The Investment And Distribution Of Resources

§ 6. The immediate effect of the expectation of a high price is to cause people to bring into active work all their appliances of production, and to work them full time and perhaps overtime.

The supply price is then the money cost of production of that part of the produce which forces the undertaker to hire such inefficient labour (perhaps tired by working overtime) at so high a price, and to put himself and others to so much strain and inconvenience that he is on the margin of doubt whether it is worth his while to do it or not.

The immediate effect of the expectation of a low price is to throw many appliances for production out of work, and slacken the work of others; and if the producers had no fear of spoiling their markets, it would be worth their while to produce for a time for any price that covered the prime costs of production and rewarded them for their own trouble.

But, as it is, they generally hold out for a higher price; each man fears to spoil his chance of getting a better price later on from his own customers; or, if he produces for a large and open market, he is more or less in fear of incurring the resentment of other producers, should he sell needlessly at a price that spoils the common market for all. The marginal production in this case is the production of those whom a little further fall of price would cause, either from a regard to their own interest or by formal or informal agreement with other producers, to suspend production for fear of further spoiling the market. The price which, for these reasons, producers are just on the point of refusing, is the true marginal supply price for short periods.

It is nearly always above, and generally very much above the special or prime cost for raw materials, labour and wear-and-tear of plant, which is immediately and directly involved by getting a little further use out of appliances which are not fully employed. This point needs further study.

In a trade which uses very expensive plant, the prime cost of goods is but a small part of their total cost; and an order at much less than their normal price may leave a large surplus above their prime cost. But if producers accept such orders in their anxiety to prevent their plant from being idle, they glut the market and tend to prevent prices from reviving. In fact however they seldom pursue this policy constantly and without moderation. If they did, they might ruin many of those in the trade, themselves perhaps among the number; and in that case a revival of demand would find little response in supply, and would raise violently the prices of the goods produced by the trade. Extreme variations of this kind are in the long run beneficial neither to producers nor to consumers; and general opinion is not altogether hostile to that code of trade morality which condemns the action of anyone who “spoils the market” by being too ready to accept a price that does little more than cover the prime cost of his goods, and allows but little on account of his general expenses43 .

For example, if at any time the prime cost, in the narrowest sense of the word, of a bale of cloth is £100; and if another £100 are needed to make the cloth pay its due share of the general expenses of the establishment, including normal profits to its owners, then the practically effective supply price is perhaps not very likely to fall below £150 under ordinary conditions, even for short periods; though of course a few special bargains may be made at lower prices without much affecting the general market.

Thus, although nothing but prime cost enters necessarily and directly into the supply price for short periods, it is yet true that supplementary costs also exert some influence indirectly. A producer does not often isolate the cost of each separate small parcel of his output; he is apt to treat a considerable part of it, even in some cases the whole of it, more or less as a unit. He inquires whether it is worth his while to add a certain new line to his present undertakings, whether it is worth while to introduce a new machine and so on. He treats the extra output that would result from the change more or less as a unit beforehand; and afterwards he quotes the lowest prices, which he is willing to accept, with more or less reference to the whole cost of that extra output regarded as a unit.

In other words he regards an increase in his processes of production, rather than an individual parcel of his products, as a unit in most of his transactions. And the analytical economist must follow suit, if he would keep in close touch with actual conditions. These considerations tend to blur the sharpness of outline of the theory of value: but they do not affect its substance.

To sum up then as regards short periods. The supply of specialized skill and ability, of suitable machinery and other material capital, and of the appropriate industrial organization has not time to be fully adapted to demand; but the producers have to adjust their supply to the demand as best they can with the appliances already at their disposal. On the one hand there is not time materially to increase those appliances if the supply of them is deficient; and on the other, if the supply is excessive, some of them must remain imperfectly employed, since there is not time for the supply to be much reduced by gradual decay, and by conversion to other uses.

Variations in the particular income derived from them do not for the time affect perceptibly the supply; and do not directly affect the price of the commodities produced by them. The income is a surplus of total receipts over prime cost; [that is, it has something of the nature of a rent as will be seen more clearly in chapter VIII.]. But unless it is sufficient to cover in the long run a fair share of the general costs of the business, production will gradually fall off. In this way a controlling influence over the relatively quick movements of supply price during short periods is exercised by causes in the background which range over a long period; and the fear of “spoiling the market” often makes those causes act more promptly than they otherwise would.

§ 7. In long periods on the other hand all investments of capital and effort in providing the material plant and the organization of a business, and in acquiring trade knowledge and specialized ability, have time to be adjusted to the incomes which are expected to be earned by them: and the estimates of those incomes therefore directly govern supply, and are the true long-period normal supply price of the commodities produced.

A great part of the capital invested in a business is generally spent on building up its internal organization and its external trade connections.

If the business does not prosper all that capital is lost, even though its material plant may realize a considerable part of its original cost. And anyone proposing to start a new business in any trade must reckon for the chance of this loss. If himself a man of normal capacity for that class of work, he may look forward ere long to his business being a representative one, in the sense in which we have used this term, with its fair share of the economies of production on a large scale. If the net earnings of such a representative business seem likely to be greater than he could get by similar investments in other trades to which he has access, he will choose this trade. Thus that investment of capital in a trade, on which the price of the commodity produced by it depends in the long run, is governed by estimates on the one hand of the outgoings required to build up and to work a representative firm, and on the other of the incomings, spread over a long period of time, to be got by such a price.

At any particular moment some businesses will be rising and others falling: but when we are taking a broad view of the causes which govern normal supply price, we need not trouble ourselves with these eddies on the surface of the great tide.

Any particular increase of production may be due to some new manufacturer who is struggling against difficulties, working with insufficient capital, and enduring great privations in the hope that he may gradually build up a good business. Or it may be due to some wealthy firm which by enlarging its premises is enabled to attain new economies, and thus obtain a larger output at a lower proportionate cost: and, as this additional output will be small relatively to the aggregate volume of production in the trade, it will not much lower the price; so that the firm will reap great gains from its successful adaptation to its surroundings. But while these variations are occurring in the fortunes of individual businesses, there may be a steady tendency of the long-period normal supply price to diminish, as a direct consequence of an increase in the aggregate volume of production.

§ 8. There is no hard and sharp line of division between “long” and “short” periods.

Nature has drawn no such lines in the economic conditions of actual life; and in dealing with practical problems they are not wanted. Just as we contrast civilized with uncivilized races, and establish many general propositions about either group, though no hard and fast division can be drawn between the two; so we contrast long and short periods without attempting any rigid demarcation between them.

If it is necessary for the purposes of any particular argument to divide one case sharply from the other, it can be done by a special interpretation clause: but the occasions on which this is necessary are neither frequent nor important.

Four classes stand out. In each, price is governed by the relations between demand and supply. As regards market prices, Supply is taken to mean the stock of the commodity in question which is on hand, or at all events “in sight.” As regards normal prices, when the term Normal is taken to relate to short periods of a few months or a year, Supply means broadly what can be produced for the price in question with the existing stock of plant, personal and impersonal, in the given time.

As regards normal prices, when the term Normal is to refer to long periods of several years, Supply means what can be produced by plant, which itself can be remuneratively produced and applied within the given time; while lastly, there are very gradual or Secular movements of normal price, caused by the gradual growth of knowledge, of population and of capital, and the changing conditions of demand and supply from one generation to another45 .

The remainder of the present volume is chiefly concerned with the third of the above classes: that is, with the normal relations of wages, profits, prices, etc., for rather long periods.

But occasionally account has to be taken of changes that extend over very many years; and one chapter, Book VI. ch. XII., is given up to “The Influence of Progress on Value,” that is, to the study of secular changes of value.