fringe of unskilled 
labour as the early Victorian employers looked upon the 
reserves of all labour? I think there can be no doubt that 
although the economic obligation in one case is much 
smaller, it cannot be an indifferent matter to the interests of 
far-sighted employers. One reason sufficiently obvious for 


this is, that since there is no moral question which does not 
react on economics, so much more is it true that a burning 
poHtical question is Hkely to produce an immense effect on 
business through legislation sooner or later. The difference 
between this problem and the one discussed in the last 
chapter is that while employers in their own interests should 
have provided out of capital for the reserves of skill, it is 
probable that their interests in dealing with all unemploy- 
ment are not so great that it was ever their business to 
attempt to solve this question without help from the state. 
Happily the state in this country now seems to be tenta- 
tively stretching out a hand to deal with this problem or 
with the fringe of it, and there may be some opportunity for 
employers to re-establish their partial control over this 
movement instead of allowing it to pass into the hands of 
the newer forms of unionism. 

Let us now cease, however, to look at this question from 
the employer's point of view, which has perhaps been too 
much the case both in the last chapter and in this, and 
examine the economic content of the demand made by the 
unemployed as individuals and as members of our common 
community for continuous instead of casual employment 
and for some limitation of the laws of supply and demand 
in their favour so as to secure a minimum means of exist- 
ence. These two demands are involved in one another, as 
the required answer to the first implies an attempt to fix the 
second. They may, however, be discussed separately, and 
they are questions already labelled with popular titles as the 
" right to work " and the " minimum wage." 

Taking one at a time, the right to work, if it is to be 
distinguished at all from the purely moral question, the 
right to live, means economically no more and no less than 
the right to self-maintenance. It is the claim of a social 
unit, the unemployed unskilled workman, on the social 


aggregate, the state, that he shall be provided by the 
economic system with employment and the due reward 
of employment in order that he may live and become a 
decent citizen. If the present system does not furnish this 
opportunity of self-maintenance, then the economic claim 
becomes a political call that the system shall be changed. 
There is no question which cuts more deeply at the root of 
our economic system, because it is intimately concerned 
with the true meaning of value and the working of the laws 
of demand. There is, of course, a charitable reply to this 
demand for work ; there is the forcible reply of a seizure 
and redistribution of property by the state, but I venture to 
say that there is no economic reply to it except on the 
theory of value as I have enunciated it in this book and on 
the laws of supply and demand or something very similar 
to them, as I have formulated them. 

Let me state it quite shortly. Supposing it to be true, as 
is popularly held, that there is such a thing as intrinsic 
value ; then the right to work implies a demand, that the 
working man shall be given tools and the use of fixed 
capital and a fair wage, in order that he may create articles 
with an intrinsic value which pass into the possession of 
the state. The state assesses these values and pays over to 
the labourers and their associates perhaps a small bonus in 
addition to wages and salaries, reserving a small profit to 
itself after replacing capital outlay. It is here assumed 
that the state, being just and all-powerful, shall give the 
right proportion out of values to all workers, and can force 
them to accept it. There can, therefore, be no question 
under this theory of labourers and others demanding too 
much, and therefore not leaving a margin to capital and 
the state. The state, therefore, having satisfied all de- 
mands, sells these goods to all who require them at their 
intrinsic values and contentedly keeps all the surplus goods, 


knowing that their values, being intrinsic, will endure for 
ever without loss. It is not under any obligation to take 
any trouble about selling them. 

There is no escape from this logic, if values are held to 
be present or intrinsic. It is only a question of the state 
taking enough trouble and doing the operations sufficiently 
cheaply, both of them matters which can be decided by 
repeated experiment, and in view of the fact that the lives 
of many and the comfort of the majority of our civilized 
population is at stake, no effort should be spared and every 
distress should be endured to bring about this just and 
supposedly happy result. Why, however, is the hypothesis 
absurd ? Because everyone knows that selling a thing and 
keeping it over for future sale are operations which bring 
in a different rate of profit. In other words, there is a time 
element in value ; so that there can be no intrinsic values. 
Again, an equally clear practical absurdity is obvious in our 
hypothesis, because we know that in many cases the state 
will never sell its goods at all. What import is implied in 
this ? It is that value is not, and can never be, anything 
else than a personal estimate of desirability on the part of 
the buyer, backed up by willingness to provide the equivalent 
satisfaction. This has in it an element of futurity, a time- 
agio, bringing with it all manner of uncertainties in its 
train ; the necessity of meeting these uncertainties brings 
with it enhanced selling costs ; finally enhanced selling 
costs tend to grow and grow and take the price of an 
article further and further away from the nett cost of 
production. In the case of nearly all articles it costs more 
to sell them than to make them. 

The right to work implies, therefore, the right to have 
your product sold for you and, as the state is notoriously 
a bad seller, the selling costs of state products would be 
higher than under our present system and it is probable 


that the reward of labour under the experimental system, 
which we have examined, would sink indefinitely and 
poverty would be increased. The limits of state and 
municipal production are matters of experiment among 
those articles for which the demand is continuous and 
almost unconscious. The lowest grades of secondary 
demand for something, which we want so often that we do 
not reflect whether we want it or not, are the natural field 
for state production, when at the same time great economies 
can be effected by large capital expenditure. Routine is the 
genius of the state, but it spells ruin in the realm of 
demand and enjoyment. When the state caters for luxury 
or convenience, as when the French Government provides us 
with cigars and matches, the results are so unappetizing or 
so inefficient that only severely enforced monopoly can keep 
the business in state hands. The concomitant necessity of 
state production is the exclusion of all other production. 

The right to work is urged and the cry of the unem- 
ployed is heard on behalf of people of very varying degrees 
of efficiency divisible into so many groups that it is 
impossible to examine even a few representative cases. 
Let us, then, only consider the claims of those who occupy 
the position of extremists of unemployed efficiency, those, 
namely, who are highly skilled yet outside any trade union 
or provident society, and those whose sole claim is their 
helplessness and uselessness, except for toil of the most 
routine description. Now the difficulty of helping the 
unemployed is precisely the same for different reasons at 
each end of the scale. To find work for the skilled work- 
man, it must be done either in his own trade or in another. 
In the first instance the state or municipality must enter 
into expensive and intolerable competition with the ordinary 
employer. In the second place the public authority is 
steadily lessening the man's special skill by putting him ou 


to other work, and thus practically taking him out of his 
own trade and making it gradually more difficult for him to 
return to it. 

To help the helpless is a much greater problem for which 
economic science offers no solution, and only has the right 
to suggest difficulties in the way of any short cut proposed 
by sentiment or laziness, or a combination of the two. The 
real difficulty is the small economic value of the labour at 
this end of the scale ; and here I refer not only to those, 
numerous enough, who have failed in character or have 
become demoralized by privation, but of many who are 
sound in health and possess still average determination of 
character. The economic defect of this class of labour is, 
particularly in this country, its inadaptability and obstinate 
independence. Incapable of finding and keeping a niche 
for itself in this weirdly incomprehensible hive of industry 
— how few, if any, of many above them understand it — this 
class of labourer instinctively chooses times, places and 
opportunities wrongly and this not so much out of stupidity 
as out of a ruggedness of disposition, which is almost 
strength of character. They are unteachable because to 
them all teaching is taming. Their offer of labour to 
industry is made under conditions which perhaps make it 
worth 15s. 6d. to the employer, when the standard rate may 
be 18s. or 20s. The employer finds them useful and their 
labour profitable only in times of pressure. Their error is 
the common misunderstanding of value ; fifty hours of 
standard labour has never the intrinsic value of 18s. or 20s., 
although that may be what the employer pays for it. Its 
product has to be sold by expensive machinery for treble its 
cost in material and labour before the employer can expect 
any return on his speculation. That is a side of the 
question, which many people besides the less intelligent 
wage-earners will never grasp. 


What is value, as far as the wage-earner can grasp it? 
How can a man sell his labour and make it worth selling ? 
These are problems which nine men in ten do not under- 
stand and which ninety-nine men out of a hundred leave 
to the hundredth. With the hundredth man, who organizes 
the others, the matter has become a routine, so that when 
there comes an interruption of smooth working he may be 
aware in a general way of the cause but has no remedy to 
offer. I should say from much that I have seen and more 
that I have heard and read that our country has the highest 
quality of labour in the world in large masses, but that, 
except when it is highly organised and where it has leaders 
who understand what competition implies and therefore to 
some extent know what selling costs are, British labour is, 
roughly speaking, the most difficult to employ. It is 
neither bo well disciplined as French and German labour, 
80 patient of direction as Italian or Belgian, nor so natu- 
rally self-adaptive as the native American. These special 
qualities of British labour are overcome by patience in the 
employer and by common sense in the workman, where 
industry can be steadily developed. But where interrup- 
tions occur and unemployment follows, the national 
character makes the problem more severe in this country 
than elsewhere. 

Such an inherited resistance to adaptation in large 
classes of men not specially skilled renders them unteach- 
able by misfortune and makes their demoralization sure, if 
unemployment is prolonged. Where more elastic characters 
would turn inventive, this type of mind deteriorates and 
the man loses his will-power, if not his physical efficiency. 
He passes naturally into what has been called, the un- 
employable class, but, more strictly, the occasionally 
employable class. It is in this stage that he becomes 
easy material for the hard employer and a menace to the 


interests of his own class. If he were really unemployable 
we should hear of him no more in industry ; but the danger 
to the public lies in the fact that he preserves his efficiency 
for short bursts and can be casually employed. Where 
there are large quantities of casual labour the unscrupulous 
employer can use it in competition with steady labour in 
order to lower wages and exact hard conditions, thus 
tending to drive all the labour he employs into the casual 
class. Thus efficiency is lowered until the employer him- 
self ultimately suffers. 

It seems to me that the proper understanding of the 
problem of casual labour is the only new contribution, 
which economic science can offer on the practical problem 
of dealing with unemployment. The danger of the manu- 
facture of real unemployables has been seen, and there are 
many suggestions before the public for its alleviation or 
cure which are chiefly political or charitable in their nature. 
I believe myself that the real controllable danger lies 
higher up in the class of semi-efficient men, who are still 
capable of competing with the admittedly efficient men and 
owing to their weakness accept terms below the efficiency 
mark, thus bringing all down to their level. Thus out of the 
casually employable class the steady manufacture of the 
real unemployables begins, and at this stage I think the 
problem has passed out of the economic sphere. The 
unemployables, unless they are reclaimable and thus are 
made to become a doubtful reinforcement to the casually 
employable class, pass on to be the objects of charitable help 
for the moralist or public nuisances and public dangers to 
the politician or merely material for agitation. 

Here we come to a point in the problem where considera- 
tion of the right to work passes over into discussion of the 
possibility or desirability of a minimum wage. I must, 
however, exculpate myself from the charge of making any 


practical suggestion to legislators, which is not the duty 
of economic science, as I attempt to follow it ; but I know 
of no way of illustrating the ins and outs of the theory 
without taking a supposititious concrete case for the purposes 
of analysis or dissection. Such a concrete case must be 
taken for what it is worth, and must not be held to imply 
an approximate estimate or even an attempted estimate of 
what a minimum wage should be. Here, to some extent, 
we are on safe ground, because there is not the smallest 
possibility in the practical politics of this country of any 
agreement being arrived at between rival parties on any 
feasible amount. Such an obvious probability is easy to 
prove, because any minimum wage fixed by law, below 
which no wages should be allowed to fall in any trade, must 
necessarily be very low, because of the low value economi- 
cally of just that class of labour whose protection is 
economically desirable in the interests of the whole com- 
mercial system. But the leaders of the trade unions, the 
aristocracy of labour, have already in their various 
grades determined what each class of labour aims at 
as a living wage and therefore considers desirable as a 
minimum wage in their grade. They cannot possibly as 
semi-political leaders and skilful economic bargainers allow 
the general standard of wages to be prejudiced by accepting 
any figure, which is likely to be sufficiently low to be 
economically possible, and by economically possible I mean 
approximately near to the standard actually earned under 
the laws of supply and demand by the least efficient class 
which is permanently self-maintaining. Consequently I 
may feel that whatever figure I select — and I admit that I 
select one entirely at haphazard without the slightest 
inquiry as to what a suitable figure might be — this figure 
will never be regarded as a practical suggestion by anyone 
or as anything but an academic hypothesis. 


Theoretically, what justification is there for the establish- 
ment of a minimum wage ; in other words, of a special 
limitation of the action of the laws of supply and demand 
in the sale and purchase of labour, as if it were different 
from any other commodity ? The reply we have already 
seen in the last chaj)ter, where we examined the question 
as to how far labour was a commodity. Personal services 
are the only articles in the world, which are regularly given 
away free and also sold for inadequate consideration and 
also offered for economic sale in the market side by side 
with one another, so that any special limitation on their 
sale is not necessarily an economic offence. 

Practically, then, what is the necessity of establishing 
this limitation and what, apart from the moral question, is 
the economic gain ? The necessity is caused by the solidarity 
of interests in the world of industry, which exists through- 
out grades and also across grades. Among competitive 
capitalists there is danger, lest too many weak ones 
should go together to the wall. Among the grades of 
labour the undue depression of the lowest ranks spreads 
upwards to all and lowers the standard of reward which 
personal exertion and skill has set for itself as its own 
price. The common interests of both classes demand that 
undue depression of wages should not diminish the standard 
of efficiency. 

What, then, is undue depression of labour conditions and 
wages and where can the line be drawn ? Now at the risk 
of being considered pedantic in economic matters I shall 
refuse to enter into any discussion of the living wage ; to 
my mind that is not an economic question but a practical 
estimate of the personal will. All an economist has to 
ascertain is what will any large number of men live on and 
work steadily on, while continuing to maintain their effici- 
ency, however low it may be. The criterion which enables 


the line to be drawn is continuity of efifort and maintenance 
of standard. We are not concerned as economists to 
inquire where the line of sacrifice is drawn by this class 
itself, which works and endures, but we are concerned to see 
that continuous effort is not so broken down by the com- 
petition of discontinuous efifort as to become itself dis- 

The economic object of a minimum wage is the elimina- 
tion or close restriction of casual labour. Where it is 
necessary, as economically it occasionally is, it must be 
sufficiently penalised in cost to discourage its use by the 
employer and to compensate the class which is engaged in 
it for the threatened danger to its own efficiency. Exactly 
a similar object is aimed at and the same danger successfully 
discouraged by the trade unions whenever they exact penal 
rates for working overtime. The remaining question is as 
to how this can be done and for this purpose we must hardily 
seize upon our concrete illustration. Let us suppose that 
the state should select as its minimum rate the wage of 
18s. a week for forty-eight hours, and 6d. an hour overtime 
up to six hours, and 9d. an hour above that. The employer 
would thus have a certain elasticity in extending the 
employment of his own hands with two rates successively 
penalising him, if he tried to extend their labours too far. 
What I should be inclined to deny him would be elasticity 
in the other direction. It is probable, however, that some 
businesses are so casual, taking the employment of a 
jobbing gardener for example, that absolute denial of the 
right to employ a man for part of a week would become 

Let us suppose, then, that the minimum time for which a 
man should be engaged should be three days, and that an 
appreciable penalty on splitting the week should be imposed 
by making the wage for three days 10s. 6d. The method by 


which this might be enforced would be by granting the 
workman a title to a three-day ticket on the occasion of any 
employment of whatever kind, such ticket constituting a 
claim for three days' wages from the employer, provided 
that the workman turned up at the appointed time and 
place for work on three consecutive days and carried out 
any reasonable orders given him during the course of 
employment. Similarly work given for four consecutive 
days would entitle a man to a ticket for the minimum weekly 
wage of 18s. 

The most obvious criticism of such a proposal, if it ever 
came near to the realm of practice, is that it would 
undoubtedly lead to frequent cases of collusive evasion. 
The employer, who had odd jobs to give out, would say to 
any unemployed waiting round his works that he could not 
afford to take on any more hands as the government rate of 
three days' pay for a day's work was too expensive. He and 
his foreman would then offer a day's work, provided that the 
workman would accept a day's wage and undertake to sell 
back his ticket for a few pence at the end of the first day. 
This would happen with great frequency, especially at first, so 
long as the present class of casual labour continued their 
old habits. There are many men now who still prefer to be 
employed in this fashion rather than undertake regular 
work. But employers would soon begin to feel the pressure 
of combination against them to prevent this collusion, and 
a small fine leviable against both j)arties to such a corrupt 
bargain would gradually break up these habits and disperse 
the present casual class. Within a comparatively short 
period employers would find no one willing to consider such 
a bargain, and they would then be driven so to organize 
their work that odd days here and there would be abolished 
and the new principle of the minimum wage could be 

L.S.D. B 


Such an arrangement would be possible for men only. 
At first sight the moral and sentimental claim for protection 
in bargaining seems much greater in the case of women on 
account of their weakness, but economically it would be 
quite impossible to keej) them on the same footing as men 
in this respect. The most important reason against it is 
that the position of women in the matter of business, as of 
everything else, is so much influenced by the peculiar 
institution of marriage, which cuts right across all other 
ties, that it remains doubtful whether they can be said to 
have any purely economic relations either with other women 
or with men. It is not only marriage but the eventuality 
of marriage which has to be taken into account. Thus, for 
instance, it is questionable for other than economic reasons 
whether the state should encourage any permanent liveli- 
hood for women, tending to avert them from or lessen their 
prospect of matrimony. Then, again, the interests of a large 
number of women are exactly opposed to those of men in 
this particular respect. Casual occupation is the curse of 
men, leading to idleness, dissipation and degeneration. 
Casual labour and temporary work are especially suitable to 
many women, who often cannot shed all their home duties. 
What most women seek is not complete self-maintenance by 
their labour, but a prop and aid to their independence to 
which they are not necessarily tied. 

The most fatal objection to a minimum wage for women 
is the difficulty of placing them on an equality with men 
and the apparent injustice of refusing it to them. We 
should be confronted with one of those difficult plain 
questions — why should a woman, task for task, receive less 
than a man ? Yet, if the minimum wage for women were 
fixed at IH.s. a we(3k, or lO.**. Gd. for three days, there would 
be a great diminution of the demand for their work at that 
price and wholesale and syatematic evasions would follow 


There would be so much necessitous appeal for the partial 
maintenance, such as many women now earn, and without 
which many of them could not exist, that the prohibition of 
collusive bargains would break down everywhere. The 
foundation for this necessity I have mentioned above, that 
women's labour asks for partial and sometimes casual 
employment ; that any attempt to professionalize them 
except in a few cases could not on the whole be to the 
higher interests or refined tastes of many of them ; that, in 
fact, the privation of casual employment would not be a boon 
but a penalty, which they would be bound to evade in a 
thousand ways. 

Returning to the point which for the moment I dismissed 
rather summarily above, that the state is notoriously a bad 
seller and therefore fundamentally unable to take any part 
in those productive industries which do not lend themselves 
to monopoly, I would ask anyone to reflect on the nature of 
his dealings not only with the government but also with 
municipalities, as traders, and even with great institutions of 
any kind, who enjoy quasi-monopolies for light, heating, tele- 
phones, &c. Does one not experience a feeling of exaspera- 
tion at the impossibility of making on such an impersonal 
thing the requisite imj^ression which one's personality 
craves for? It is partly habit, partly unnecessary self- 
assertion, which should be controlled, but deeper down it is 
also chiefly the feeling that the material object required 
for the moment is a quite inadequate satisfaction of one's 
real want. Acquiring the mere object does not fulfil the 
want, which pictured it as necessary. There is an inevit- 
able personal factor demanded from the seller, some con- 
sideration for the buyer's own special preferences, some 
sympathy for his need and its satisfaction, some delicate 
persuasion that the satisfaction of the want is really com- 
plete. If many sellers do not succeed in fulfilling all these 



requirements, it is some consolation for us to feel, that at 
least it is attempted. The impersonal seller makes surprise 
impossible and stifles desire. 

All this may appear very fanciful, but I believe it to be, 
on reflection, the real fundamental psychological basis of 
our individualistic commercial system. Some idealists 
•would like to have everything made and sold by the govern- 
ment, like postage stamps. Have they realized that we 
only buy postage stamps from the government because we 
cannot get them anywhere else ; that if we could get them 
elsewhere the majority of us, supposing the other postal 
service were equally good, would prefer to do so ? Very few 
people know, for instance, that they can buy at the post 
offices in this country something more valuable than stamps, 
namely, life-insurance, with a greater guarantee of safety 
than any private company can oft'er, and on better terms 
for smaller amounts than the industrial companies, with 
their heavy advertising expenses, can afford to give. Yet 
the insurance companies do not even take the government 
competition seriously, and very little government insurance 
is done. We might accept compulsory insurance from the 
government with a moderate grumble, but in this respect 
no one can call the government a good seller. 

1 am aware that my own ideas will seem to many more 
than far-fetched, and proof in these matters, at least nega- 
tively, is out of the question. The question might be proved 
positively by the success of government enterprize without 
monopoly against individualistic competition. Even so, it 
would be only half-proved, because government success 
in competition, even to a slight extent, would soon become 
Belf-advertised. Still the half-proof would in this case be 
practically equivalent to full proof, because governments 
would not hesitate to use this and every other advantage. 
In the absence of admitted state success in business let ua 


examine other solutions of the paradox underlying our 
modern commercial and industrial system and I am willing 
in selecting one to admit that the statement of the problem 
is, apart from the implied causation, quite fairly descriptive 
of the facts, in order that, without reserve, we may examine 
the validity of the conclusion. 

Mr. J. Ramsay Macdonald, M.P.,* at the present moment 
leader of the Labour Party, sees the explanation of the 
paradox in the unnecessary waste of capital. He writes : 
" One of the chief characteristics of competitive com- 
mercialism is its chaos. It has no system at all. A. B. 
and C. engage in competition with each other. Nothing 
but capacity of output or danger of bankruptcy limits and 
controls their activities. They pour upon the markets their 
goods ; they manufacture their stocks in expectation of 
orders, which may or may not come. They take work- 
people from other employers and callings, and may have 
to discharge them at the end of the week. Production 
is theoretically for the feeding and clothing of the people, 
but conducted as it is to-day by rivals, who seek to stuff 
their victims and bury them under clothes, and who only 
stop their mad follies when the markets are choked, and 
when a paralyzed industry tells them in words that cannot 
be mistaken that they must stop, it results in industrial 
disorder, uncertainty and poverty. Hence it is true, not 
only of over-capitalized trusts, that production is bearing 
too heavy burdens, it is true of industry in general. There 
is far more capital in use than is necessary for efficient 
production, and for that competitive commercialism is 
alone to blame." 

Assuming that there is more in this argument than the 
rhetoric, all this trouble seems to go back to A. B. and C, 

* J. Eamsay Macdonald, M.P. " The Socialist Movement," p. 64. 


who, if they are not merely wasting their capital for the 
pleasure of forcing goods on people to the point of satiety, 
must be acting in sheer ignorance, until the paralysis of 
trade warns them to stop. Mr. Macdonald no doubt knows 
how sensitive this warning mechanism in trade can be and 
how keenly the markets are watched by it every day, but, 
quite pardonably, he neglects it for the moment. His point 
is that A. B. and C. are fundamentally so blind about their 
real interests, that refinement of their instruments will not 
compensate them for their own failings. Yet he will clearly 
admit, that they are deeply interested in the result, their 
solvency depending on it. Now what guarantee is there 
that the all-producing state, suggested as an alternative to 
A. B. and C. by Mr. Macdonald, will develop an equally 
vigilant mechanism for sifting the vagaries of demand or 
any mechanism at all ? What compelling self-interest in 
the state will replace the fear of bankruptcy in A. B. and C. ? 
Is not the state less likely in the end, owing to its command 
of overwhelming force and wealth, laboriously to test, follow 
and please the wayward, recalcitrant, easily-nauseated palate 
of demand than individuals who have to make their living 
by it ? I think the experience of business is against him. 

The difficulties which I have examined in the case of a 
universally producing state have been so far only the diffi- 
culties of satisfying the home markets. We may well ask, 
whether such a state would be successful in meeting [inter- 
national competition. The impediments would undoubtedly 
be much greater, so great, in fact, that the probability of 
surmounting them need not be seriously considered. The 
all-productive state would certainly be an isolated state and, 
when the territory was small, also a small and poor state. 
It might very possibly distribute happiness more evenly and 
perhaps more fully among its members than our present 
individualistic system, but hardly the kind of happiness 


which is most in request at the present day, no less among 
the poor than among the rich. It would be a circumscribed 
happiness, offering more abundantly opportunities for higher 
self-development, cutting off many degrading temptations 
and providing a rigid discipline of the private will, which is 
sadly lacking in modern life. But almost equally certainly 
there would not be so many of us surviving to enjoy it, and 
the problem of the selection of the survivors would present 
fresh difficulties. 



" Le raisonnement que vous en avez fait est si docte et si beau 
qu'il est impossible que le malade no soit pas fou et melanco- 
lique hypocondriaque ; et quand il iie le serait pas, il faudrait 
qu'il le devint, pour la beaute des choscs que vous avez dites et la 
justesse du raisonnement que vous avez fait." 

Deuxieme medecin. M. de Pourceau<i;uac. Act I., Sc. 8. 


Theories are the last things we desire, except our own, 
but once adopted, a complete theory is the last thing we dis- 
card. Our minds once captured become accomplices of the 
enslaving power ; if we are persuaded that according to 
theory we are ill, we often unnecessarily become so ; if 
philosophers convince us that in our own higher interests 
we should be proud, domineering and ruthless, we take a 
melancholy satisfaction in trying to live up to the heroic 
part ; if selfishness is successfully proclaimed to be an 
obscure god working beneficently behind unlovely practices, 
we bow in his temple and invent a ritual for his worship. 
Of the ritual of selfishness the most frequently recurring 
phrase in the responses is, as I have noted in the first 
chapter, some reference to the " law of supply and demand." 
In most discussions that do not concern themselves with 
literature or art it is almost inevitable. It has so valid a 
currency that it is considered impertinence or bad manners 
to ring it on the counter or to ask for its equivalent. I 
hope I have done something to extinguish this fetichism 


and rend one more cloak wherewith we protect our 
lazinesses and weaknesses. 

Let us once and for ever abolish the feverish, over- 
strained, intolerably efficient spectre of the economic man 
and confine ourselves to the sober inquiry as to whether 
our motives are entirely bad and self-seeking, when we 
follow what I have tried to outline as the laws of supply and 
demand. Are we consistently and inevitably selfish in all 
our economic relations? I see no reason to believe that we 
are and the onus of proving the presumption to the contrary 
surely rests with the other side. We are probably the same 
blundering selves in business relations as elsewhere, hasty 
at times in overreaching others and afterwards sorry that 
it has done ourselves so little good, sometimes generous, 
sometimes cruel and mean and then repentant. The 
difference between economics and other branches of 
psychology is that the material, which is dealt with by this, 
the pedestrian sister of the moral sciences, is petty more 
than sordid, uninteresting rather than repulsive. Besides, 
the objects of economic acquisition are secondary and lead 
on to higher objects and ambitions. Our wealth and 
poverty at best should be only the humble instruments of 
our inner life, and if there is a certain rapacity in forging 
the instruments, it is largely because, according to theories 
long current in economics and still dormant in us, even 
when expressly disclaimed, we have become accustomed to 
expect with some assurance that everyone with whom we 
come into contact in our business relations is bound to act 
in the same manner. The assumption is quite needless and 
will, we hope, gradually grow out of date as we acquire 
more sensible habits.* 

* After the above sentences were written I came across a passage, 
which appears in an article by Professor Henry Jones, of Glasgow, in 
the quarterly Hibbert Jownal, on the corruption of the citizenship of 


The laws of supply and demand are no more nor less than 
the habits of our commercial system. They are almost 
entirely unconscious and indeed are still to-day probably 
incompletely formulated. They have grown up out of the 
natural inclination of all those who trade and exchange to 
secure the maximum reward for their own efforts or sacrifices 
and their fundamental principle must therefore be the seek- 
ing of a self-estimated justice tempered by similar endeavours 
on the part of others. The process may be described as 
trivial and petty but not necessarily mean or sordid. There 
can be nothing essentially wrong in this self-protection and, 
where efforts are pushed to extremes by either one side or 
the other there is probably no more vanity, meanness or 
cruelty current in business than there is, say, in social or 
political circles or among artistic ambitions. 

The unconscious aim of our commercial system is to 
make as swiftly and as cheaply as possible what I shall call 
the '* great exchange." The " great exchange " is the 

the working man. I cannot help quoting it as exhibiting the most 
common way of misunderstanding the true scope of economic science, 
yet the actual wording of the paragraph is oddly parallel to my own 
words in the text. " The industrial world presupposes, exists within 
and in virtue of a wider social order whose interests are as multi- 
farious as the desires of man and which is indefinitely richer in 
ethical content. At its best it is only a means and an instrument 
and can supply man with only the raw material of his real life. Its 
value does not lie in itself, but is relative to its use and depends upon 
the kind of satisfaction which is sought by means of it. It is, there- 
fore, only one of the organs of the state and is subject, even when 
the state is far from attaining aiij' kind of perfection, to its restraints 
and discipline. As well claim unlimited range for the animal pro- 
pensities in man, appeal only to his appetites and ignore his rational 
and moral nature, as allow economic conceptinns to dominate politics 
and the methods of indnstriulism to go their way undisputed and 
unrestrained within the state." I ask only, why and how are 
economic conceptions opposed to ethical needs 't 


securing of a commercial equivalent for the largest possible 
number of personal sacrifices and these personal sacrifices 
are infinitely variable in kind and variable in their concrete 
expressions and variable also in the personal amount of 
effort, exertion, sufi"ering, abstention, &c., which have been put 
forward. It is the last feature in this variability of personal 
effort and suffering which seems to be the stumbling-block 
preventing many men from accepting the fundamental justice 
of our commercial system. The inherent paradoxes are so 
startling that an infinite patience of analysis is required to 
disentangle the essential simplicity underlying the tormented 
facts. Let me state two paradoxes for consideration ; similar 
in their nature yet dissimilar in the superficial plausibility of 
their presentation. Why should one minute of Mr. Rocke- 
feller's time, implying as it does his abstention from the 
dispersal of his fortune during that period, have a much 
higher exchangeable value than the week's work of a Chinese 
coolie on his rice fields ? Why should not one hour of 
M. Jean de Reszke's singing exchange as the equivalent 
of one hour's work of a pavement artist on the Thames 
embankment ? 

Taking the case of the pavement artist it is evident that 
we cannot weigh his distress and effort against that of the 
singer, much less so against the past efforts of the singer. 
But that is not the cause of their inferior value. If the 
singer's voice were ruined his present efforts and past 
struggles would be of no use to him. Nor is artistic merit 
the economic cause of value, because there are many 
instances of unrecognized artistic work of the very greatest 
merit and there are still more cases of high prices paid for 
mediocre work. It is evident that in one case there is great 
competition to buy and there is none in the other. The 
sacrifices of Mr. Rockefeller are more difficult to disentangle, 
since it is probably long since he took an active part in 


business, and still longer since he was in any kind of want. 
But assuming, for the sake of the argument, that he does 
not any longer manipulate his fortune, but allows it to 
accumulate and be reinvested, what is the nature of the 
sacrifices which he makes which have such an enormous 
exchange value ? This is one of those cases, very frequent 
in economics, where the word, which we keep to serve us, 
turns against us and finds itself in a position where its 
usual connotation is absurd. The sacrifices of Mr. Eocke- 
feller are purely economic and imply in his case no personal 
penalty or discomfort ; they imply that he renounces his 
right to disperse his accumulating surplus in enjoyment of any 
kind and instead simply throws his millions on the market. 
The market is always eager to seize and use money for the 
development of commerce and production, whether it belongs 
to a millionaire or a church. The rate of remuneration 
offered by the market for this accommodation is just the 
same per hundred, thousand or million units whatever may 
be the character of the possessor or the amount of his 
wealth. The evil, if there be any, involved in the accumu- 
lation of gigantic private fortunes is a matter entirely for 
the state and not in any way a matter of concern to the 
money market. If the state wishes to bring about the 
more speedy dispersal of fortunes either by taxation or 
partial or whole appropriation at death, the laws of supply 
and demand have nothing directly to say to the matter. 
All that economic science may have to observe is : that it is 
extremely difficult to make distinctions, which will allow the 
market reward to small or moderate accumulations of capital 
and deny it to great ones ; that over-taxation may drive 
away capital or prevent its accumulation ; and that anything 
that looks like confiscation will be an appalling discourage- 
ment to effort and sacrifice of all kinds. 

The kind of justice aimed at by our commercial system is 


not at all a moral one, aiming at the right appropriation of 
rewards for effort or at the appraisement of any other kinds 
of value than that of mere desirability by those with money 
in their pockets. In fact, it can hardly be called justice 
otherwise than in the narrowest sense of the word, the 
securing an exact commercial equivalent for everything 
marketable with the greatest possible smoothness and 
certainty and the accomplishment of as many of these 
exchanges as time will allow. The perfection of mechanism, 
the multiplication of transactions, the lowering of cost and, 
above all, the saving of time, which is money, are its chief 
preoccupations. There is no reason why anything so 
impersonal should be called good or bad, but its operation 
is a great deal more beneficent than is allowed by its 
enemies, who have not taken the trouble to understand it. 
The failure of all those who during the centuries have tried 
to amend it by political action, or to transmute it into 
something more consciously just, has been conspicuous and 
contrasts unfavourably with many more successful experi- 
ments in other fields of social reform. 

The difficulties that beset the full accomplishment of the 
"great exchange " are roughly those of place and time. In 
the universal effort to make the largest number of exchanges 
in all the world market, goods have to be carried over 
immense distances and credit has to be arranged through a 
surprising number of links to secure payment. But this 
part of the problem is nothing more than the provision of 
elaborate mechanism such as the wealth and skill of the 
modern world can supply in abundance. Even the element 
of perishability of goods has been practically abolished 
by cold storage, thus entirely conquering the question of 
distance in the case of foodstuffs. But the factor of time is 
the chief enemy of the elaborate system of exchanges. Let 
UB suppose a negro in Tennessee growing cotton which 


ultimately is sold in the Federated Malay States to a 
Chinese coolie growing rubber. The negro at the same 
time purchases some small article made of rubber grown by 
the other. The world system found no difficulty in carrying 
each article across through dozens of hands and offering it 
for sale at the right moment to secure a due profit to all 
concerned. But it is at the last step that the difficulty 
occurs in each case. The prices of each article carry with 
them all those profits, calculated at a certain rate of 
periodicity of recurrence of demand. If either the negro 
is slow in his demand for rubber or the Chinaman for 
calico, there is a loss in either case and, on the two 
single transactions, there may be a loss in both, which is 
borne by the sellers. Supposing each individual in 
the assumed case stands for a group large enough to 
affect supply, we shall have double over-production and 
negroes will be thrown out of work because Chinamen 
are slow in buying calico and Chinamen thrown out of 
work because negroes are slow in buying rubber. Is it a 
wonder that the system, which finds its mechanical duties 
80 easy and its persuasive work so hard, should be expensive 
and still increasing in cost ? 

It will be noted that in describing the above process of 
bringing goods to their market, we have to make a sharp 
distinction between the mechanical distribution of the goods 
and the art of selling them. Between the two there is all 
the difference that there is between bringing the horse to 
the water and making him drink. Yet in the common 
nomenclature of political economy selling has been taken to 
be, as a matter of course, a function of distribution. It is a 
proof, that the theory of economics has often not been 
properly in touch with real business, that that which is our 
chief everyday practical problem, to sell our goods, has 
been treated in one sense as coming under production, as 


when it is included in the "cost of production," and in 
another sense as being a mere detail of distribution. It is 
neither, it is a third process and vastly more difficult to 
effect than either of the other two. The crowning paradox 
of our economic civilization is here ; that while we have to 
make our goods with great rapidity to obtain cheapness, we 
have to sell them slowly in order to secure adequate prices, 
and while they have to be manufactured at central points 
in enormous quantities, these quantities have to be pressed 
through a fine sieve and infinitely divided over the largest 
possible number of markets in order that none of the 
demand may be glutted. It is the antithesis between the 
necessary conditions of modern production and the exacting 
demand of modern consumption. 

The proper understanding of the " great exchange " has 
been the central object of study in this book. It has led ua 
to appreciate the importance of the limitations of the law of 
value and to restate the law with due definition of its limits. 
It has also led us to examine the theoretical basis of value. 
About value and the time element, which is its distinguish- 
ing feature, I might in conclusion have said much, if the 
question had not come rather prominently into our dis- 
cussion of the right to work in the last chapter, so that 
little remains to be added. The only side of the problem 
of value that we have not covered is the relation of the 
state to values in general, both as protecting them among 
its subjects and also as the owner of property of various 
kinds of very great value. 

Values to a large extent depend on the state as their 
qualifying cause, because the protection of property and 
the enforcement of bargains and contracts are ultimately 
dependent on force and force has been monopolized by the 
modern state. The state has power of limiting its protection 
of property or of excepting certain kinds of property from 


the area of its protection or of making certain conditions as 
to the general protection extended to the vahdity of contracts. 
For instance, in a lame way the state tries to regulate the 
morality of contracts. Sexual immorality in contracts is 
quite unprotected, gambling immorality is apparently but 
not really so, while the immorality of cruelty in contracts is 
regarded with complete indifference. Happily the prevention 
of cruelty is steadily becoming an easier task and is largely 
held in check by private institutions and public opinion. 
"While, however, the state can limit values by withholding 
its sanction to certain contracts, it cannot create them. I 
have used the words " creation of values " rather carelessly 
once or twice already and it is not necessary to be jjarticular 
in this respect because, commercially speaking, values are 
originated by special effort in limited fields and, as far as 
the individuals are concerned, the operation amounts to 
creation ; that is to say, the buyers or prospective buyers 
are made to want something which they never wanted 
before. But from the point of view of the whole community, 
a view which the state is always expected to take in regu- 
lating its overlordship of contracts, these new values are not 
80 much created, as elicited. Their real existence in the 
mind of the buyer is previous to the exciting stimulus 
which brings them into effect. In this sense also we may 
say that supply to some extent elicits or creates demand, 
because there is always some slight and sometimes very 
keen demand for that which is a little better than the best 
available, with the resulting effect that any improvement 
always advances the demand for something better. The 
advancing benefits of civilization generally bring with them 
the demand of newly recognized needs. 

The proper attitude of the state to property and values is 
necessarily negative. The state is most apt to fail where it 
makes distinctions not of principle but merely in respect of 


size. For this reason, as I said above, I believe the opera- 
tion of the Slierman law in America will be a failure, because 
its distinction of what is illegitimate in constraint of trade 
is not valid. Those corporations and trusts which it 
attacks and succeeds in dissolving, unless through inherent 
weakness they are already tottering, will almost certainly 
reorganize themselves in other ways as effectively as before. 
At the present moment, as I go to press, the American 
Tobacco Co., in accordance with the order of the Supreme 
Court made last spring, is splitting itself up into four 
smaller concerns, the holding of whose shares will be 
so mutually interlaced among the old shareholders as 
practically to ensure the predominance of control in the 
same hands as before.* The simple and effective weapon of 

* During the month of Novembei' this case has advanced another 
stage, which almost completely confirms my estimate of the proba- 
bilities, as sketched above. The Federal Government of the United 
States brought an action in the Federal Cii'cuit Court of New York 
to upset the proposed reorganization of the American Tobacco 
Co. in four subsidiary companies. Bad faith was alleged, and 
special powers were asked on behalf of the government of intervening 
at any time during the next five years, to check and verify the good 
faith of this reorganization. The decision of the Circuit Court on 
November 8 was almost entirely against the administration. The 
reorganization was declared to be genuinely carried out under the 
Sherman law and the government was refused all powers of 
interference. Such restraints as were imposed on the remodelled 
companies by the late decision are obviously without value, because, 
although they were in the direction of restricting transfers and of 
limiting the amount of any individual holding of shares, no means of 
ascertaining the nature and amount of these transactions was pro- 
vided. Any business man can estimate the futility of such an 
academic prohibition. After this practical defeat the administration 
hesitated as to the advisability of an appeal and finally decided 
against it, leaving the independent tobacco manufacturers without 
the power of going further. The Economist observes in this con- 
nection that the outcome of the American tobacco proceedings has 
li.S.D. I 


the commercial world against undue state interference is 

The final relation of the state to values is also a 
peculiar one, because it is the owner of all national property 
and the guardian of the national wealth. The two are 
quite distinct although they are very much related to one 
another. In the one case it owns property of vast exchange 
value, as well as property of almost no exchange value and 
property of entirely contingent value. As an instance of 
the first, we have securities, land, mines, the monopolies 
of the postal and telephone services. In the second case, 
the property is serviceable to the nation and yet is hardly 
thinkable as material for exchange, such as many great public 
buildings, highways, open spaces and the right to require 
and wield military services, the police system and all the 
apparatus of government. The third case includes the 
peculiar property of public collections of art and literary 
property, accumulated often at great cost, which if thrown 
on the market suddenly would break it. An actual 
instance of such an occurrence is rare, but one happened 
to the revolutionary government of Venice in 1848, which 
in order to raise money offered, I am told, the public art collec- 
tions of Venice to the British Government for ^£48,000. That 
government, no doubt from sentimental and political 
reasons, declined the offer, so that we have the extra- 
ordinary spectacle of property, with value almost intrinsic 
in general circumstances, of an inestimable amount, worth 
precisely at that moment nothing at all. In some sense 
we may say that all national property is of value 
contingent on the maintenance of law and order and a 
certain degree of prosperity. So much of it is useful only 

been a groat disappointment to those who wore under the impression 
that the Sherman law was now to be made a real and effective piece 
of machinery in the war against monopolies. 


to the members of the nation itself and useful to them 
only so long as trade moves briskly and offers a profitable 
demand for their employment. 

What is national wealth and how does it differ from 
national property ? The latter is included in the former, 
which also embraces the separate properties and fortunes of 
all constituent bodies, groups and private individuals inside 
the nation. Here most economists are inclined to stop and 
deny the use of the word, wealth, to strictly personal 
property such as lies in the talents, skill and capacity for 
sacrifice, exertion and labour available in any population. 
I confess myself driven by logic to conclude that since they 
are exchangeable and frequently exchanged they are no less 
wealth than wealth in fixed form. Their valuable properties 
are, however, quite unassessable at any given moment. But 
I am driven even further to give the term, wealth, to qualities 
even more impalpable than services which are usually paid 
for. There is great value and exchangeable value in 
services which are often not paid for, but given away 
either in whole or in part. These things are part of the 
national wealth, even if not part of the wealth of the 
individual. Such, for instance, are the intellectual habits 
of the Germans, the versatile energy and speculative daring 
of the Americans, and our own reputed character of keeping 
faith. The worst blow that could be dealt to the United 
Kingdom would be our inoculation with the habit of break- 
ing our word for our own advantage among ourselves. It 
would involve an internal and an external loss of wealth to 
us of incalculable amount. 





Deduced in the course of the Argument, together 
tcith such other Terms and Lmvs as are referred to 
directly or hi/ implication in the text : — 

The Law of Value. — Demand and supply, the quantity 
demanded and the quantity suppHed will be made equal. 
If unequal at any moment, competition equalizes them. 
The process of competition is further described as being one 
that brings fresh buyers, as prices fall, and brings fresh 
sellers, as prices rise. — J. S. Mill. 

The Law of Final Bargaining. — Where prices in a 
large market have been determined within certain limits 
])y 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 amount 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. — Re-statement 
of the law of the equilibrium of supply and demand. See 
Cap. I., p. 10. 

The DocxniNE of Alternative Wants is that the larger 
part of an individual's wants are dictated by some ulterior 
purpose, and one want is considered to be alternative to 
another when the satisfaction of either will appear to him 


to serve that purpose almost equally well. See Cap. III., 
p. 21, and Cap. X., p. 109. 

Value is the measure in terms of exchange of the sacrifice 
which the buyer, or more precisely the consumer or his 
agent, is prepared to make for an object, wherewith to 
relieve a necessity or to secure an enjoyment. See Cap. 
IV., p. 32. 

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. 
See Cap. IV., p. 37. 

Supply is a group of sacrifices made by producers in 
manufacturing articles of the same kind. It is usually and 
conveniently measured in quantities and prices. See Cap. 
IV., p. 38. 

Demand is an indeterminate aggregate of values of the 
same kind which come within the operating field of a 
market. See Cap. IV., p. 38. 

Demand is the chief determinant of price. See Cap. VII., 
p. 71. 

The Law of Conteacting Facilities of Production. — 
"When the natural facilities of production in any industry 
are contracting there will be diminishing returns on suc- 
cessive increments of capital and labour applied to it until 
these natural facilities are restored. See Cap. VIIL, p. 80. 

The Law of Expanding Facilities op Production. — 
When the natural facilities of production in any industry 
are expanding in one or in more directions, provided that 
there is no contraction in others, successive increments of 


capital and labour applied to that industt-y will obtain 
increasing returns until this expansion has exhausted itself 
in all directions. See Cap. VIIL, p. 80. 

The Law of Graduated Returns on Partial Monopoly. 
— In the case of a commodity, which is naturally limited in 
supply and capable of being supplied in various grades of 
quality, the prices in each grade are the result of a double 
competition, that is to say, of a competition between the 
various grades and also of a competition according to the 
laws of supply and demand between the units of each grade. 
"Wherever the grades have become stereotyped the com- 
petition within the grade is much more influential in 
determining price than the competition between the grades. 
See Cap. IX., p. 105. 

The Law of Rising Demand. — Demand, when unsatisfied, 
tends to increase to the limit of capacity and desire, these 
latter being allied factors not always present in the same 
proportion. See Cap. X., p. 108. 

The Law of Substituted Demand. — Where demand 
remains unsatisfied through want of capacity it commonly 
becomes efficient demand for any colourable substitute for 
the original object at a lower price. See Cap. X., p. 111. 

The Law of Vanishing Demand. — Demand tends to 
vanish after every completed transaction and, though after 
the extinction of demand from one source or in the course 
of it it may reappear from anotlier, there is always an 
underlying and ultimately cumulative tendency for successive 
extinctions of demand to diminish the probability of its 
reappearance. See Cap. X., p. 113. 

TuE Law of Recurring Demand. — Demand after extinc- 


tion from one source tends to recur from the same source 
after a longer or shorter interval. See Cap. X., p. 115. 

The Law of Anticipated Recurrence of Demand. — • 
Demand after extinction or during the course of extinction 
and before recurrence may be anticipated. See Cap. X., 
p. 116. 

The Law of the Stratification of Demand. — Demand, 
after having been exhausted in one group of individuals, 
may with rapidly falling prices be renewed from another 
group and again perhaps from another in such a way as to 
suggest that there are layers or strata of demand in any 
society, capable of absorbing immense quantities of com- 
modities, whenever their cost of production is sufficiently 
lowered. See Cap. X., p. 118. 

The Law of Intermediate Demand. — In the linked 
chain of traders through whose hands a single commodity 
passes to the consumer the " intermediate " demand of each 
trader for the supply of this commodity is not only deter- 
mined directly by the laws of demand as between him and 
the sellers from whom he buys, but at the same time it is 
subject also indirectly to the influence of the laws governing 
the "final demand" of the consumer. See Cap. XL, p. 125. 

The Law of Secondary Demand. — Demand for a com- 
modity may be considered " secondary " where it is primarily 
conditioned by the demand for one or more other 
commodities. Secondary demand for any commodity is 
therefore not only governed directly by the laws of demand 
in the transactions between the sellers and purchasers of 
this commodity, but also indirectly by the laws of demand, 
which affect the "primary demand" for the other commodities 
in the construction, manufacture or manipulation of which 


the first-named commodity is required. See Cap. XL, 
p. 128. 

The Law of the Equation of Supply and Demand. — 
When in any market there is a condition of stable 
equihbrium, 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 withdrawing 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. See Cap. XIL, p. 139. 

Devaluation is a fall in values, when neither deterioration, 
which is loss of utility, nor depreciation, which is writing 
down of price, has occurred. The term denotes a process 
differing from an ordinary fall in values in being exclusive 
of both deterioration and depreciation. See Cap. XVL, 
p. 199. 

Over-production in one industry, in many or in all 
together, is an acceleration of the rate of production over 
and above the rate of absorption of the market, where the 
demand follows its usual course, or a retardation of the 
rate of absorption of demand, while the rate of production 


remains constant, resulting in either case in a fall in values, 
which may either be liquidated by immediate depreciation 
or be carried over at former prices for future liquidation. 
General over-production involves at least a universal time- 
loss to all producers before the usual exchanges are effected, 
a time-loss that can be largely measured in the medium of 
exchange. See Cap. XVI., p. 199. 

The Doctrine of the Great Exchange. — The general 
tendency of the efforts of our whole commercial system, 
which is partly the outcome of instinctive striving and 
partly the result of conscious endeavour, is the mutual 
requital of two approximately equivalent sacrifices by the 
satisfaction of two approximately equivalent wants, and 
the exchange of as large a number of these satisfactions as 
possible, a result which will be brought about in the highest 
degree by extreme accuracy in self-estimates of wants and 
sacrifices. See Cap. XIIL, p. 149 and Cap. XX., p. 266. 


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Diagram to illustrate 


















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Showing Reversal ot JMilVs Law of Value, both ivays, by 
Glut and Monopoly. 

This diagram has been constructed to show graphically 
on one side certain quantities of goods representing supply, 
and certain groups of values representing demand. The 
plain lines showing convex curves downwards denote 
supply, and the dotted lines showing convex curves upwards 
denote demand. In so far as they overlap, they denote 
the bulk of completed transactions in any given period of 
time. The equal spaces A, B, C, &c., denote equal periods 
of discontinuous time, taken here to be successive days of 
a supposed period of twenty-six market days. The different 
shape of the curves at or near the points of contact or 
proximity denote what may be called the varying pressure 
of supply or demand. For instance, the elongated and 
pointed curve of supply in space K represents an extreme 
eagerness of supply to find buyers at great sacrifice. 
Similarly the almost flat curves of supply in spaces V, W, 
X and Y represent great strength and restraining power 
in the market, when the supply has been completely 
cornered. So also flat curves of demand represent lifeless 
buying, and sharply pointed curves of demand in spaces 
W, X, Y represent extremely eager, almost frantic, compe- 
tition by buyers. The scale of prices at which transactions 
take place is shown on each side. It is uimecessary to 
say that the series of transactions illustrated by the 
diagram are assumed to be two extreme cases of oppo- 
site tendency occurring in rapid succession. With this 


prelimiuary account of the elements of the diagram, I will 
proceed to describe in narrative form the successive 
transactions which it is supposed to illustrate. 

It must be remembered that supply is to some extent a 
definite and ascertainable thing, while values are indefinite 
and to some extent are only evolved by the history of 
the markets. Sellers also generally take the initiative and 
present certain quantities and quote certain prices. 

On the first day, represented by space marked A, prices 
are presumed to be a little stift' and demand is not satisfied ; 
on the three following days (B, C, D) supply is forced by 
competition to lower prices and larger business results. 
Afterwards (E, F, G), supply is weakened still further by 
over-production and falling prices meet steady but not an 
increasing number of sales, as demand is beginning to 
become satisfied. During the next three days (H, I, J), 
successive weakening of prices finds slacker and slacker 
demand ; in other words, we begin to see the reversal of 
Mill's law of value in the lower schedule, since the 
progressive lowering of price no longer attracts fresh 
demand. We may best describe four days here (I, J, K, 
L) as a period of glut, in which demand is thoroughly 
satiated. There is practically no important business done, 
as supply having pushed its sacrifices to their ultimate 
limit still finds no buyers. During these four days the 
psychology of the market is shown by the shape of the 
curves on both sides. The growing eagerness of supply 
for sales during the first three days is shown by the 
gradual elongation of the point of the supply curves, but 
on the fourth day weak supply has been shaken out and 
supply stiffens with a view to returning to normal levels. 
Demand, on the other hand, during these four days 
presents a grim flatness of curve, as if no offers of any kind 
will tempt it. 


After the glut is over the law of recurrence of demand 
begins to operate, and demand becomes buoyant and 
resumes touch with supply. The eagerness during the 
next ensuing period is all on the side of the buyers. At 
first (M, N, 0), supply succeeds in restraining itself and 
maintaining prices. A comparatively small amount of 
business is done at 23s. del., 24s. and 25s. But the recent 
glut has weakened many sellers, and finding demand steadily 
hungry they get rid of all the goods they can during the 
next three days (P, Q, E) at 25s., 24s. and 25s. It must be 
noted that from now on there is a steady keenness of 
demand, due to the long period during which very little 
business was done. Buyers are really hungry and price 
is no longer a serious obstacle to business. Consequently 
during four days (S, T, U, V) supply shows a flatter and 
firmer curve, weak sellers have been shaken out and prices 
are marked up in determined fashion without losing 
business. At averages of 26s., 27s., 28s., 29s., just as 
much business is done as before. Here occurs the second 
reversal of Mill's law of value on the higher schedule. 
The higher the price goes the more eager becomes demand, 
and we are on the edge of a corner. The next three days 
(W, X, Y) show the market cornered. Demand rises to 
frantic heights of eagerness and prices up to 87s. are 
finally exacted. Then on the last day (Z), the lambs 
having been duly shorn, prices moderate and the market is 
again on the way to normal conditions. 



3 4 




{Taken, by permission of the Author, from " The Price of 
Electricity " by E. W. Cowan, F.R.E.S.) 

" In diagram No. 2 I have attempted to isolate and depict 
the characteristic features of the principle I am endea- 
vouring to establish." 

" This diagram requires some explanation. In the first 
place, it should be pointed out that the curves representing 
the respective elasticities of demand for the three com- 
modities, light, power and heat, are not based upon any 
observed results, nor has any attempt been made to 
estimate their character in this respect. They are 
deliberately drawn to fit in with my argument. Important 
factors have been ignored, such as the efi'ect of the load- 
factors of the different classes of supply and the effect of 
the diversity in incidence of the maximum demands of each 
class. In fact, a number of factors have been omitted 
in order to simplify the diagram, and, not only emphasize, 
but exaggerate the effects of the use of a classified tariff. 
The ordinates represent money values, whether of price 
or cost, the abscissae quantity demanded. Three curves, 
representing the arbitrarily assumed elasticities of demand 
for electricity for light, heat and power at different prices, 
have been drawn." 

" Another curve, dotted black, represents the aggregate 
of these demands at equal price for all classes of demand. 
It will be noted, however, that after this curve dips below 
the cost plus profit curve at the point A, it is negligible." 

*' The curve, drawn chain dotted, represents cost, includ- 


ing connection charges, plus a percentage of profit. At 
the point A, where this curve crosses the curve of aggregate 
demand, the aggregate demand at equal profit of all classes 
of consumers is found. In the diagram it is seen to be 2*7 
in quantity, the average price per unit of supply being 2." 

*' The other points, B and C, respectively, represent the 
increase upon the demand which is obtainable under the 
conditions shown in this diagram, if the different classes of 
demand are differently priced." 

" At A all classes are charged 2 per unit of supply." 

" At B the light consumers pay 2'5 per unit, the power 
consumers 0'9, and the heat consumers 0*8. The aggregate 
demand is increased under this differentiation to 4*0 and 
the mean price reduced to 1"49. This increased demand 
has been obtained without charging the light consumers a 
higher price than the price at which they could supply 
themselves collectively. Inspection of the diagram showa 
that they could not supply themselves at a lower price 
than 3*25 and clear their expenses of production. There- 
fore, light consumers are not being penalized and the 
power and heat consumers are not being subsidised at 
their expense." 

"At C the light consumers are charged 2, the power 
consumers 0'8, and the heat consumers O'G, the average 
price per unit being 1*13. Here the light consumers obtain 
no benefit from the classified tariff compared with the 
equal profit, but they are not penalized. A comparison of 
the results shows that at C, under the classified tariff's, 
more than twice the demand is obtained, and at a lower 
price, viz., 1"13 per unit, as against 2 under the equal 
profit tariff, which lower price represents an advantage to 
the power and heat consumers, while the light consumers 
neither gain nor lose. The power and the heat consumers 
both gain the advantage of obtaining a supply which 


would otherwise have been beyond their reach. In short, 
the benefits of electricity supply are extended to a larger 
area. From a subjective standpoint the light and power 
and heat consumers all stand in the same position. The 
classified tariff constitutes under the assumed conditions, 
subjectively speaking, an equitable tariff," 


r.s.D. u 


This book is DUE on the last date stamped below 

APR 3 1947 



JUL 2^U ' ' 
MAR 2 8 I960 


APR 2^ 



FEB 05 1987 

Korm I, 9-15m-3,'34 




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AA 000 539 480 4 


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