The Intellectual Foundations of Political Economy
19th Century Classical Economists
Principles of Economics: An Introductory Volume
Book 3: On Wants and Their Satisfaction
|Chapter I||Chapter IV|
|Chapter II||Chapter V|
|Chapter III||Chapter VI|
1. The older definitions of economics described it as the science which is concerned with the production, the distribution, the exchange, and the consumption of wealth. Later experience has shown that the problems of distribution and exchange are so closely connected, that it is doubtful whether anything is to be gained by the attempt to keep them separate. There is however a good deal of general reasoning with regard to the relation of demand and supply which is required as a basis for the practical problems of value, and which acts as an underlying backbone, giving unity and consistency to the main body of economic reasoning. Its very breadth and generality mark it off from the more concrete problems of distribution and exchange to which it is subservient; and therefore it is put together in Book V on "The General Theory of Demand and Supply" which prepares the way for "Distribution and Exchange, or Value."
But first comes the present Book III, a study of Wants and their satisfaction, i.e. of demand and consumption: and then Book IV, a study of the agents of production, that is, the agents by whose means wants are satisfied, including man himself, the chief agent and the sole aim of production. Book IV corresponds in general character to that discussion of production to which a large place has been given in nearly all English treatises on general economics during the last two generations; although its relation to the problems of demand and supply has not been made sufficiently clear.
2. Until recently the subject of demand or consumption has been somewhat neglected. For important as is the inquiry how to turn our resources to the best account, it is not one which lends itself, so far as the expenditure of private individuals is concerned, to the methods of economics. The common sense of a person who has had a large experience of life will give him more guidance in such a matter than he can gain from subtle economic analyses; and until recently economists said little on the subject, because they really had not much to say that was not the common property of all sensible people. But recently several causes have combined to give the subject a greater prominence in economic discussions.
The first of these is the growing belief that harm was done by Ricardo's habit of laying disproportionate stress on the side of cost of production, when analysing the causes that determine exchange value. For although he and his chief followers were aware that the conditions of demand played as important a part as those of supply in determining value, yet they did not express their meaning with sufficient clearness, and they have been misunderstood by all but the most careful readers.
Secondly, the growth of exact habits of thought in economics is making people more careful to state distinctly the premises on which they reason. This increased care is partly due to the application by some writers of mathematical language and mathematical habits of thought. It is indeed doubtful whether much has been gained by the use of complex mathematical formulae. But the application of mathematical habits of thought has been of great service; for it has led people to refuse to consider a problem until they are quite sure what the problem is; and to insist on knowing what is, and what is not intended to be assumed before proceeding further.
This has in its turn compelled a more careful analysis of all the leading conceptions of economics, and especially of demand; for the mere attempt to state clearly how the demand for a thing is to be measured opens up new aspects of the main problems of economics. And though the theory of demand is yet in its infancy, we can already see that it may be possible to collect and arrange statistics of consumption in such a way as to throw light on difficult questions of great importance to public wellbeing.
Lastly, the spirit of the age induces a closer attention to the question whether our increasing wealth may not be made to go further than it does in promoting the general wellbeing; and this again compels us to examine how far the exchange value of any element of wealth, whether in collective or individual use, represents accurately the addition which it makes to happiness and wellbeing.
We will begin this Book with a short study of the variety of human wants, considered in their relation to human efforts and activities. For the progressive nature of man is one whole. It is only temporarily and provisionally that we can with profit isolate for study the economic side of his life; and we ought to be careful to take together in one view the whole of that side. There is a special need to insist on this just now, because the reaction against the comparative neglect of the study of wants by Ricardo and his followers shows signs of being carried to the opposite extreme. It is important still to assert the great truth on which they dwelt somewhat too exclusively; viz. that while wants are the rulers of life among the lower animals, it is to changes in the forms of efforts and activities that we must turn when in search for the keynotes of the history of mankind.
1. Human wants and desires are countless in number and very various in kind: but they are generally limited and capable of being satisfied. The uncivilized man indeed has not many more than the brute animal; but every step in his progress upwards increases the variety of his needs together with the variety in his methods of satisfying them. He desires not merely larger quantities of the things he has been accustomed to consume, but better qualities of those things; he desires a greater choice of things, and things that will satisfy new wants growing up in him.
Thus though the brute and the savage alike have their preferences for choice morsels, neither of them cares much for variety for its own sake. As, however, man rises in civilization, as his mind becomes developed, and even his animal passions begin to associate themselves with mental activities, his wants become rapidly more subtle and more various; and in the minor details of life he begins to desire change for the sake of change, long before he has consciously escaped from the yoke of custom. The first great step in this direction comes with the art of making a fire: gradually he gets to accustom himself to many different kinds of food and drink cooked in many different ways; and before long monotony begins to become irksome to him, and he finds it a great hardship when accident compels him to live for a long time exclusively on one or two kinds of food.
As a man's riches increase, his food and drink become more various and costly; but his appetite is limited by nature, and when his expenditure on food is extravagant it is more often to gratify the desires of hospitality and display than to indulge his own senses.
This brings us to remark with Senior that "Strong as is the desire for variety, it is weak compared with the desire for distinction: a feeling which if we consider its universality, and its constancy, that it affects all men and at all times, that it comes with us from the cradle and never leaves us till we go into the grave, may be pronounced to be the most powerful of human passions." This great half-truth is well illustrated by a comparison of the desire for choice and various food with that for choice and various dress.
2. That need for dress which is the result of natural causes varies with the climate and the season of year, and a little with the nature of a person's occupations. But in dress conventional wants overshadow those which are natural. Thus in many of the earlier stages of civilization the sumptuary mandates of Law and Custom have rigidly prescribed to the members of each caste or industrial grade, the style and the standard of expense up to which their dress must reach and beyond which they may not go; and part of the substance of these mandates remains now, though subject to rapid change. In Scotland, for instance, in Adam Smith's time many persons were allowed by custom to go abroad without shoes and stockings who may not do so now; and many may still do it in Scotland who might not in England. Again, in England now a well-to-do labourer is expected to appear on Sunday in a black coat and, in some places, in a silk hat; though these would have subjected him to ridicule but a short time ago. There is a constant increase both in that variety and expensiveness which custom requires as a minimum, and in that which it tolerates as a maximum; and the efforts to obtain distinction by dress are extending themselves throughout the lower grades of English society.
But in the upper grades, though the dress of women is still various and costly, that of men is simple and inexpensive as compared with what it was in Europe not long ago, and is to-day in the East. For those men who are most truly distinguished on their own account, have a natural dislike to seem to claim attention by their dress; and they have set the fashion. (1)
3. House room satisfies the imperative need for shelter from the weather: but that need plays very little part in the effective demand for house room. For though a small but well-built cabin gives excellent shelter, its stifling atmosphere, its necessary uncleanliness, and its want of the decencies and the quiet of life are great evils. It is not so much that they cause physical discomfort as that they tend to stunt the faculties, and limit people's higher activities. With every increase in these activities the demand for larger house room becomes more urgent. (2)
And therefore relatively large and well-appointed house room is, even in the lowest social ranks, at once a "necessary for efficiency," (3) and the most convenient and obvious way of advancing a material claim to social distinction. And even in those grades in which everyone has house room sufficient for the higher activities of himself and his family, a yet further and almost unlimited increase is desired as a requisite for the exercise of many of the higher social activities.
4. It is, again, the desire for the exercise and development of activities, spreading through every rank of society, which leads not only to the pursuit of science, literature and art for their own sake, but to the rapidly increasing demand for the work of those who pursue them as professions. Leisure is used less and less as an opportunity for mere stagnation; and there is a growing desire for those amusements, such as athletic games and travelling, which develop activities rather than indulge any sensuous craving. (4)
For indeed the desire for excellence for its own sake, is almost as wide in its range as the lower desire for distinction. Just as the desire for distinction graduates down from the ambition of those who may hope that their names will be in men's mouths in distant lands and in distant times, to the hope of the country lass that the new ribbon she puts on for Easter may not pass unnoticed by her neighbours; so the desire for excellence for its own sake graduates down from that of a Newton, or a Stradivarius, to that of the fisherman who, even when no one is looking and he is not in a hurry, delights in handling his craft well, and in the fact that she is well built and responds promptly to his guidance. Desires of this kind exert a great influence on the supply of the highest faculties and the greatest inventions; and they are not unimportant on the side of demand. For a large part of the demand for the most highly skilled professional services and the best work of the mechanical artisan, arises from the delight that people have in the training of their own faculties, and in exercising them by aid of the most delicately adjusted and responsive implements.
Speaking broadly therefore, although it is man's wants in the earliest stages of his development that give rise to his activities, yet afterwards each new step upwards is to be regarded as the development of new activities giving rise to new wants, rather than of new wants giving rise to new activities.
We see this clearly if we look away from healthy conditions of life, where new activities are constantly being developed; and watch the West Indian negro, using his new freedom and wealth not to get the means of satisfying new wants, but in idle stagnation that is not rest; or again look at that rapidly lessening part of the English working classes, who have no ambition and no pride or delight in the growth of their faculties and activities, and spend on drink whatever surplus their wages afford over the bare necessaries of a squalid life.
It is not true therefore that "the Theory of Consumption is the scientific basis of economics." (5) For much that is of chief interest in the science of wants, is borrowed from the science of efforts and activities. These two supplement one another; either is incomplete without the other. But if either, more than the other, may claim to be the interpreter of the history of man, whether on the economic side or any other, it is the science of activities and not that of wants; and McCulloch indicated their true relations when, discussing "the progressive nature of man" (6) he said: - "The gratification of a want or a desire is merely a step to some new pursuit. In every stage of his progress he is destined to contrive and invent, to engage in new undertakings; and when these are accomplished to enter with fresh energy upon others."
From this it follows that such a discussion of demand as is possible at this stage of our work, must be confined to an elementary analysis of an almost purely formal kind. The higher study of consumption must come after, and not before, the main body of economic analysis; and, though it may have its beginning within the proper domain of economics, it cannot find its conclusion there, but must extend far beyond. (7)
1. A woman may display wealth, but she may not display only her wealth, by her dress; or else she defeats her ends. She must also suggest some distinction of character as well as of wealth; for though her dress may owe more to her dressmaker than to herself, yet there is a traditional assumption that, being less busy than man with external affairs, she can give more time to taking thought as to her dress. Even under the sway of modern fashions, to be "well dressed" - not "expensively dressed" is a reasonable minor aim for those who desire to be distinguished for their faculties and abilities; and this will be still more the case if the evil dominion of the wanton vagaries of fashion should pass away. For to arrange costumes beautiful in themselves, various and well-adapted to their purposes, is an object worthy of high endeavour; it belongs to the same class, though not to the same rank in that class, as the painting of a good picture.
2. It is true that many active-minded working men prefer cramped lodgings in a town to a roomy cottage in the country; but that is because they have a strong taste for those activities for which a country life offers little scope.
3. See Book II, ch. III, sec. 3.
4. As a minor point it may be noticed that those drinks which stimulate the mental activities are largely displacing those which merely gratify the senses. The consumption of tea is increasing very fast, while that of alcohol is stationary; and there is in all ranks of society a diminishing demand for the grosser and more immediately stupefying forms of alcohol.
5. This doctrine is laid down by Banfield, and adopted by Jevons as the key of his position. It is unfortunate that here as elsewhere Jevons' delight in stating his case strongly has led him to a conclusion, which not only is inaccurate, but does mischief by implying that the older economists were more at fault than they really were. Banfield says "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." And if this were true, the above doctrine, which he bases on it, would be true also. But, as Jevons points out (Theory, 2nd Ed. p. 59), it is not true: and he substitutes for it the statement that the satisfaction of a lower want permits a higher want to manifest itself. That is a true and indeed an identical proposition: but it affords no support to the claims of the Theory of Consumption to supremacy.
6. Political Economy, ch. II.
7. The formal classification of Wants is a task not without interest; but it is not needed for our purposes. The basis of most modern work in this direction is to be found in Hermann's Staatswirtschaftliche Untersuchungen, Ch. II, where wants are classified as "absolute and relative, higher and lower, urgent and capable of postponement, positive and negative, direct and indirect, general and particular, constant and interrupted, permanent and temporary, ordinary and extraordinary, present and future, individual and collective, private and public." Some analysis of wants and desires is to be found in the great majority of French and other Continental treatises on economics even of the last generation; but the rigid boundary which English writers have ascribed to their science has excluded such discussions. And it is a characteristic fact that there is no allusion to them in Bentham's Manual of Political Economy, although his profound analysis of them in the Principles of Morals and legislation and in the Table of the Springs of Human Action has exercised a wide-spread influence. Hermann had studied Bentham; and on the other hand Banfield, whose lectures were perhaps the first ever given in an English University that owed much directly to German economic thought, acknowledges special obligations to Hermann. In England the way was prepared for Jevons' excellent work on the theory of wants, by Bentham himself; by Senior, whose short remarks on the subject are pregnant with far-reaching hints; by Banfield, and by the Australian Hearn. Hearn's Plutology or Theory of the Efforts to satisfy Human Wants is at once simple and profound: it affords an admirable example of the way in which detailed analysis may be applied to afford a training of a very high order for the young, and to give them an intelligent acquaintance with the economic conditions of life, without forcing upon them any particular solution of those more difficult problems on which they are not yet able to form an independent judgment. At about the same time as Jevons' Theory appeared, Carl Menger gave a great impetus to the subtle and interesting studies of wants and utilities by the Austrian school of economists: they had already been initiated by von Thunen, as is indicated in the Preface to this Volume.
1. When a trader or a manufacturer buys anything to be used in production, or be sold again, his demand is based on his anticipations of the profits which he can derive from it. These profits depend at any time on speculative risks and on other causes, which will need to be considered later on. But in the long run the price which a trader or manufacturer can afford to pay for a thing depends on the prices which consumers will pay for it, or for the things made by aid of it. The ultimate regulator of all demands is therefore consumers' demand. And it is with that almost exclusively that we shall be concerned in the present Book.
Utility is taken to be correlative to Desire or Want. It has been already argued that desires cannot be measured directly, but only indirectly by the outward phenomena to which they give rise: and that in those cases with which economics is chiefly concerned the measure is found in the price which a person is willing to pay for the fulfilment or satisfaction of his desire. He may have desires and aspirations which are not consciously set for any satisfaction: but for the present we are concerned chiefly with those which do so aim; and we assume that the resulting satisfaction corresponds in general fairly well to that which was anticipated when the purchase was made. (1)
There is an endless variety of wants, but there is a limit to each separate want. This familiar and fundamental tendency of human nature may be stated in the law of satiable wants or of diminishing utility thus: —The total utility of a thing to anyone (that is, the total pleasure or other benefit it yields him) increases with every increase in his stock of it, but not as fast as his stock increases. If his stock of it increases at a uniform rate the benefit derived from it increases at a diminishing rate. In other words, the additional benefit which a person derives from a given increase of his stock of a thing, diminishes with every increase in the stock that he already has.
That part of the thing which he is only just induced to purchase may be called his marginal purchase, because he is on the margin of doubt whether it is worth his while to incur the outlay required to obtain it. And the utility of his marginal purchase may be called the marginal utility of the thing to him. Or, if instead of buying it, he makes the thing himself, then its marginal utility is the utility of that part which he thinks it only just worth his while to make. And thus the law just given may be worded: —
The marginal utility of a thing to anyone diminishes with every increase in the amount of it he already has. (2)
There is however an implicit condition in this law which should be made clear. It is that we do not suppose time to be allowed for any alteration in the character or tastes of the man himself. It is therefore no exception to the law that the more good music a man hears, the stronger is his taste for it likely to become; that avarice and ambition are often insatiable; or that the virtue of cleanliness and the vice of drunkenness alike grow on what they feed upon. For in such cases our observations range over some period of time; and the man is not the same at the beginning as at the end of it. If we take a man as he is, without allowing time for any change in his character, the marginal utility of a thing to him diminishes steadily with every increase in his supply of it. (3)
2. Now let us translate this law of diminishing utility into terms of price. Let us take an illustration from the case of a commodity such as tea, which is in constant demand and which can be purchased in small quantities. Suppose, for instance, that tea of a certain quality is to be had at 2s. per lb. A person might be willing to give 10s. for a single pound once a year rather than go without it altogether; while if he could have any amount of it for nothing he would perhaps not care to use more than 30 lbs. in the year. But as it is, he buys perhaps 10 lbs. in the year; that is to say, the difference between the satisfaction which he gets from buying 9 lbs. and I 0 lbs. is enough for him to be willing to pay 2s. for it: while the fact that he does not buy an eleventh pound, shows that he does not think that it would be worth an extra 2s. to him. That is, 2s. a pound measures the utility to him of the tea which lies at the margin or terminus or end of his purchases; it measures the marginal utility to him. If the price which he is just willing to pay for any pound be called his demand price, then 2s. is his marginal demand price. And our law may be worded: —
The larger the amount of a thing that a person has the less, other things being equal (i.e. the purchasing power of money, and the amount of money at his command being equal), will be the price which he will pay for a little more of it: or in other words his marginal demand price for it diminishes.
His demand becomes efficient, only when the price which he is willing to offer reaches that at which others are willing to sell.
This last sentence reminds us that we have as yet taken no account of changes in the marginal utility of money, or general purchasing power. At one and the same time, a person's material resources being unchanged, the marginal utility of money to him is a fixed quantity, so that the prices he is just willing to pay for two commodities are to one another in the same ratio as the utility of those two commodities.
3. A greater utility will be required to induce him to buy a thing if he is poor than if he is rich. We have seen how the clerk with £100 a year will walk to business in a heavier rain than the clerk with £300 a year. (4) But although the utility, or the benefit, that is measured in the poorer man's mind by twopence is greater than that measured by it in the richer man's mind; yet if the richer man rides a hundred times in the year and the poorer man twenty times, then the utility of the hundredth ride which the richer man is only just induced to take is measured to him by twopence; and the utility of the twentieth ride which the poorer man is only just induced to take is measured to him by twopence. For each of them the marginal utility is measured by twopence; but this marginal utility is greater in the case of the poorer man than in that of the richer.
In other words, the richer a man becomes the less is the marginal utility of money to him; every increase in his resources increases the price which he is willing to pay for any given benefit. And in the same way every diminution of his resources increases the marginal utility of money to him, and diminishes the price that he is willing to pay for any benefit. (5)
4. To obtain complete knowledge of demand for anything, we should have to ascertain how much of it he would be willing to purchase at each of the prices at which it is likely to be offered; and the circumstance of his demand for, say, tea can be best expressed by a list of the prices which he is willing to pay; that is, by his several demand prices for different amounts of it. (This list may be called his demand schedule.)
Thus for instance we may find that he would buy
6 lbs. at 50d. per lb. 10 lbs. at 24d. per lb.
7 " 40 " 11 " 21 "
8 " 33 " 12 " 19 "
9 " 28 " 13 " 17 "
If corresponding prices were filled in for all intermediate amounts we should have an exact statement of his demand. (6) We cannot express a person's demand for a thing by the "amount he is willing to buy" or by the "intensity of his eagerness to buy a certain amount," without reference to the prices at which he would buy that amount and other amounts. We can represent it exactly only by lists of the prices at which he is willing to buy different amounts. (7)
When we say that a person's demand for anything increases, we mean that he will buy more of it than he would before at the same price, and that he will buy as much of it as before at a higher price. A general increase in his demand is an increase throughout the whole list of prices at which he is willing to purchase different amounts of it, and not merely that he is willing to buy more of it at the current prices. (8)
5. So far we have looked at the demand of a single individual. And in the particular case of such a thing as tea, the demand of a single person is fairly representative of the general demand of a whole market: for the demand for tea is a constant one; and, since it can be purchased in small quantities, every variation in its price is likely to affect the amount which he will buy. But even among those things which are in constant use, there are many for which the demand on the part of any single individual cannot vary continuously with every small change in price, but can move only by great leaps. For instance, a small fall in the price of hats or watches will not affect the action of every one; but it will induce a few persons, who were in doubt whether or not to get a new hat or a new watch, to decide in favour of doing so.
There are many classes of things the need for which on the part of any individual is inconstant, fitful, and irregular. There can be no list of individual demand prices for wedding-cakes, or the services of an expert surgeon. But the economist has little concern with particular incidents in the lives of individuals. He studies rather "the course of action that may be expected under certain conditions from the members of an industrial group," in so far as the motives of that action are measurable by a money price; and in these broad results the variety and the fickleness of individual action are merged in the comparatively regular aggregate of the action of many.
In large markets, then —where rich and poor, old and young, men and women, persons of all varieties of tastes, temperaments and occupations are mingled together, —the peculiarities in the wants of individuals will compensate one another in a comparatively regular gradation of total demand. Every fall, however slight in the price of a commodity in general use, will, other things being equal, increase the total sales of it; just as an unhealthy autumn increases the mortality of a large town, though many persons are uninjured by it. And therefore if we had the requisite knowledge, we could make a list of prices at which each amount of it could find purchasers in a given place during, say, a year.
The total demand in the place for, say, tea, is the sum of the demands of all the individuals there. Some will be richer and some poorer than the individual consumer whose demand we have just written down; some will have a greater and others a smaller liking for tea than he has. Let us suppose that there are in the place a million purchasers of tea, and that their average consumption is equal to his at each several price. Then the demand of that place is represented by the same list of prices as before, if we write a million pounds of tea instead of one pound. (9)
There is then one general law of demand: —The greater the amount to be sold, the smaller must be the price at which it is offered in order that it may find purchasers; or, in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price. There will not be any uniform relation between the fall in price and the increase of demand. A fall of one-tenth in the price may increase the sales by a twentieth or by a quarter, or it may double them. But as the numbers in the left-hand column of the demand schedule increase, those in the right-hand column will always diminish. (10)
The price will measure the marginal utility of the commodity to each purchaser individually: we cannot speak of price as measuring marginal utility in general, because the wants and circumstances of different people are different.
6. The demand prices in our list are those at which various quantities of a thing can be sold in a market during a given time and under given conditions. If the conditions vary in any respect the prices will probably require to be changed; and this has constantly to be done when the desire for anything is materially altered by a variation of custom, or by a cheapening of the supply of a rival commodity, or by the invention of a new one. For instance, the list of demand prices for tea is drawn out on the assumption that the price of coffee is known; but a failure of the coffee harvest would raise the prices for tea. The demand for gas is liable to be reduced by an improvement in electric lighting; and in the same way a fall in the price of a particular kind of tea may cause it to be substituted for an inferior but cheaper variety. (11)
Our next step will be to consider the general character of demand in the cases of some important commodities ready for immediate consumption. We shall thus be continuing the inquiry made in the preceding chapter as to the variety and satiability of wants; but we shall be treating it from a rather different point of view, viz. that of price statistics. (12)
1. It cannot be too much insisted that to measure directly, or per se, either desires or the satisfaction which results from their fulfilment is impossible, if not inconceivable. If we could, we should have two accounts to make up, one of desires, and the other of realized satisfactions. And the two might differ considerably. For, to say nothing of higher aspirations, some of those desires with which economics is chiefly concerned, and especially those connected with emulation, are impulsive; many result from the force of habit; some are morbid and lead only to hurt; and many are based on expectations that are never fulfilled. (See above I, II, sections 3, 4) Of course many satisfactions are not common pleasures, but belong to the development of man's higher nature, or to use a good old word, to his beatification; and some may even partly result from self abnegation. (See I, II, sec. 1) The two direct measurements then might differ. But as neither of them is possible, we fall back on the measurement which economics supplies, of the motive or moving force to action: and we make it serve, with all its faults, both for the desires which prompt activities and for the satisfactions that result from them. (Compare "Some remarks on Utility" by Prof. Pigou in the Economic Journal for March, 1903.)
2. See Note I in the Mathematical Appendix at the end of the Volume. This law holds a priority of position to the law of diminishing return from land; which however has the priority in time; since it was the first to be subjected to a rigid analysis of a semi-mathematical character. And if by anticipation we borrow some of its terms, we may say that the return of pleasure which a person gets from each additional dose of a commodity diminishes till at last a margin is reached at which it is no longer worth his while to acquire any more of it.
The term marginal utility (Grenz-nutz) was first used in this connection by the Austrian Wieser. It has been adopted by Prof. Wicksteed. It corresponds to the term Final used by Jevons, to whom Wieser makes his acknowledgments in the Preface (p. xxiii of the English edition). His list of anticipators of his doctrine is headed by Gossen, 1854.
3. It may be noticed here, though the fact is of but little practical importance, that a small quantity of a commodity may be insufficient to meet a certain special want; and then there will be a more than proportionate increase of pleasure when the consumer gets enough of it to enable him to attain the desired end. Thus, for instance, anyone would derive less pleasure in proportion from ten pieces of wall paper than from twelve, if the latter would, and the former would not, cover the whole of the walls of his room. Or again a very short concert or a holiday may fail of its purpose of soothing and recreating: and one of double length might be of more than double total utility. This case corresponds to the fact, which we shall have to study in connection with the tendency to diminishing return, that the capital and labour already applied to any piece of land may be so inadequate for the development of its full powers, that some further expenditure on it even with the existing arts of agriculture would give a more than proportionate return; and in the fact that an improvement in the arts of agriculture may resist that tendency, we shall find an analogy to the condition just mentioned in the text as implied in the law of diminishing utility.
4. See I, II, sec. 2.
5. See Note II in the Mathematical Appendix.
6. Such a demand schedule may be translated, on a plan now coming into familiar use, into a curve that may be called his demand curve. Let Ox and Oy be drawn the one horizontally, the other vertically. Let an inch measured along Ox represent 10 lbs. of tea, and an inch measured along Oy represent 40d.
tenths of fortieths of
an inch. an inch.
take Om1 = 6, and draw m1p1 = 50
Om2 = 7 " " m2p2 = 40
Om3 = 8 " " m3p3 = 33
Om4 = 9 " " m4p4 = 28
Om5 = 10 " " m5p5 = 24
Om6 = 11 " " m6p6 = 21
Om7 = 12 " " m7p7 = 19
Om8 = 13 " " m8p8 = 17
m1 being on Ox and m1p1 being drawn vertically from m1; and so for the others. Then p1 p2... p8 are points on his demand curve for tea; or as we may say demand points. If we could find demand points in the same manner for every possible quantity of tea, we should get the whole continuous curve DD' as shown in the figure. This account of the demand schedule and curve is provisional; several difficulties connected with it are deferred to chapter v.
7. Thus Mill says that we must " mean by the word demand, the quantity demanded, and remember that this is not a fixed quantity, but in general varies according to the value." (Principles, III, II, sec. 4) This account is scientific in substance; but it is not clearly expressed and it has been much misunderstood. Cairnes prefers to represent "demand as the desire for commodities and services, seeking its end by an offer of general purchasing power, and supply as the desire for general purchasing power, seeking its end by an offer of specific commodities or services." He does this in order that he may be able to speak of a ratio, or equality, of demand and supply. But the quantities of two desires on the part of two different persons cannot be compared directly; their measures may be compared, but not they themselves. And in fact Cairnes is himself driven to speak of supply as "limited by the quantity of specific commodities offered for sale, and demand by the quantity of purchasing power offered for their purchase." But sellers have not a fixed quantity of commodities which they offer for sale unconditionally at whatever price they can get: buyers have not a fixed quantity of purchasing power which they are ready to spend on the specific commodities, however much they pay for them. Account must then be taken in either case of the relation between quantity and price, in order to complete Cairnes' account, and when this is done it is brought back to the lines followed by Mill. He says, indeed, that "Demand, as defined by Mill, is to be understood as measured, not, as my definition would require, by the quantity of purchasing power offered in support of the desire for commodities, but by the quantity of commodities for which such purchasing power is offered." It is true that there is a great difference between the statements, "I will buy twelve eggs," and "I will buy a shilling's Worth of eggs." But there is no substantive difference between the statement, "I will buy twelve eggs at a penny each, but only six at three halfpence each," and the statement, "I will spend a shilling on eggs at a penny each, but if they cost three halfpence each I will spend ninepence on them." But while Cairnes' account when completed becomes substantially the same as Mill's, its present form is even more misleading. (See an article by the present writer on Mill's Theory of Value in the Fortnightly Review for April, 1876)
8. We may sometimes find it convenient to speak of this as a raising of his demand schedule. Geometrically it is represented by raising his demand curve, or, what comes to the same thing, moving it to the right, with perhaps some modification of its shape.
9. The demand is represented by the same curve as before, only an inch measured along Ox now represents ten million pounds instead of ten pounds. And a formal definition of the demand curve for a market may be given thus: —The demand curve for any commodity in a market during any given unit of time is the locus of demand points for it. That is to say, it is a curve such that if from any point P on it, a straight line PM be drawn perpendicular to Ox, PM represents the price at which purchasers will be forthcoming for an amount of the commodity represented by OM.
10. That is, if a point moves along the curve away from Oy it will constantly approach Ox. Therefore if a straight line PT be drawn touching the curve at P and meeting Ox in T, the angle PTx is an obtuse angle. It will be found convenient to have a short way of expressing this fact; which may be done by saying that PT is inclined negatively. Thus the one universal rule to which the demand curve conforms is that it is inclined negatively throughout the whole of its length.
It will of course be understood that "the law of demand" does not apply to the demand in a campaign between groups of speculators. A group, which desires to unload a great quantity of a thing on to the market, often begins by buying some of it openly. When it has thus raised the price of the thing, it arranges to sell a great deal quietly, and through unaccustomed channels. See an article by Professor Taussig in the Quarterly Journal of Economics (May, 1921, p. 402).
11. It is even conceivable, though not probable, that a simultaneous and proportionate fall in the price of all teas may diminish the demand for some particular kind of it; if it happens that those whom the increased cheapness of tea leads to substitute a superior kind for it are more numerous than those who are led to take it in the place of an inferior kind. The question where the lines of division between different commodities should be drawn must be settled by convenience of the particular discussion. For some purposes it may be best to regard Chinese and Indian teas, or even Souchong and Pekoe teas, as different commodities; and to have a separate demand schedule for each of them. While for other purposes it may be best to group together commodities as distinct as beef and mutton, or even as tea and coffee, and to have a single list to represent the demand for the two combined; but in such a case of course some convention must be made as to the number of ounces of tea which are taken as equivalent to a pound of coffee.
Again, a commodity may be simultaneously demanded for several uses (for instance there may be a "composite demand" for leather for making shoes and portmanteaus); the demand for a thing may be conditional on there being a supply of some other thing without which it would not be of much service (thus there may be a "joint demand" for raw cotton and cotton-spinners' labour). Again, the demand for a commodity on the part of dealers who buy it only with the purpose of selling it again, though governed by the demand of the ultimate consumers in the background, has some peculiarities of its own. But all such points may best be discussed at a later stage.
12. A great change in the manner of economic thought has been brought about during the present generation by the general adoption of semi-mathematical language for expressing the relation between small increments of a commodity on the one hand, and on the other hand small increments in the aggregate price that will be paid for it: and by formally describing these small increments of price as measuring corresponding small increments of pleasure. The former, and by far the more important, step was taken by Cournot (Recherches sur les Principes Mathematiques de la Theorie des Richesses, 1838); the latter by Dupuit (De la Mesure d'utiiite des travaux publics in the Annales des Ponts et Chaussees, 1844), and by Gossen (Entwickelung der Gesetze des menschlichen Verkehrs, 1854). But their work was forgotten; part of it was done over again, developed and published almost simultaneously by Jevons and by Carl Menger in 1871, and by Walras a little later. Jevons almost at once arrested public attention by his brilliant lucidity and interesting style. He applied the new name final utility so ingeniously as to enable people who knew nothing of mathematical science to get clear ideas of the general relations between the small increments of two things that are gradually changing in causal connection with one another. His success was aided even by his faults. For under the honest belief that Ricardo and his followers had rendered their account of the causes that determine value hopelessly wrong by omitting to lay stress on the law of satiable wants, he led many to think he was correcting great errors; whereas he was really only adding very important explanations. He did excellent work in insisting on a fact which is none the less important, because his predecessors, and even Cournot, thought it too obvious to be explicitly mentioned, viz. that the diminution in the amount of a thing demanded in a market indicates a diminution in the intensity of the desire for it on the part of individual consumers, whose wants are becoming satiated. But he has led many of his readers into a confusion between the provinces of Hedonics and Economics, by exaggerating the applications of his favourite phrases, and speaking (Theory, 2nd Edn, p. 105) without qualification of the price of a thing as measuring its final utility not only to an individual, which it can do, but also to "a trading body," which it cannot do. These points are developed later on in Appendix I on Ricardo's Theory of value. It should be added that Prof. Seligman has shown (Economic Journal, 1903, pp. 356-63) that a long-forgotten Lecture, delivered by Prof. W.F. Lloyd at Oxford in 1833, anticipated many of the central ideas of the present doctrine of utility.
An excellent bibliography of Mathematical Economics is given by Prof. Fisher as an appendix to Bacon's translation of Cournot's Researches, to which the reader may be referred for a more detailed account of the earlier mathematical writings on economics, as well as of those by Edgeworth, Pareto, Wicksteed, Auspitz, Lieben and others. Pantaleoni's Pure Economics, amid much excellent matter, makes generally accessible for the first time the profoundly original and vigorous, if somewhat abstract, reasonings of Gossen.
1. We have seen that the only universal law as to a person's desire for a commodity is that it diminishes, other things being equal, with every increase in his supply of that commodity. But this diminution may be slow or rapid. If it is slow the price that he will give for the commodity will not fall much in consequence of a considerable increase in his supply of it; and a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case his willingness to purchase the thing stretches itself out a great deal under the action of a small inducement: the elasticity of his wants, we may say, is great. In the latter case the extra inducement given by the fall in price causes hardly any extension of his desire to purchase: the elasticity of his demand is small. If a fall in price from say 16d. to 15d. per lb. of tea would much increase his purchases, then a rise in price from 15 d. to 16d. would much diminish them. That is, when the demand is elastic for a fall in price, it is elastic also for a rise.
And as with the demand of one person so with that of a whole market. And we may say generally: - The elasticity (or responsiveness) of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price, and diminishes much or little for a given rise in price. (1)
2. The price which is so high relatively to the poor man as to be almost prohibitive, may be scarcely felt by the rich; the poor man, for instance, never tastes wine, but the very rich man may drink as much of it as he has a fancy for, without giving himself a thought of its cost. We shall therefore get the clearest notion of the law of the elasticity of demand by considering one class of society at a time. Of course there are many degrees of richness among the rich, and of poverty among the poor; but for the present we may neglect these minor subdivisions.
When the price of a thing is very high relatively to any class, they will buy but little of it; and in some cases custom and habit may prevent them from using it freely even after its price has fallen a good deal. It may still remain set apart for a limited number of special occasions, or for use in extreme illness, etc. But such cases, though not infrequent, do not form the general rule; and anyhow as soon as it has been taken into common use, any considerable fall in its price causes a great increase in the demand for it. The elasticity of demand is great for high prices, and great, or at least considerable, for medium prices; but it declines as the price falls; and gradually fades away if the fall goes so far that satiety level is reached.
This rule appears to hold with regard to nearly all commodities and with regard to the demand of every class; save only that the level at which high prices end and low prices begin, is different for different classes; and so again is the level at which low prices end and very low prices begin. There are however many varieties in detail; arising chiefly from the fact that there are some commodities with which people are easily satiated, and others-chiefly things used for display-for which their desire is almost unlimited. For the latter the elasticity of demand remains considerable, however low the price may fall, while for the former the demand loses nearly all its elasticity as soon as a low price has once been reached. (2)
3. There are some things the current prices of which in this country are very low relatively even to the poorer classes; such are for instance salt, and many kinds of savours and flavours, and also cheap medicines. It is doubtful whether any fall in price would induce a considerable increase in the consumption of these.
The current prices of meat, milk and butter, wool, tobacco, imported fruits, and of ordinary medical attendance, are such that every variation in price makes a great change in the consumption of them by the working classes, and the lower half of the middle classes; but the rich would not much increase their own personal consumption of them however cheaply they were to be had. In other words, the direct demand for these commodities is very elastic on the part of the working and lower middle classes, though not on the part of the rich. But the working class is so numerous that their consumption of such things as are well within their reach is much greater than that of the rich; and therefore the aggregate demand for all things of the kind is very elastic. A little while ago sugar belonged to this group of commodities: but its price in England has now fallen so far as to be low relatively even to the working classes, and the demand for it is therefore not elastic. (3)
The current prices of wall-fruit, of the better kinds of fish, and other moderately expensive luxuries are such as to make the consumption of them by the middle class increase much with every fall in price; in other words, the middle class demand for them is very elastic: while the demand on the part of the rich and on the part of the working class is much less elastic, the former because it is already nearly satiated, the latter because the price is still too high.
The current prices of such things as rare wines, fruit out of season, highly skilled medical and legal assistance, are so high that there is but little demand for them except from the rich: but what demand there is, often has considerable elasticity. Part of the demand for the more expensive kinds of food is really a demand for the means of obtaining social distinction, and is almost insatiable. (4)
4. The case of necessaries is exceptional. When the price of wheat is very high, and again when it is very low, the demand has very little elasticity: at all events if we assume that wheat, even when scarce, is the cheapest food for man; and that, even when most plentiful, it is not consumed in any other way. We know that a fall in the price of the quartern loaf from 6d. to 4d. has scarcely any effect in increasing the consumption of bread. With regard to the other end of the scale it is more difficult to speak with certainty, because there has been no approach to a scarcity in England since the repeal of the corn laws. But, availing ourselves of the experience of a less happy time, we may suppose that deficits in the supply of 1, 2, 3, 4, or 5 tenths would cause a rise in price of 3, 8, 16, 28, or 45 tenths respectively. (5) Much greater variations in prices indeed than this have not been uncommon. Thus wheat sold in London for ten shillings a bushel in 1335, but in the following year it sold for ten pence. (6)
There may be even more violent changes than this in the price of a thing which is not necessary, if it is perishable and the demand for it is inelastic: thus fish may be very dear one day, and sold for manure two or three days later.
Water is one of the few things the consumption of which we are able to observe at all prices, from the very highest down to nothing at all. At moderate prices the demand for it is very elastic. But the uses to which it can be put are capable of being completely filled: and as its price sinks towards zero the demand for it loses its elasticity. Nearly the same may be said of salt. Its price in England is so low that the demand for it as an article of food is very inelastic: but in India the price is comparatively high and the demand is comparatively elastic.
The price of house-room, on the other hand, has never fallen very low except when a locality is being deserted by its inhabitants. Where the condition of society is healthy, and there is no check to general prosperity, there seems always to be an elastic demand for house-room, on account both of the real conveniences and the social distinction which it affords. The desire for those kinds of clothing which are not used for the purpose of display, is satiable: when their price is low the demand for them has scarcely any elasticity.
The demand for things of a higher quality depends much on sensibility. some people care little for a refined flavour in their wine provided they can get plenty of it: others crave a high quality, but are easily satiated. In the ordinary working class districts the inferior and the better joints are sold at nearly the same price: but some well-paid artisans in the north of England have developed a liking for the best meat, and will pay for it nearly as high a price as can be got in the west end of London, where the price is kept artificially high by the necessity of sending the inferior joints away for sale elsewhere. U se also gives rise to acquired distastes as well as to acquired tastes. Illustrations which make a book attractive to many readers, will repel those whose familiarity with better work has rendered them fastidious. A person of high musical sensibility in a large town will avoid bad concerts: though he might go to. them gladly if he lived in a small town, where no good concerts are to be heard, because there are not enough persons willing to pay the high price required to cover their expenses. The effective demand for first-rate music is elastic only in large towns; for second-rate music it is elastic both in large and small towns.
Generally speaking those things have the most elastic demand, which are capable of being applied to many different uses. Water for instance is needed first as food, then for cooking, then for washing of various kinds and so on. When there is no special drought, but water is sold by the pailful, the price may be low enough to enable even the poorer classes to drink as much of it as they are inclined, while for cooking they sometimes use the same water twice over, and they apply it very scantily in washing. The middle classes will perhaps not use any of it twice for cooking; but they will make a pail of water go a good deal further for washing purposes than if they had an unlimited supply at command. When water is supplied by pipes, and charged at a very low rate by meter, many people use as much of it even for washing as they feel at all inclined to do; and when the water is supplied not by meter but at a fixed annual charge, and is laid on in every place where it is wanted, the use of it for every purpose is carried to the full satiety limit. (7)
On the other hand, demand is, generally speaking, very inelastic, firstly, for absolute necessaries (as distinguished from conventional necessaries and necessaries for efficiency); and secondly, for some of those luxuries of the rich which do not absorb much of their income.
5. So far we have taken no account of the difficulties of getting exact lists of demand prices, and interpreting them correctly. The first which we have to consider arises from the element of time, the source of many of the greatest difficulties in economics.
Thus while a list of demand prices represents the changes in the price at which a commodity can be sold consequent on changes in the amount offered for sale, other things being, yet other things seldom are equal in fact over equal; periods of time sufficiently long for the collection of full and trustworthy statistics. There are always occurring disturbing causes whose effects are commingled with, and cannot easily be separated from, the effects of that particular cause which we desire to isolate. This difficulty is aggravated by the fact that in economics the full effects of a cause seldom come at once, but often spread themselves out after it has ceased to exist.
To begin with, the purchasing power of money is continually changing, and rendering necessary a correction of the results obtained on our assumption that money retains a uniform value. This difficulty can however be overcome fairly well, since we can ascertain with tolerable accuracy the broader changes in the purchasing power of money.
Next come the changes in the general prosperity and in the total purchasing power at the disposal of the community at large. The influence of these changes is important, but perhaps less so than is generally supposed. For when the wave of prosperity is descending, prices fall, and this increases the resources of those with fixed incomes at the expense of those whose incomes depend on the profits of business. The downward fluctuation of prosperity is popularly measured almost entirely by the conspicuous losses of this last class; but the statistics of the total consumption of such commodities as tea, sugar, butter, wool, etc. prove that the total purchasing power of the people does not meanwhile fall very fast. Still there is a fall, and the allowance to be made for it must be ascertained by comparing the prices and the consumption of as many things as possible.
Next come the changes due to the gradual growth of population and wealth. For these an easy numerical correction can be made when the facts are known. (8)
6. Next, allowance must be made for changes in fashion, and taste and habit, (9) for the opening out of new uses of a commodity, for the discovery or improvement or cheapening of other things that can be applied to the same uses with it. In all these cases there is great difficulty in allowing for the time that elapses between the economic cause and its effect. For time is required to enable a rise in the price of a commodity to exert its full influence on consumption. Time is required for consumers to become familiar with substitutes that can be used instead of it, and perhaps for producers to get into the habit of producing them in sufficient quantities. Time may be also wanted for the growth of habits of familiarity with the new commodities and the discovery of methods of economizing them.
For instance when wood and charcoal became dear in England, familiarity with coal as a fuel grew slowly, fireplaces were but slowly adapted to its use, and an organized traffic in it did not spring up quickly even to places to which it could be easily carried by water.. the invention of processes by which it could be used as a substitute for charcoal in manufacture went even more slowly, and is indeed hardly yet complete. Again, when in recent years the price of coal became very high, a great stimulus was given to the invention of economies in its use, especially in the production of iron and steam; but few of these inventions bore much practical fruit till after the high price had passed away. Again, when a new tramway or suburban railway is opened, even those who live near the line do not get into the habit of making the most of its assistance at once; and a good deal more time elapses before many of those whose places of business are near one end of the line change their homes so as to live near the other end. Again, when petroleum first became plentiful few people were ready to use it freely; gradually petroleum and petroleum lamps have become familiar to all classes of society: too much influence would therefore be attributed to the fall in price which has occurred since then, if it were credited with all the increase of consumption.
Another difficulty of the same kind arises from the fact that there are many purchases which can easily be put off for a short time, but not for a long time. This is often the case with regard to clothes and other things which are worn out gradually, and which can be made to serve a little longer than usual under the pressure of high prices. For instance, at the beginning of the cotton famine the recorded consumption of cotton in England was very small. This was partly because retail dealers reduced their stock, but chiefly because people generally made shift to do as long as they could without buying new cotton goods. In 1864 however many found themselves unable to wait longer; and a good deal more cotton was entered for home consumption in that year, though the price was then much higher, than in either of the preceding years. For commodities of this kind then a sudden scarcity does not immediately raise the price fully up to the level, which properly corresponds to the reduced supply. Similarly after the great commercial depression in the United States in 1873 it was noticed that the boot trade revived before the general clothing trade; because there is a great deal of reserve wear in the coats and hats that are thrown aside in prosperous times as worn out, but not so much in the boots.
7. The above difficulties are fundamental: but there are others which do not lie deeper than the more or less inevitable faults of our statistical returns.
We desire to obtain, if possible, a series of prices at which different amounts of a commodity can find purchasers during a given time in a market. A perfect market is a district, small or large, in which there are many buyers and many sellers all so keenly on the alert and so well acquainted with one another's affairs that the price of a commodity is always practically the same for the whole of the district. But independently of the fact that those who buy for their own consumption, and not for the purposes of trade, are not always on the look out for every change in the market, there is no means of ascertaining exactly what prices are paid in many transactions. Again, the geographical limits of a market are seldom clearly drawn, except when they are marked out by the sea or by custom-house barriers; and no country has accurate statistics of commodities produced in it for home consumption.
Again, there is generally some ambiguity even in such statistics as are to be had. They commonly show goods as entered for consumption as soon as they pass into the hands of dealers; and consequently an increase of dealers' stocks cannot easily be distinguished from an increase of consumption. But the two are governed by different causes. A rise of prices tends to check consumption; but if the rise is expected to continue, it will probably, as has already been noticed, lead dealers to increase their stocks. (10)
Next it is difficult to insure that the commodities referred to are always of the same quality. After a dry summer what wheat there is, is exceptionally good; and the prices for the next harvest year appear to be higher than they really are. It is possible to make allowance for this, particularly now that dry Californian wheat affords a standard. But it is almost impossible to allow properly for the changes in quality of many kinds of manufactured goods. This difficulty occurs even in the case of such a thing as tea: the substitution in recent years of the stronger Indian tea for the weaker Chinese tea has made the real increase of consumption greater than that which is shown by the statistics.
NOTE ON STATISTICS OF CONSUMPTION
8. General Statistics of consumption are published by many Governments with regard to certain classes of commodities. But partly for the reasons just indicated they are of very little service in helping us to trace either a causal connection between variations in prices and variations in the amounts which people will buy, or in the distribution of different kinds of consumption among the different classes of the community.
As regards the first of these objects, viz. the discovery of the laws connecting variations in consumption consequent on variations in price, there seems much to be gained by working out a hint given by Jevons (Theory, pp. 11, 12) with regard to shopkeepers' books. A shopkeeper, or the manager of a co-operative store, in the working man's quarter of a manufacturing town has often the means of ascertaining with tolerable accuracy the financial position of the great body of his customers. He can find out how many factories are at work, and for how many hours in the week, and he can hear about all the important changes in the rate of wages: in fact he makes it his business to do so. And as a rule his customers are quick in finding out changes in the price of things which they commonly use. He will therefore often find cases in which an increased consumption of a commodity is brought about by a fall in its price, the cause acting quickly, and acting alone without any admixture of disturbing causes. Even where disturbing causes are present, he will often be able to allow for their influence. For instance, he will know that as the winter comes on, the prices of butter and vegetables rise; but the cold weather makes people desire butter more and vegetables less than before: and therefore when the prices of both vegetables and butter rise towards the winter, he will expect a greater falling off of consumption in the case of vegetables than should properly be attributed to the rise in price taken alone, but a less falling off in the case of butter. If however in two neighbouring winters his customers have been about equally numerous, and in receipt of about the same rate of wages; and if in the one the price of butter was a good deal higher than in the other, then a comparison of his books for the two winters will afford a very accurate indication of the influence of changes in price on consumption. Shopkeepers who supply other classes of society must occasionally be in a position to furnish similar facts relating to the consumption of their customers.
If a sufficient number of tables of demand by different sections of society could be obtained, they would afford the means of estimating indirectly the variations in total demand that would result from extreme variations in price, and thus attaining an end which is inaccessible by any other route. For, as a general rule, the price of a commodity fluctuates within but narrow limits; and therefore statistics afford us no direct means of guessing what the consumption of it would be, if its price were either fivefold or a fifth part of what it actually is. But we know that its consumption would be confined almost entirely to the rich if its price were very high; and that, if its price were very low, the great body of its consumption would in most cases be among the working classes. If then the present price is very high relatively to the middle or to the working classes, we may be able to infer from the laws of their demand at the present prices what would be the demand of the rich if the price were so raised so as to be very high relatively even to their means. On the other hand, if the present price is moderate relatively to the means of the rich, we may be able to infer from their demand what would be the demand of the working classes if the price were to fall to a level which is moderate relatively to their means. It is only by thus piecing together fragmentary laws of demand that we can hope to get any approach to an accurate law relating to widely different prices. (That is to say, the general demand curve for a commodity cannot be drawn with confidence except in the immediate neighbourhood of the current price, until we are able to piece it together out of the fragmentary demand curves of different classes of society. Compare the second section of this Chapter.
When some progress has been made in reducing to definite law the demand for commodities that are destined for immediate consumption, then, but not till then, will there be use in attempting a similar task with regard to those secondary demands which are dependent on these -the demands namely for the labour of artisans and others who take part in the production of things for sale; and again the demand for machines, factories, railway material and other instruments of production. The demand for the work of medical men, of domestic servants and of all those whose services are rendered direct to the consumer is similar in character to the demand for commodities for immediate consumption, and its laws may be investigated in the same manner.
It is a very important, but also difficult task to ascertain the proportions in which the different classes of society distribute their expenditure between necessaries, comforts and luxuries; between things that provide only present pleasure, and those that build up stores of physical and moral strength; and lastly between those which gratify the lower wants and those which stimulate and educate the higher wants. Several endeavours have been made in this direction on the Continent during the last fifty years; and latterly the subject has been investigated with increasing vigour not only there but also in America and in England. (11)
1. We may say that the elasticity of demand is one, if a small fall in price will cause an equal proportionate increase in the amount demanded: or as we may say roughly, if a fall of one per cent. in price will increase the sales by one per cent; that it is two or a hal, if a fall of one per cent in price makes an increase of two or one half per cent respectively in the amount demanded; and so on. (This statement is rough; because 98 does not bear exactly the same proportion to 100 that 100 does to 102.) The elasticity of demand can be best traced in the demand curve with the aid of the following rule. Let a straight line touching the curve at any point P meet Ox in T and Oy in t, then the measure of the elasticity at the point P is the ratio of PT to Pt.
If PT were twice Pt, a fall of 1 per cent in price would cause an increase of 2 per cent, in the amount demanded; the elasticity of demand would be two. If PT were one-third of Pt, a fall of 1 per cent in price would cause an increase of 1/3 per cent. in the amount demanded; the elasticity of demand would be one-third; and so on. Another way of looking at the same result is this: the elasticity at the point P is measured by the ratio of PT to Pt, that is of MT to MO (PM being drawn perpendicular to Om); and therefore the elasticity is equal to one when the angle TPM is equal to the angle OPM; and it always increases when the angle TPM increases relatively to the angle OPM, and vice versa. See Note III in the Mathematical Appendix.
2. Let us illustrate by the case of the demand for, say, green peas in a town in which all vegetables are bought and sold in one market. Early in the season perhaps 100 lb. a day will be brought to market and sold at 1s. per lb., later on 500 lb. will be brought and sold at 6d., later on 1,000 lb. at 4d., later still 5,000 at 2d., and later still 10,000 at 1 1/2d. Thus demand is represented in fig. (4), an inch along Ox representing 5,000 lb. and an inch along Oy representing 10d. Then a curve through p1, p2,..., p5, found as shown above, will be the total demand curve. But this total demand will be made up of the demands of the rich, the middle class and the poor. The amounts that they will severally demand may perhaps be represented by the following schedules: --
At price in Number of lbs. bought by
pence per lb. rich middle class poor Total
12 100 0 0 100
6 300 200 0 500
4 500 400 100 1,000
2 800 2,500 1,700 5,000
1 1/2 1,000 4,000 5,000 10,000
These schedules are translated into curves figs. (5), (6), (7), showing the demands of the rich, the middle class and the poor represented on the same scale as fig. (4). Thus for instance AH, BK and CL each represents a price of 2d. and is.2 inches in length; OH =.16 in. representing 800 lb., OK =.5 in. representing 2,500 lb. and OL =.34 in. representing 1,700 lb., while OH + OK + OL = 1 inch, i.e. = Om4 in fig. (4) as they should do. This may serve as an example of the way in which several partial demand curves, drawn to the same scale, can be superimposed horizontally on one another to make the total demand curve representing the aggregate of the partial demands.
3. We must however remember that the character of the demand schedule for any commodity depends in a great measure on whether the prices of its rivals are taken to be fixed or to alter with it. If we separated the demand for beef from that for mutton, and supposed the price of mutton to be held fixed while that for beef was raised, then the demand for beef would become extremely elastic. For any slight fall in the price of beef would cause it to be used largely in the place of mutton and thus lead to a very great increase of its consumption: while on the other hand even a small rise in price would cause many people to eat mutton to the almost entire exclusion of beef. But the demand schedule for all kinds of fresh meat taken together, their prices being supposed to retain always about the same relation to one another, and to be not very different from those now prevail ing in England, shows only a moderate elasticity. And similar remarks apply to beet-root and cane-sugar. Compare the note on p. 100.
4. See above ch. II, sec. 1. In April 1894, for instance, six plovers' eggs, the first of the season, were sold in London at 10s. 6d each. The following day there were more, and the price fell to 5s.; the next day to 3s. each; and a week later to 4d.
5. This estimate is commonly attributed to Gregory King. Its bearing on the law of demand is admirably discussed by Lord Lauderdale (Inquiry, pp. 51-3). It is represented in fig. (8) by the curve DD', the point A corresponding to the ordinary price. If we take account of the fact that where the price of wheat is very low, it may be used, as it was for instance in 1834, for feeding cattle and sheep and pigs and for brewing and distilling, the lower part of the curve would take a shape somewhat like that of the dotted line in the figure. And if we assume that when the price is very high, cheaper substitutes can be got for it, the upper part of the curve would take a shape similar to that of the upper dotted line.
6. Chronicon Preciosum (A.D. 1745) says that the price of wheat in London was as low as 2s. a quarter in 1336: and that at Leicester it sold at 40s. on a Saturday, and at 14s. on the following Friday.
7. Thus the general demand of any one person for such a thing as water is the aggregate (or compound, see V, VI, 3) of his demand for it for each use; in the same way as the demand of a group of people of different orders of wealth for a commodity, which is serviceable in only one use, is the aggregate of the demands of each member of the group. Again, just as the demand of the rich for peas is considerable even at a very high price, but loses all elasticity at a price that is still high relatively to the consumption of the poor; so the demand of the individual for water to drink is considerable even at a very high price, but loses all elasticity at a price that is still high relatively to his demand for it for the purpose of cleaning up the house. And as the aggregate of a number of demands on the part of different classes of people for peas retains elasticity over a larger range of price than will that of any one individual, so the demand of an individual for water for many uses retains elasticity over a larger range of prices than his demand for it for any one use. Compare an article by J.B. Clark on A Universal Law of Economic Variation in the Harvard Journal of Economics, Vol. VIII.
8. When a statistical table shows the gradual growth of the consumption of a commodity over a long series of years, we may want to compare the percentage by which it increases in different years. This can be done pretty easily with a little practice. But when the figures are expressed in the form of a statistical diagram, it cannot easily be done, without translating the diagram back into figures; and this is a cause of the disfavour in which many statisticians hold the graphic method. But by the knowledge of one simple rule the balance can be turned, so far as this point goes, in favour of the graphic method. The rule is as follows: - Let the quantity of a commodity consumed (or of trade carried, or of tax levied etc.) be measured by horizontal lines parallel to Ox, fig. (9), while the corresponding years are in the usual manner ticked off in descending order at equal distances along Oy. To measure the rate of growth at any point P, put a ruler to touch the curve at P. Let it meet Oy in t, and let N be the point on Oy at the same vertical height as P: then the number of years marked off along Oy by the distance Nt is the inverse of the fraction by which the amount is increasing annually. That is, if Nt is 20 years, the amount is increasing at the rate of 1/20, i.e. of 5 per cent, annually. if Nt is 25 years, the increase is 1/25 or 4 per cent annually; and so on. See a paper by the present writer in the Jubilee number of the Journal of the London Statistical Society, June 1885; also Note IV in the Mathematical Appendix.
9. For illustrations of the influence of fashion see articles by Miss Foley in the Economic Journal, Vol. III, and Miss Heather Bigg in the Nineteenth Century, Vol. XXIII.
10. In examining the effects of taxation, it is customary to compare the amounts entered for consumption just before and just after the imposition of the tax. But this is untrustworthy. For dealers anticipating the tax lay in large stocks just before it is imposed, and need to buy very little for some time afterwards. And vice versa when a tax is lowered. Again, high taxes lead to false returns. For instance, the nominal importation of molasses into Boston increased fifty-fold in consequence of the tax being lowered by the Rockingham Ministry in 1766, from 6d. to 1d. per gallon. But this was chiefly due to the fact that with the tax at 1d., it was cheaper to pay the duty than to smuggle.
11. A single table made out by the great statistician Engel for the consumption of the lower, middle and working classes in Saxony in 1857, may be quoted here; because it has acted as a guide and a standard of comparison to later inquiries. It is as follows:
Proportions of the Expenditure of the Family of:
Items of Expenditure I. II III
1. Food only 62.0% 25.0% 50.0%
2. Clothing 16.0 18.0 18.0
3. Lodging 12.0 12.0 12.0
4. Light and Fuel 5.0 5.0 5.0
5. Education 2.0 3.8 5.5
6. Legal Protection 1.0 2.0 3.0
7. Care of Health 1. 2.0 3.0
8. Comfort and recreation 1.0 2.5 3.5
TOTALS 100.0 100.0 100.0
I. Workmen with an income of 45 l. to 60 l. a Year.
II. Workmen with an income of 90 l. to 120 l. a Year.
III. Workmen with an income of 150 l. to 200 l. a Year.
Working men's budgets have often been collected and compared. But like all other figures of the kind they suffer from the facts that those who will take the trouble to make such returns voluntarily are not average men, that those who keep careful accounts are not average men; and that when accounts have to be supplemented by the memory, the memory is apt to be biassed by notions as to how the money ought to have been spent, especially when the accounts are put together specially for another's eye. This border-ground between the provinces of domestic and public economy is one in which excellent work may be done by many who are disinclined for more general and abstract speculations.
Information bearing on the subject was collected long ago by Harrison, Petty, Cantillon (whose lost Supplement seems to have contained some workmen's budgets), Arthur Young, Malthus and others. Working-men's budgets were collected by Eden at the end of the last century; and there is much miscellaneous information on the expenditure of the working classes in subsequent Reports of Commissions on Poor-relief, Factories, etc. Indeed almost every year sees some important addition from public or private sources to our information on these subjects.
It may be noted that the method of le Play's monumental Les Ouvriers Europeens is the intensive study of all the details of the domestic life of a few carefully chosen families. To work it well requires a rare combination of judgment in selecting cases, and of insight and sympathy in interpreting them. At its best, it is the best of all: but in ordinary hands it is likely to suggest more untrustworthy general conclusions, than those obtained by the extensive method of collecting more rapidly very numerous observations, reducing them as far as possible to statistical form, and obtaining broad averages in which inaccuracies and idiosyncrasies may be trusted to counteract one another to some extent.
1. The primitive housewife finding that she has a limited number of hanks of yarn from the year's shearing, considers all the domestic wants for clothing and tries to distribute the yarn between them in such a way as to contribute as much as possible to the family wellbeing. She will think she has failed if, when it is done, she has reason to regret that she did not apply more to making, say, socks, and less to vests. That would mean that she had miscalculated the points at which to suspend the making of socks and vests respectively; that she had gone too far in the case of vests, and not far enough in that of socks; and that therefore at the points at which she actually did stop, the utility of yarn turned into socks was greater than that of yarn turned into vests. But if, on the other hand, she hit on the right points to stop at, then she made just so many socks and vests that she got an equal amount of good out of the last bundle of yarn that she applied to socks, and the last she applied to vests. This illustrates a general principle, which may be expressed thus: --
If a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all. For if it had a greater marginal utility in one use than another, he would gain by taking away some of it from the second use and applying it to the first. (1)
One great disadvantage of a primitive economy, in which there is but little free exchange, is that a person may easily have so much of one thing, say wool, that when he has applied it to every possible use, its marginal utility in each use is low: and at the same time he may have so little of some other thing, say wood, that its marginal utility for him is very high. Meanwhile some of his neighbours may be in great need of wool, and have more wood than they can turn to good account. If each gives up that which has for him the lower utility and receives that which has the higher, each will gain by the exchange. But to make such an adjustment by barter, would be tedious and difficult.
The difficulty of barter is indeed not so very great where there are but a few simple commodities each capable of being adapted by domestic work to several uses; the weaving wife and the spinster daughters adjusting rightly the marginal utilities of the different uses of the wool, while the husband and the sons do the same for the wood.
2. But when commodities have become very numerous and highly specialized, there is an urgent need for the free use of money, or general purchasing power; for that alone can be applied easily in an unlimited variety of purchases. And in a money-economy, good management is shown by so adjusting the margins of suspense on each line of expenditure that the marginal utility of a shilling's worth of goods on each line shall be the same. And this result each one will attain by constantly watching to see whether there is anything on which he is spending so much that he would gain by taking a little away from that line of expenditure and putting it on some other line.
Thus, for instance, the clerk who is in doubt whether to ride to town, or to walk and have some little extra indulgence at his lunch, is weighing against one another the (marginal) utilities of two different modes of spending his money. And when an experienced housekeeper urges on a young couple the importance of keeping accounts carefully., a chief motive of the advice is that they may avoid spending impulsively a great deal of money on furniture and other things; for, though some quantity of these is really needful, yet when bought lavishly they do not give high (marginal) utilities in proportion to their cost. And when the young pair look over their year's budget at the end of the year, and find perhaps that it is necessary to curtail their expenditure somewhere, they compare the (marginal) utilities of different items, weighing the loss of utility that would result from taking away a pound's expenditure here, with that which they would lose by taking it away there: they strive to adjust their parings down so that the aggregate loss of utility may be a minimum, and the aggregate of utility that remains to them may be a maximum. (2)
3. The different uses between which a commodity is distributed need not all be present uses; some may be present and some future. A prudent person will endeavour to distribute his means between all their several uses, present and future, in such a way that they will have in each the same marginal utility. But in estimating the present marginal utility of a distant source of pleasure a twofold allowance must be made; firstly, for its uncertainty (this is an objective property which all well-informed persons would estimate in the same way); and secondly, for the difference in the value to them of a distant as compared with a present pleasure (this is a subjective property which different people would estimate in different ways according to their individual characters, and their circumstances at the time).
If people regarded future benefits as equally desirable with similar benefits at the present time, they would probably endeavour to distribute their pleasures and other satisfactions evenly throughout their lives. They would therefore generally be willing to give up a present pleasure for the sake of an equal pleasure in the future, provided they could be certain of having it. But in fact human nature is so constituted that in estimating the "present value" of a future benefit most people generally make a second deduction from its future value, in the form of what we may call a "discount," that increases with the period for which the benefit is deferred. One will reckon a distant benefit at nearly the same value which it would have for him if it were present; while another who has less power of realizing the future, less patience and self-control, will care comparatively little for any benefit that is not near at hand. And the same person will vary in his mood, being at one time impatient, and greedy for present enjoyment; while at another his mind dwells on the future, and he is willing to postpone all enjoyments that can conveniently be made to wait. Sometimes he is in a mood to care little for anything else: sometimes he is like the children who pick the plums out of their pudding to eat them at once, sometimes like those who put them aside to be eaten last. And, in any case, when calculating the rate at which a future benefit is discounted, we must be careful to make allowance for the pleasures of expectation.
The rates at which different people discount the future affect not only their tendency to save, as the term is ordinarily understood, but also their tendency to buy things which will be a lasting source of pleasure rather than those which give a stronger but more transient enjoyment; to buy a new coat rather than to indulge in a drinking bout, or to choose simple furniture that will wear well, rather than showy furniture that will soon fall to pieces.
It is in regard to these things especially that the pleasure of possession makes itself felt. Many people derive from the mere feeling of ownership a stronger satisfaction than they derive from ordinary pleasures in the narrower sense of the term: for example, the delight in the possession of land will often induce people to pay for it so high a price that it yields them but a very poor return on their investment. There is a delight in ownership for its own sake; and there is a delight in ownership on account of the distinction it yields. Sometimes the latter is stronger than the former, sometimes weaker; and perhaps no one knows himself or other people well enough to be able to draw the line quite certainly between the two.
4. As has already been urged, we cannot compare the quantities of two benefits, which are enjoyed at different times even by the same person. When a person postpones a pleasure-giving event he does not postpone the pleasure; but he gives up a present pleasure and takes in its place another, or an expectation of getting another at a future date: and we cannot tell whether he expects the future pleasure to be greater than the one which he is giving up, unless we know all the circumstances of the case. And therefore, even though we know the rate at which he discounts future pleasurable events, such as spending £1 on immediate gratifications, we yet do not know the rate at which he discounts future pleasures. (3)
We can however get an artificial measure of the rate at which he discounts future benefits by making two assumptions. These are, firstly, that he expects to be about as rich at the future date as he is now; and secondly, that his capacity for deriving benefit from the things which money will buy will on the whole remain unchanged, though it may have increased in some directions and diminished in others. On these assumptions, if he is willing, but only just willing, to spare a pound from his expenditure now with the certainty of having (for the disposal of himself or his heirs) a guinea one year hence, we may fairly say that he discounts future benefits that are perfectly secure (subject only to the conditions of human mortality) at the rate of five per cent per annum. And on these assumptions the rate at which he discounts future (certain) benefits, will be the rate at which he can discount money in the money market. (4)
So far we have considered each pleasure singly; but a great many of the things which people buy are durable, i.e. are not consumed in a single use; a durable good, such as a piano, is the probable source of many pleasures, more or less remote; and its value to a purchaser is the aggregate of the usance, or worth to him of all these pleasures, allowance being made for their uncertainty and for their distance. (5)
1. Our illustration belongs indeed properly to domestic production rather than to domestic consumption. But that was almost inevitable; for there are very few things ready for immediate consumption which are available for many different uses. And the doctrine of the distribution of means between different uses has less important and less interesting applications in the science of demand than in that of supply. See e.g. V, III, sec. 3.
2. The working-class budgets which were mentioned in Ch. IV, sec. 8 may render most important services in helping people to distribute their resources wisely between different uses, so that the marginal utility for each purpose shall be the same. But the vital problems of domestic economy relate as much to wise action as to wise spending. The English and the American housewife make limited means go a less way towards satisfying wants than the French housewife does, not because they do not know how to buy, but because they cannot produce as good finished commodities out of the raw material of inexpensive joints, vegetables etc., as she can. Domestic economy is often spoken of as belonging to the science of consumption: but that is only half true. The greatest faults in domestic economy, among the sober portion of the Anglo-Saxon working classes at all events, are faults of production rather than of consumption.
3. In classifying some pleasures as more urgent than others, it is often forgotten that the postponement of a pleasurable event may alter the circumstances under which it occurs, and therefore alter the character of the pleasure itself. For instance it may be said that a young man discounts at a very high rate the pleasure of the Alpine tours which he hopes to be able to afford himself when he has made his fortune. He would much rather have them now, partly because they would give him much greater pleasure now.
Again, it may happen that the postponement of a pleasurable event involves an unequal distribution in Time of a certain good, and that the Law of Diminution of Marginal Utility acts strongly in the case of this particular good. For instance, it is sometimes said that the pleasures of eating are specially urgent; and it is undoubtedly true that if a man goes dinnerless for six days in the week and eats seven dinners on the seventh, he loses very much; because when postponing six dinners, he does not postpone the pleasures of eating six separate dinners, but substitutes for them the pleasure of one day's excessive eating. Again, when a person puts away eggs for the winter he does not expect that they will be better flavoured then than now; he expects that they will be scarce, and that therefore their utility will be higher than now. This shows the importance of drawing a clear distinction between discounting a future pleasure, and discounting the pleasure derived from the future enjoyment of a certain amount of a commodity. For in the latter case we must make separate allowance for differences between the marginal utilities of the commodity at the two times: but in the former this has been allowed for once in estimating the amount of the pleasure; and it must not be allowed for again.
4. It is important to remember that, except on these assumptions there is no direct connection between the rate of discount on the loan of money, and the rate at which future pleasures are discounted. A man may be so impatient of delay that a certain promise of a pleasure ten years hence will not induce him to give up one close at hand which he regards as a quarter as great. And yet if he should fear that ten years hence money may be so scarce with him (and its marginal utility therefore so high) that half-a-crown then may give him more pleasure or save him more pain than a pound now, he will save something for the future even though he have to hoard it, on the same principle that he might store eggs for the winter. But we are here straying into questions that are more closely connected with Supply than with Demand. We shall have to consider them again from different points of view in connection with the Accumulation of Wealth, and later again in connection with the causes that determine the Rate of Interest.
We may however consider here how to measure numerically the present value of a future pleasure, on the supposition that we know, (i) its amount, (ii) the date at which it will come, if it comes at all, (iii) the chance that it will come, and (iv) the rate at which the person in question discounts future pleasures.
If the probability that a pleasure will be enjoyed is three to one, so that three chances out of four are in its favour, the value of its expectation is three-fourths of what it would be if it were certain: if the probability that it will be enjoyed were only seven to five, so that only seven chances out of twelve are in its favour, the value of its expectation is only seven twelfths of what it would be if the event were certain, and so on. [This is its actuarial value: but further allowance may have to be made for the fact that the true value to anyone of an uncertain gain is generally less than its actuarial value (see the note on p. 135).] If the anticipated pleasure is both uncertain and distant, we have a twofold deduction to make from its full value. We will suppose, for instance, that a person would give 10s. for a gratification if it were present and certain, but that it is due a year hence, and the probability of its happening then is three to one. Suppose also that he discounts the future at the rate of twenty per cent per annum. Then the value to him of the anticipation of it is 3/4 x 80/100 x 10s. i.e. 6s. Compare the Introductory chapter of Jevons, Theory of Practical Economy.
5. Of course this estimate is formed by a rough instinct; and in any attempt to reduce it to numerical accuracy (see Note V in the Mathematical Appendix), we must recollect what has been said, in this and the preceding Section, as to the impossibility of comparing accurately pleasures or other satisfactions that do not occur at the same time; and also as to the assumption of uniformity involved in supposing the discount of future pleasures to obey the exponential law.
1. We may now turn to consider how far the price which is actually paid for a thing represents the benefit that arises from its possession. This is a wide subject on which economic science has very little to say, but that little is of some importance.
We have already seen that the price which a person pays for a thing can never exceed, and seldom comes up to that which he would be willing to pay rather than go without it: so that the satisfaction which he gets from its purchase generally exceeds that which he gives up in paying away its price; and he thus derives from the purchase a surplus of satisfaction. The excess of the price which he would be willing to pay rather than go without the thing, over that which he actually does pay, is the economic measure of this surplus satisfaction. It may be called consumer's surplus.
It is obvious that the consumer's surpluses derived from some commodities are much greater than from others. There are many comforts and luxuries of which the prices are very much below those which many people would pay rather than go entirely without them; and which therefore afford a very great consumer's surplus. Good instances are matches, salt, a penny newspaper, or a postage-stamp.
This benefit, which he gets from purchasing at a low price things for which he would rather pay a high price than go without them, may be called the benefit which he derives from his opportunities, or from his environment. or, to recur to a word that was in common use a few generations ago, from his conjuncture. Our aim in the present chapter is to apply the notion of consumer's surplus as an aid in estimating roughly some of the benefits which a person derives from his environment or his conjuncture. (1)
2. In order to give definiteness to our notions, let us consider the case of tea purchased for domestic consumption. Let us take the case of a man, who, if the price of tea were 20s. a pound, would just be induced to buy one pound annually; who would just be induced to buy two pounds if the price were 14s., three pounds if the price were 10s., four pounds if the price were 6s., five pounds if the price were 4s., six pounds if the price were 3s., and who, the price being actually 2s., does purchase seven pounds. We have to investigate the consumer's surplus which he derives from his power of purchasing tea at 2s. a pound.
The fact that he would just be induced to purchase one pound if the price were 20s., proves that the total enjoyment or satisfaction which he derives from that pound is as great as that which he could obtain by spending 20s. on other things. When the price falls to 14s., he could, if he chose, continue to buy only one pound. He would then get for 14s. what was worth to him at least 20s.; and he will obtain a surplus satisfaction worth to him at least 6s., or in other words a consumer' s surplus of at least 6s. But in fact he buys a second pound of his own free choice, thus showing that he regards it as worth to him at least 14s., and that this represents the additional utility of the second pound to him. He obtains for 28s. what is worth to him at least 20s. + 14s.; i.e. 34s. His surplus satisfaction is at all events not diminished by buying it, but remains worth at least 6s. to him. The total utility of the two pounds is worth at least 34s., his consumer's surplus is at least 6s. (2) The fact that each additional purchase reacts upon the utility of the purchases which he had previously decided to make has already been allowed for in making out the schedule and must not be counted a second time.
When the price falls to 10s., he might, if he chose, continue to buy only two pounds; and obtain for 20s. what was worth to him at least 34s., and derive a surplus satisfaction worth at least 14s. But in fact he prefers to buy a third pound: and as he does this freely, we know that he does not diminish his surplus satisfaction by doing it. He now gets for 30s. three pounds; of which the first is worth to him at least 20s., the second at least 14s., and the third at least 10s. The total utility of the three is worth at least 44s., his consumer's surplus is at least 14s., and so on.
When at last the price has fallen to 2s. he buys seven pounds, which are severally worth to him not less than 20, 14, 10, 6, 4, 3, and 2s. or 59s. in all. This sum measures their total utility to him, and his consumer's surplus is (at least) the excess of this sum over the 14s. he actually does pay for them, i.e. 45s. This is the excess value of the satisfaction he gets from buying the tea over that which he could have got by spending the 14s. in extending a little his purchase of other commodities, of which he had just not thought it worth while to buy more at their current prices; and any further purchases of which at those prices would not yield him any consumer's surplus. In other words, he derives this 45s. worth of surplus enjoyment from his conjuncture, from the adaptation of the environment to his wants in the particular matter of tea. If that adaptation ceased, and tea could not be had at any price, he would have incurred a loss of satisfaction at least equal to that which he could have got by spending 45s. more on extra supplies of things that were worth to him only just what he paid for them. (3)
3. In the same way if we were to neglect for the moment the fact that the same sum of money represents different amounts of pleasure to different people, we might measure the surplus satisfaction which the sale of tea affords, say, in the London market, by the aggregate of the sums by which the prices shown in a complete list of demand prices for tea exceeds its selling price. (4)
This analysis, with its new names and elaborate machinery, appears at first sight laboured and unreal. On closer study it will be found to introduce no new difficulties and to make no new assumptions; but only to bring to light difficulties and assumptions that are latent in the common language of the market-place. For in this, as in other cases, the apparent simplicity of popular phrases veils a real complexity, and it is the duty of science to bring out that latent complexity; to face it; and to reduce it as far as possible: so that in later stages we may handle firmly difficulties that could not be grasped with a good grip by the vague thought and language of ordinary life.
It is a common saying in ordinary life that the real worth of things to a man is not gauged by the price he pays for them: that, though he spends for instance much more on tea than on salt, yet salt is of greater real worth to him; and that this would be clearly seen if he were entirely deprived of it. This line of argument is but thrown into precise technical form when it is said that we cannot trust the marginal utility of a commodity to indicate its total utility. If some shipwrecked men, expecting to wait a year before they were rescued, had a few pounds of tea and the same number of pounds of salt to divide between them, the salt would be the more highly prized; because the marginal utility of an ounce of salt, when a person expects to get only a few of them in the year is greater than that of tea under like circumstances. But, under ordinary circumstances, the price of salt being low, every one buys so much of it that an additional pound would bring him little additional satisfaction: the total utility of salt to him is very great indeed, and yet its marginal utility is low. On the other hand, since tea is costly, most people use less of it and let the water stay on it rather longer than they would, if it could be got at nearly as low a price as salt can. Their desire for it is far from being satiated: its marginal utility remains high, and they may be willing to pay as much for an additional ounce of it as they would for an additional pound of salt. The common saying of ordinary life with which we began suggests all this: but not in an exact and definite form, such as is needed for a statement which will often be applied in later work. The use of technical terms at starting adds nothing to knowledge: but it puts familiar knowledge in a firm compact shape, ready to serve as the basis for further study. (5)
Or the real worth of a thing might be discussed with: reference not to a single person but to people in general; and thus it would naturally be assumed that a shilling's worth of gratification to one Englishman might be taken as equivalent with a shilling's worth to another, " to start with," and " until cause to the contrary were shown." But everyone would know that this was a reasonable course only on the supposition that the consumers of tea and those of salt belonged to the same classes of people; and included people of every variety of temperament. (6)
This involves the consideration that a pound's worth of satisfaction to an ordinary poor man is a much greater thing than a pound's worth of satisfaction to an ordinary rich man: and if instead of comparing tea and salt, which are both used largely by all classes, we compared either of them with champagne or pineapples, the correction to be made on this account would be more than important: it would change the whole character of the estimate. In earlier generations many statesmen, and even some economists, neglected to make adequate allowance for considerations of this class, especially when constructing schemes of taxation; and their words or deeds seemed to imply a want of sympathy with the sufferings of the poor; though more often they were due simply to want of thought.
On the whole however it happens that by far the greater number of the events with which economics deals, affect in about equal proportions all the different classes of society; so that if the money measures of the happiness caused by two events are equal, there is not in general any very great difference between the amounts of the happiness in the two cases. And it is on account of this fact that the exact measurement of the consumers' surplus in a market has already much theoretical interest, and may become of high practical importance.
It will be noted however that the demand prices of each commodity, on which our estimates of its total utility and consumers, surplus are based, assume that other things remain equal, while its price rises to scarcity value: and when the total utilities of two commodities which contribute to the same purpose are calculated on this plan, we cannot say that the total utility of the two together is equal to the sum of the total utilities of each separately. (7)
4. The substance of our argument would not be affected if we took account of the fact that, the more a person spends on anything the less power he retains of purchasing more of it or of other things, and the greater is the value of money to him (in the technical language every fresh expenditure increases the marginal value of money to him). But though its substance would not be altered, its form would be made more intricate without any corresponding gain; for there are very few practical problems, in which the corrections to be made under this head would be of any importance. (8)
There are however some exceptions. For instance, as Sir R. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it. But such cases are rare; when they are met with, each must be treated on its own merits.
It has already been remarked that we cannot guess at all accurately how much of anything people would buy at prices very different from those which they are accustomed to pay for it: or in other words, what the demand prices for it would be for amounts very different from those which are commonly sold. Our list of demand prices is therefore highly conjectural except in the neighbourhood of the customary price; and the best estimates we can form of the whole amount of the utility of anything are liable to large error. But this difficulty is not important practically. For the chief applications of the doctrine of consumers' surplus are concerned with such changes in it as would accompany changes in the price of the commodity in question in the neighbourhood of the customary price: that is, they require us to use only that information with which we are fairly well supplied. These remarks apply with special force to necessaries. (9)
5. There remains another class of considerations which are apt to be overlooked in estimating the dependence of wellbeing upon material wealth. Not only does a person's happiness often depend more on his own physical, mental and moral health than on his external conditions: but even among these conditions many that are of chief importance for his real happiness are apt to be omitted from an inventory of his wealth. Some are free gifts of nature; and these might indeed be neglected without great harm if they were always the same for everybody; but in fact they vary much from place to place. More of them however are elements of collective wealth which are often omitted from the reckoning of individual wealth; but which become important when we compare different parts of the modern civilized world, and even more important when we compare our own age with earlier times.
Collective action for the purposes of securing common wellbeing, as for instance in lighting and watering the streets, will occupy us much towards the end of our inquiries. Co-operative associations for the purchase of things for personal consumption have made more progress in England than elsewhere: but those for purchasing the things wanted for trade purposes by farmers and others, have until lately been backward in England. Both kinds are sometimes described as Consumers' associations; but they are really associations for economizing effort in certain branches of business, and belong to the subject of Production rather than Consumption.
6. When we speak of the dependence of wellbeing on material wealth, we refer to the flow or stream of wellbeing as measured by the flow or stream of incoming wealth an d the consequent power of using and consuming it. A person's stock of wealth yields by its usance and in other ways an income of happiness, among which of course are to be counted the pleasures of possession: but there is little direct connection between the aggregate amount of that stock and his aggregate happiness. And it is for that reason that we have throughout this and preceding chapters spoken of the rich, the middle classes and the poor as having respectively large, medium and small incomes - not possessions. (10)
In accordance with a suggestion made by Daniel Bernoulli, we may regard the satisfaction which a person derives from his income as commencing when he has enough to support life, and afterwards as increasing by equal amounts with every equal successive percentage that is added to his income; and vice versa for loss of income. (11)
But after a time new riches often lose a great part of their charms. Partly this is the result of familiarity; which makes people cease to derive much pleasure from accustomed comforts and luxuries, though they suffer greater pain from their loss. Partly it is due to the fact that with increased riches there often comes either the weariness of age, or at least an increase of nervous strain; and perhaps even habits of living that lower physical vitality, and diminish the capacity for pleasure.
In every civilized country there have been some followers of the Buddhist doctrine that a placid serenity is the highest ideal of life; that it is the part of the wise man to root out of his nature as many wants and desires as he can; that real riches consist not in the abundance of goods but in the paucity of wants. At the other extreme are those who maintain that the growth of new wants and desires is always beneficial because it stimulates people to increased exertions. They seem to have made the mistake, as Herbert Spencer says, of supposing that life is for working, instead of working for life. (12)
The truth seems to be that as human nature is constituted, man rapidly degenerates unless he has some hard work to do, some difficulties to overcome; and that some strenuous exertion is necessary for physical and moral health. The fulness of life lies in the development and activity of as many and as high faculties as possible. There is intense pleasure in the ardent pursuit of any aim, whether it be success in business, the advancement of art and science, or the improvement of the condition of one's fellow-beings. The highest constructive work of all kinds must often alternate between periods of over-strain and periods of lassitude and stagnation; but for ordinary people, for those who have no strong ambitions, whether of a lower or a higher kind, a moderate income earned by moderate and fairly steady work offers the best opportunity for the growth of those habits of body, mind, and spirit in which alone there is true happiness.
There is some misuse of wealth in all ranks of society. And though, speaking generally, we may say that every increase in the wealth of the working classes adds to the fulness and nobility of human life because it is used chiefly in the satisfaction of real wants; yet even among the artisans in England, and perhaps still more in new countries, there are signs of the growth of that unwholesome desire for wealth as a means of display which has been the chief bane of the well-to-do classes in every civilized country. Laws against luxury have been futile; but it would be a gain if the moral sentiment of the community could induce people to avoid all sorts of display of individual wealth. There are indeed true and worthy pleasures to be got from wisely ordered magnificence: but they are at their best when free from any taint of personal vanity on the one side and envy on the other; as they are when they centre round public buildings, public parks, public collections of the fine arts, and public games and amusements. So long as wealth is applied to provide for every family the necessaries of life and culture, and an abundance of the higher forms of enjoyment for collective use, so long the pursuit of wealth is a noble aim; and the pleasures which it brings are likely to increase with the growth of those higher activities which it is used to promote.
When the necessaries of life are once provided, everyone should seek to increase the beauty of things in his possession rather than their number or their magnificence. An improvement in the artistic character of furniture and clothing trains the higher faculties of those who make them, and is a source of growing happiness to those who use them. But if instead of seeking for a higher standard of beauty, we spend our growing resources on increasing the complexity and intricacy of our domestic goods, we gain thereby no true benefit, no lasting happiness. The world would go much better if everyone would buy fewer and simpler things, and would take trouble in selecting them for their real beauty; being careful of course to get good value in return for his outlay, but preferring to buy a few things made well by highly paid labour rather than many made badly by low paid labour.
But we are exceeding the proper scope of the present Book; the discussion of the influence on general wellbeing which is exerted by the mode in which each individual spends his income is one of the more important of those applications of economic science to the art of living.
1. This term is a familiar one in German economics, and meets a need which is much felt in English economics. For "opportunity" and "environment," the only available substitutes for it, are sometimes rather misleading. By Konjunktur, says Wagner (Grundlegung, Ed. III, p. 387), "we understand the sum total of the technical, economic, social and legal conditions; which, in a mode of national life (Volkswirtschaft) resting upon division of labour and private property,especially private property in land and other material means of production determine the demand for and supply of goods, and therefore their exchange value: this determination being as a rule, or at least in the main, independent of the will of the owner, of his activity and his remissness."
2. Some further explanations may be given of this statement; though in fact they do little more than repeat in other words what has already been said. The significance of the condition in the text that he buys the second pound of his own free choice is shown by the consideration that if the price of 14s. had been offered to him on the condition that he took two pounds, he would then have to elect between taking one pound for 20s. or two pounds for 28s. : and then his taking two pounds would not have proved that he thought the second pound worth more than 8s. to him. But as it is, he takes a second pound paying 14s. unconditionally for it; and that proves that it is worth at least 14s. to him. (If he can get buns at a penny each, but seven for sixpence; and he elects to buy seven, we know that he is willing to give up his sixth penny for the sake of the sixth and the seventh buns: but we cannot tell how much he would pay rather than go without the seventh bun only.) It is sometimes objected that as he increases his purchases, the urgency of his need for his earlier purchases is diminished, and their utility falls; therefore we ought to continually redraw the earlier parts of our list of demand prices at a lower level, as we pass along it towards lower prices (i.e. to redraw at a lower level our demand curve as we pass along it to the right). But this misconceives the plan on which the list of prices is made out. The objection would have been valid, if the demand price set against each number of pounds of tea represented the average utility of that number. For it is true that, if he would pay just 20s. for one pound, and just 14s. for a second, then he would pay just 34s. for the two; i.e. 17s. each on the average. And if our list had had reference to the average prices he would pay, and had set 17s. against the second pound; then no doubt we should have had to redraw the list as we passed on. For when he has bought a third pound the average utility to him of each of the three will be less than that of 17s.; being in fact 14s. 8d. if, as we go on to assume, he would pay just 10s. for a third pound. But this difficulty is entirely avoided on the plan of making out demand prices which is here adopted; according to which his second pound is credited, not with the 17s. which represents the average value per pound of the two pounds; but with the 14s., which represents the additional utility which a second pound has for him. For that remains unchanged when he has bought a third pound, of which the additional utility is measured by 10s.
The first pound was probably worth to him more than 20s. All that we know is that it was not worth less to him. He probably got some small surplus even on that. Again, the second pound was probably worth more than 14s. to him. All that we know is that it was worth at least 14s. and not worth 20s. to him. He would get therefore at this stage a surplus satisfaction of at least 6s., probably a little more. A ragged edge of this kind, as mathematicians are aware, always exists when we watch the effects of considerable changes, as that from 20s. to 14s. a pound. If we had begun with a very high price, had descended by practically infinitesimal changes of a farthing per pound, and watched infinitesimal variations in his consumption of a small fraction of a pound at a time, this ragged edge would have disappeared.
3. Prof. Nicholson (Principles of Political Economy, Vol. I and Economic Journal, Vol. IV) has raised objections to the notion of consumers' surplus, which have been answered by Prof. Edgeworth in the same Journal. Prof. Nicholson says: - "Of what avail is it to say that the utility of an income of (say) £100 a year is worth (say) £1000 a year?" There would be no avail in saying that. But there might be use, when comparing life in Central Africa with life in England, in saying that, though the things which money will buy in Central Africa may on the average be as cheap there as here, yet there are so many things which cannot be bought there at all, that a person with a thousand a year there is not so well off as a person with three or four hundred a year here. If a man pays 1d. toll on a bridge, which saves him an additional drive that would cost a shilling, we do not say that the penny is worth a shilling, but that the penny together with the advantage offered him by the bridge (the part it plays in his conjuncture) is worth a shilling for that day. Were the bridge swept away on a day on which he needed it, he would be in at least as bad a position as if he had been deprived of eleven pence.
4. Let us then consider the demand curve DD' for tea in any large market. Let OH be the amount which is sold there at the price HA annually, a year being taken as our unit of time. Taking any point M in OH let us draw MP vertically upwards to meet the curve in P and cut a horizontal line through A in R. We will suppose the several lb. numbered in the order of the eagerness of the several purchasers : the eagerness of the purchaser of any lb. being measured by the price he is just willing to pay for that lb. The figure informs us that OM can be sold at the price PM; but that at any higher price not quite so many lbs. can be sold. There must be then some individual who will buy more at the price PM, than he will at any higher price; and we are to regard the OMth lb. as sold to this individual. Suppose for instance that PM represents 4s., and that OM represents a million lbs. The purchaser described in the text is just willing to buy his fifth lb. of tea at the price 4s., and the OMth or millionth lb. may be said to be sold to him. If AH and therefore RM represent 2s., the consumers' surplus derived from the OMth lb. is the excess of PM or 4s. which the purchaser of that lb. would have been willing to pay for it over RM the 2s. which he actually does pay for it. Let us suppose that a very thin vertical parallelogram is drawn of which the height is PM and of which the base is the distance along Ox that measures the single unit or lb. of tea. It will be convenient henceforward to regard price as measured not by a mathematical straight line without thickness, as PM; but by a very thin parallelogram, or as it may be called a thick straight line, of which the breadth is in every case equal to the distance along Ox which measures a unit or lb. of tea. Thus we should say that the total satisfaction derived from the OMth lb. of tea is represented (or, on the assumption made in the last paragraph of the text is measured) by the thick straight line MP; that the price paid for this lb. is represented by the thick straight line MR and the consumers' surplus derived from this lb. by the thick straight line RP. Now let us suppose that such thin parallelograms, or thick straight lines, are drawn from all positions of M between O and H, one for each lb. of tea. The thick straight lines thus drawn, as MP is, from Ox up to the demand curve will each represent the aggregate of the satisfaction derived from a lb. of tea; and taken together thus occupy and exactly fill up the whole area DOHA. Therefore we may say that the area DOHA represents the aggregate of the satisfaction derived from the consumption of tea. Again, each of the straight lines drawn, as MR is, from Ox upwards as far as AC represents the price that actually is paid for a lb. of tea. These straight lines together make up the area COHA; and therefore this area represents the total price paid for tea. Finally each of the straight lines drawn as RP is from AC upwards as far as the demand curve, represents the consumers' surplus derived from the corresponding lb. of tea. These straight lines together make up the area DCA; and therefore this area represents the total consumers' surplus that is derived from tea when the price is AH. But it must be repeated that this geometrical measurement is only an aggregate of the measures of benefits which are not all measured on the same scale except on the assumption just made in the text. Unless that assumption is made the area only represents an aggregate of satisfactions, the several amounts of which are not exactly measured. On that assumption only, its area measures the volume of the total net satisfaction derived from the tea by its various purchasers.
5. Harris On Coins 1757, says "Things in general are valued, not according to their real uses in supplying the necessities of men; but rather in proportion to the land, labour and skill that are requisite to produce them. It is according to this proportion nearly, that things or commodities are exchanged one for another; and it is by the said scale, that the intrinsic values of most things are chiefly estimated. Water is of great use, and yet ordinarily of little or no value; because in most places, water flows spontaneously in such great plenty, as not to be withheld within the limits of private property; but all may have enough, without other expense than that of bringing or conducting it, when the case so requires. On the other hand, diamonds being very scarce, have upon that account a great value, though they are but little use."
6. There might conceivably be persons of high sensibility who would suffer specially from the want of either salt or tea: or who were generally sensitive, and would suffer more from the loss of a certain part of their income than others in the same station of life. But it would be assumed that such differences between individuals might be neglected, since we were considering in either case the average of large numbers of people; though of course it might be necessary to consider whether there were some special reason for believing, say, that those who laid most store by tea were a specially sensitive class of people. If it could, then a separaTe allowance for this would have to be made before applying the results of economic analysis to practical problems of ethics or politics.
7. Some ambiguous phrases in earlier editions appear to have suggested to some readers the opposite opinion. But the task of adding together the total utilities of all commodities, so as to obtain the aggregate of the total utility of all wealth, is beyond the range of any but the most elaborate mathematical formulae. An attempt to treat it by them some years ago convinced the present writer that even if the task be theoretically feasible, the result would be encumbered by so many hypotheses as to be practically useless.
Attention has already (pp. 100, 105) been called to the fact that for some purposes such things as tea and coffee must be grouped together as one commodity: and it is obvious that, if tea were inaccessible, people would increase their consumption of coffee, and vice versa. The loss that people would suffer from being deprived both of tea and coffee would be greater than the sum of their losses from being deprived of either alone: and therefore the total utility of tea and coffee is greater than The sum of the total utility of tea calculated on the supposition that people can have recourse to coffee, and that of coffee calculated on a like supposition as to tea. This difficulty can be theoretically evaded by grouping the two "rival" commodities together under a common demand schedule. On the other hand, if we have calculated the total utility of fuel with reference to the fact that without it we could not obtain hot water to obtain the beverage tea from tea leaves, we should count something twice over if we added to that utility the total utility of tea leaves, reckoned on a similar plan. Again the total utility of agricultural produce includes that of ploughs; and the two may not be added together; though the total utility of ploughs may be discussed in connection with one problem, and that of wheat in connection with another. Other aspects of these two difficulties are examined in V, VI.
Prof. Patten has insisted on the latter of them in some able and suggestive writings. But his attempt to express the aggregate utility of all forms of wealth seems to overlook many difficulties.
8. In mathematical language the neglected elements would generally belong to the second order of small quantities; and the legitimacy of the familiar scientific method by which they are neglected would have seemed beyond question, had not Prof. Nicholson challenged it. A short reply to him has been given by Prof. Edgeworth in the Economic Journal for March 1894; and a fuller reply by Prof. Barone in the Giornale degli Economisti for Sept. 1894; of which some account is given by Mr Sanger in the Economic Journal for March 1995.
As is indicated in Note VI in the Mathematical Appendix, formal account could be taken of changes in the marginal utility of money, if it were desired to do so. If we attempted to add together the total utilities of all commodities, we should be bound to do so: that task is however impracticable.
9. The notion of consumers' surplus may help us a little now; and, when our statistical knowledge is further advanced, it may help us a great deal to decide how much injury would be done to the public by an additional tax of 6d. a pound on tea, or by an addition of ten per cent. to the freight charges of a railway: and the value of the notion is but little diminished by the fact that it would not help us much to estimate the loss that would be caused by a tax of 30s. a pound on tea, or a tenfold rise in freight charges.
Reverting to our last diagram, we may express this by saying that, if A is the point on the curve corresponding to the amount that is wont to be sold in the market, data can be obtained sufficient for drawing the curve with tolerable correctness for some distance on either side of A; though the curve can seldom be drawn with any approach to accuracy right up to D. But this is practically unimportant, because in the chief practical applications of the theory of value we should seldom make any use of a knowledge of the whole shape of the demand curve if we had it. We need just what we can get, that is, a fairly correct knowledge of its shape in the neighbourhood of A. We seldom require to ascertain the total area DCA; it is sufficient for most of our purposes to know the changes in this area that would be occasioned by moving A through small distances along the curve in either direction. Nevertheless it will save trouble to assume provisionally, as in pure theory we are at liberty to do, that the curve is completely drawn.
There is however a special difficulty in estimating the whole of the utility of commodities some supply of which is necessary for life. If any attempt is made to do it, the best plan is perhaps to take that necessary supply for granted, and estimate the total utility only of that part of the commodity which is in excess of this amount. But we must recollect that the desire for anything is much dependent on the difficulty of getting substitutes for it. (See Note VI in the Mathematical Appendix.)
10. See Note VII in the Mathematical Appendix.
11. That is to say, if £30 represent necessaries, a person's satisfaction from his income will begin at that point; and when it has reached £40, an additional £1 will add a tenth to the £10 which represents its happiness-yielding power. But if his income were £100, that is £70 above the level of necessaries, an additional £7 would be required to add as much to his happiness as £1 if his income were £40: while if his income were £10,000, an additional £1000 would be needed to produce an equal effect (compare Note VIII in the Mathematical Appendix). Of course such estimates are very much at random, and unable to adapt themselves to the varying circumstances of individual life. As we shall see later, the systems of taxation which are now most widely prevalent follow generally on the lines of Bernoulli's suggestion. Earlier systems took from the poor very much more than would be in accordance with that plan; while the systems of graduated taxation, which are being foreshadowed in several countries, are in some measure based on the assumption that the addition of one per cent to a very large income adds less to the wellbeing of its owner than an addition of one per cent to smaller incomes would, even after Bernoulli's correction for necessaries has been made.
It may be mentioned in passing that from the general law that the utility to anyone of an additional £1 diminishes with the number of pounds he already has, there follow two important practical principles. The first is that gambling involves an economic loss, even when conducted on perfectly fair and even terms. For instance, a man who having £600 makes a fair even bet of £100, has now an expectation of happiness equal to half that derived from £700, and half that derived from £500; and this is less than the certain expectation of the happiness derived from £600, because by hypothesis the difference between the happiness got from £600 and £500 is greater than the difference between the happiness got from £700 and £600. (Compare Note IX in the Mathematical Appendix and Jevons, l.c. Ch. IV) The second principle, the direct converse of the first, is that a theoretically fair insurance against risks is always an economic gain. But of course insurance office, after calculating what is a theoretically fair premium, every has to share in addition to it enough to pay profits on its own capital, and to cover its own expenses of working, among which are often to be reckoned very heavy items for advertising and for losses by fraud. The question whether it is advisable to pay the premium which insurance offices practically do charge, is one that must be decided for each case on its own merits.
12. See his lecture on The Gospel of Relaxation.