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Supply and Demand
by Hubert D. Henderson
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I suppose that it is inevitable that many readers will have concluded that the preceding chapters must be taken to mean that the distribution of wealth is not susceptible of any appreciable change. I would remind those readers of an important distinction upon which impatient people have sometimes based a complaint against economists. The economist, it is said, analyses with great pomp and ceremony the laws governing the distribution of wealth among the agents of production, but says practically nothing about the distribution between individuals and classes, which is the only thing of any real interest to practical people. Now the economist concentrates on the agents of production for the very good reason that it is only with respect to them that any clear and certain laws as to distribution can be laid down. Into the distribution between individuals and classes there enter other and variable factors, governed by no fundamental economic law; and here, the conclusion should at once suggest itself, is the field for action designed to alter the distribution of wealth. What is possible or desirable in this field, it is again not the purpose of this volume to discuss. It is an obvious, even if not a very helpful conclusion that an increase in the habit of saving among weekly wage-earners might, without appreciably affecting the distribution between Capital and Labor, greatly modify the resulting distribution between social classes. But questions as to how far it might be possible or justifiable to achieve a similar result by the use of the weapon of taxation, by changes in inheritance laws, or by the public ownership of industry take us into a far more uncertain and controversial sphere. The difficulties and objections which present themselves are familiar and formidable; but they are of quite a different order from the economic laws which we have been examining. The laws themselves do not entitle us to make any dogmatic pronouncement upon these large issues of social policy.

But this is not to deprive these laws of practical importance. They represent essential criteria of sound policy in the sphere of social reorganization no less than in ordinary business. In our days a curious obsession has led many people to disparage these criteria, as though they were the sordid prejudices of a stupid tradesman. Because it has been found a matter of obvious practical convenience to maintain the roads out of taxation or of rates, and to dispense with charges for their use, it is suggested that the same principle should be applied to the railways. Or, more commonly, because it has been found convenient to make the same charge for the carrying of letters between Land's End and John o' Groats as between Hampstead and Highgate, it is suggested that this principle should be applied to railway rates and fares. It may be well, therefore, to point out that the justification of uniform postal charges rests upon the facts: (1) that the costs of collection, sorting, etc., are so large a part of the costs of carrying a letter, that the real cost between John o' Groats and Land's End does not differ from that between Hampstead and Highgate by as much as might at first sight appear, (2) that the charges in any case are very small; so that (3) the avoidance of the small degree of taxes and bounties which the present system implies is not worth the book-keeping expenses which differential charges would involve. It should be obvious that these considerations apply to the railways with a greatly diminished force. They might possibly justify what is known as the "zone" system of charges, i.e. uniform rates within certain narrow areas. But the notion of uniform rates throughout Great Britain conjures up a vision of trains taking coal from South Wales to Scotland, and others taking coal from Scotland to South Wales, in accordance with the slightest preferences of the consumers, and without regard to the extra real cost involved, on a scale to which the "wastes of competition" afford no parallel. It would in fact achieve the essential folly of "sending coals to Newcastle." These considerations, however, are not what interest the advocates of the postal principle. They seem to recommend the obliteration or the confusion of the relations between price and cost as a superior ideal. It is important to be clear what exactly this ideal involves.

It involves, in the first place, as the whole argument of this volume has gone to show, a less economical employment of our productive resources; they would be diverted to ends of less utility, and so produce less real wealth. But this is not the worst. There is plenty of waste and maladjustment in our economic system at the present time. The desirable relation of price to marginal cost is but imperfectly attained. The further departures from this relation, which would follow from any likely applications of the postal principle, might not matter in themselves so very much. What is far more serious is that the criteria of efficiency would become blunted, and the clear aims of management would be confused in fog. It is essential that every manager should be on the alert to eliminate waste and to improve efficiency, that he should be always trying to secure the best results; but how can he do this if he has no simple means of measuring what results are good and what are bad? The measure which he has at present is that of price, cost and the resultant profit, and it would be fatal to take that away, unless an equally simple and more accurate measure could be substituted for it.

This is not a question, it should be observed, of motive or incentive. Very likely we much exaggerate the importance of the profit motive. It may be true that men would work, perhaps that they already work in fact, as zealously for a fixed salary, as for personal gain. But aim and motive are two somewhat different things, and the aim of profit, is, and will remain, essential to the efficient conduct of business. In a game the players are not animated by the motive of scoring runs or points, but they aim at them; and the zest disappears very speedily from the game, if that aim ceases to be of interest. Moreover, while a scoring system is always a somewhat arbitrary thing, measuring imperfectly the true merits of the play, if it measures them with the roughest accuracy, we prefer the issue of our games to be decided so, rather than by the decisions of an impartial judge, who can take into account the finest points of skill. So it is in the world of business. The scoring-board of profits may be an imperfect one; let us, by all means, where we can, alter the rules of the game so as to make it better. But let us not imagine that it displays a finer insight or a superior intellect to speak as though the scoring-board could be dispensed with, and the test of profit and loss treated as irrelevant. Quantitative measurement is essential to efficiency. Let us be careful to remember all that this implies.

INDEX

Ability Accountancy Allocation of resources Ambiguities Australasia

Bastiat, Frederic Beef and hides Borrowing and lending, system of Business efficiency Business man as a purchaser Business risk

Capital; as representing a period of waiting; distribution; distribution and rate of interest; effect on labor of an increased supply; not a stock of consumable goods; reaction of price charges on; reflections upon; supply; supply as affected by charges in interest rate Capital goods Capital market Capitalism Capitalist Chance Coal industry, cost of production and price; miners' wages Coats, J. & P. Collective saving Commodities; labor as a commodity Competition Composite demand Composite supply Consumable goods Consumers' goods and producers' goods Consumption, margin of; waiting for Control and risk-taking Controversy Cooeperation; unorganized Cost, general relation of price, utility and cost; price relation to; rent as factor in real costs; ultimate; utility and Cotton and cotton-seed; contrast to wool and mutton Cotton industry Criteria of policy Currency inflation Cycles

Demand, ambiguity of expression "increase in demand,"; derived; elastic and inelastic; see also Composite demand; Joint demand; Supply and demand Derived demand Derived utility Diagrams, use of Diminishing utility; money and Directors Distribution of wealth; interest rate and Dividends Division of labor

Economic laws; fundamental character Economic theory; fact and Economic world, orderly nature Education Efficiency Elastic demand Employers' associations Enterprise Entrepreneur "Equal pay for equal work," Expectation

Fact and theory Farmers Fortunes

Gambling Government, enterprises; failings

Hides and beef Houses Housewife as purchaser Housing

Ideas and institutions Incompetents Increase in demand, ambiguity Index numbers Inelastic demand Inflation Institutions and ideas Insurance companies; significance Interest; necessity of Interest rate; changes and their effect on supply of capital; distribution and; price of land and Intuition

Joint demand; importance of the unimportant; marginal utility under; summary of considerations Joint products; cost of production Joint-stock company Joint supply, marginal cost under; summary of considerations

Keynes, J. M.

Labor; apportionment among occupations; apportionment among places; apportionment among social grades; as a commodity; cost, difficulty of estimating; division; effect of increased supply of capital; four grades; mobility; product of; reaction of price changes on; supply in general Laissez-faire; retrospect on Land, characteristics; differential aspect; margin of transference; marginal; price and rent, relation; question of real costs; scarcity aspect; supply; tenure; urban; see also Rent Landlords Large scale business Laws, fundamental

Malthus, T.R. Management Margin, danger of ignoring Margin of consumption Margin of production Margin of transference Marginal cost, aspects; misinterpretation; under joint supply Marginal land Marginal purchaser Marginal utility; price relation to; under joint demand Market Marshall, Alfred Marx, Karl Mill, J. S. Miners Monetary changes, disturbances of Money, diminishing utility Monte Carlo Mutton. See Wool and Mutton

Natural ability Normal conditions

Occupations; apportionment of labor among Order, economic

Pasture versus tillage Pigou, A. C. Policy, criteria Population Postal charges Poverty; national Price, consequences of higher; general relation with utility and cost; law of tendency; marginal utility and; post-war; reaction of changes in demand and supply; relation of demand and supply to; utility and Producers' goods Production, power of; real costs; waiting for Professions Profiteering Profits; elements; general analysis; in risky industries Protective tariff Psychology and economics Purchasers, business man; housewife; marginal Purchasing power

Railway rates Railways Rate of interest. See Interest rate Rent; complex character; marginal land; necessity; rate of interest and Reserves Residuary profits Resources, allocation Risk, reward for; under large-scale organization

Satisfaction Saving; individual; involuntary; psychology; social School teachers Service Serving cotton Shareholders Sinking-fund Situation Smith, Adam Social grades, labor movement among Socialism Speculation Steel smelters Subsidies, industrial Substitutes Supply, reactions of price changes on; see also Composite supply; Joint supply Supply and demand, changes in, and their reaction on price; forces behind; general laws; relation of price to; wages and Supreme Allied Council

Teachers Theory, economic Thrift Tillage versus pasture Trade cycles Trade depression Trade unions; actions; wage level and

Ultimate real costs Unearned increment Unemployment; trade union policy and Utility; cost and; derived; general relation of price, utility and cost; law of diminishing utility; law of diminishing utility as applied to money; marginal; price relation to; wealth and

Wages, general wage level; trade unions and; women's Wages Fund Waiting, essence of; for consumption; for production Waste, economic Wealth, distribution; utility and "What should be" and "What is," Women's wages Wool and mutton; contrast to cotton and cotton-seed Workers' control

THE END

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