of the problem, one which is insoluble without additional data. Far from being anomalous, that case may be normally assumed as a harmless and convenient simplification, very proper to an introductory statement of the general theory.1 "Nec Deus intersit, nisi dignus vindice nodus The case of like dispositions does not present any peculiar difficulty calling for so very mechanical a Deus ex machina as the hypothesis that "the total amount of means of purchase must be strictly limited and the buyers must be determined to spend the whole of this sum in purchase of the commodities in question." It is riding a one-horse illustration to death to put the accidents of an exceptional sort of auction as representative of the actual transactions by which the great mass of national income is distributed. This criticism, it must be freely admitted, involves an issue about which legitimate differences of opinion may exist,-what is the most appropriate conception of the process by which value is determined through the higgling of the market? Any simple conception must involve a considerable element of hypothesis, not admitting of decisive proof. The hypothetical character of the inquiry will appear if we look back to that model labour market in which guides or porters were supposed to be hired by amateur mountaineers. It was tacitly assumed that each party has certain dispositions as to the amount of money that he is willing to give or take in exchange for a certain amount of work,-a scale of subjective estimates 2 which is supposed to be formed before the parties come into communication, and not to be modified by the chaffering of the market. The constancy of these dispositions being assumed, it is presumed that somehow a state of equilibrium will be brought about, such that the party on one side cannot improve his position by entering into new contracts with some party or parties on the other side. The better opinion is that only the position of equilibrium is knowable, not the path by which equilibrium is reached. As Jevons says, "It is a far more easy task to lay down the conditions under which trade is completed and interchange ceases than to attempt to ascertain at what rate trade 1 It is so assumed in Mathematical Psychics. 2 Whether expressed by a demand-curve (or schedule, cf. Marshall, Principles, Book III.) or by way of indifference curves, as Professor Pareto has suggested (Giornale degli Economisti, 1900). will go on when equilibrium is not attained." 1 Particular paths may be indicated by way of illustration, "to fix the ideas," as mathematicians say.2 In this spirit two kinds of higgling may be distinguished as appropriate respectively to short and long periods. First, we may suppose the intending buyers and sellers to remain in communication without actually making exchanges, each trying to get at the dispositions of the others, and estimating his chances of making a better bargain than one that has been provisionally contemplated. By this preliminary tentative process a system of bargains complying with the condition of equilibrium is, as it were, rehearsed before it is actually performed. Or, second, one may suppose a performance to take place before such rehearsal is completed. On the first day in our example a set of hirings are made which prove not to be in accordance with the dispositions of the parties. These contracts terminating with the day, the parties encounter each other the following day,3 with dispositions the same as on the first day,—like combatants armis animisque refecti,—in all respects as they were at the beginning of the first encounter, except that they have obtained by experience the knowledge that the system of bargains entered into on the first occasion does not fit the real dispositions of the parties. The second plan of higgling was supposed in the example,5-the plan which is more appropriate to "normal" value. Contemplating the theory of exchange in the abstract, we may exclaim with Burke, " Nobody, I believe, has observed with any reflection what market is without being astonished at the truth, the correctness, the celerity, the general equity, with which the balance of wants is settled." But, when we come to the labour market, or any particular market, we must carefully inquire with what degree of approximateness the above-stated fundamental postulate holds good. When the bargaining 1 Theory, 2nd edition, pp. 101-2. The context seems to impose an unnecessary limitation : "Holders of commodities will be regarded not as continuously passing on these commodities in streams of trade, but as possessing certain fixed amounts which they exchange until they come to equilibrium." The "fixed amount" may be considered as renewed from time to time for each of the individuals placed along a "stream of trade" (see below, p. 197). 2 This view of the subject is presented at greater length in an article in the Revue d'Économie Politique, January, 1891. [See note appended to a (Section VI)]. They recontract, in the phraseology of Mathematical Psychics. 4 Eneid. xii. 788. Thought and Details on Scarcity. He is speaking with special reference to the labour market. 7 Above, p. 39. extends over a considerable time, changes are apt to occur in the dispositions of the parties, whether independently of each other and sporadically, or in a manner even more fatal to the theory, by way of imitation.1 Also, where there occurs a series of encounters between buyers and sellers, the results of the earlier encounter may affect the dispositions with which the later ones are entered on. The terms which the labourer is ready to offer and accept are altered by the alteration in his habits and efficiency which is the consequence of previous bad bargains.2 The peculiarities of the labour market pointed out by Professor Marshall go far to modify the general presumption in favour of laisser faire. But less careful writers are less successful in supporting the burden of proof which lies on those who profess to add to or take away from that outlined theory of Exchange which seems to express all that is known in general about the working of a market. A warning example of such modification not warranted by specific experience is the doctrine of the wagefund, which is now universally discredited, and ought always to have excited suspicion and challenged proof because, as already intimated in another connection, it is a supposition repugnant to the general theory of Exchange that "the total amount of means of purchase must be strictly limited, and the buyers must be determined to spend the whole of this sum in purchase of the commodities in question." 3 Perhaps, as Sir Leslie Stephen says with reference to the classical writers, "the assumption slipped into their reasoning unawares." 4 Sometimes it may have been intended only to convey that early lesson which is contained in our opening paragraphs,-that no party to production can expect to earn more than the total produce. Sometimes there was contemplated a more definite statement true of short periods, a truth which has been well stated by Professor Taussig in his article on " The Employer's Place in Distribution," and at greater length in his book on Wages and Capital— "The whole of the real income available for the community is not in any substantial sense at the disposal of the capitalists. ... 1 See Pigou on "Utility " in the ECONOMIC JOURNAL for March, 1901. Compare, as to the absence of predeterminateness in the dispositions of parties to the labour market, Walker, Political Economy, Art. 320. 2 Cp. Marshall, Principles of Economics, Book VI. chap. iv., and Walker, Political Economy, Art. 308 et seq. Quoted from Böhm-Bawerk, who himself compares his theory with that of the wage-fund (Positive Theory, p. 419). Both theories seem true of short periods. The context accords with the view here taken of the theory, as true of short periods, inadequate to long periods. The English Utilitarians, Vol. III. p. 216. A large part of the commodities now on hand would not serve their turn. The supply of bread and flour and grain at any moment is adjusted to the expected needs of the whole mass of consumers. . . . The effective choice which the capitalists would have . . would be thus confined, for the time being at least, within limits not very elastic." 1 Let us suppose that the working classes live on bread only, while the capitalist classes consume buns also. On a day, after a conference between employers and employed, the partition of the national dividend is altered in favour of the capitalists. Yet they will be unable to benefit immediately by the change. On that day more buns will not be forthcoming, all the bakers' ovens being preoccupied with bread. For the purpose of illustration there has been chosen a specially simple case in which the articles consumed by the two classes are formed out of the same material, and by a process which is identical up to the penultimate stage. The stream of production does not bifurcate till it debouches into the mouths of the two parties to Distribution. When we consider longer tracts of that stream, there comes into view a circumstance to be discussed under the head of Capital, the influence of time on value. To illustrate the distribution of produce between those who have contributed at different times to its production, let us at first make abstraction of other differences, and imagine economic men uniting the functions of workman and capitalist-entrepreneur, differing only in the amount of capitalisation, the length of time during which their labour is invested. One labours at proximate means, another at remote means, tending to the ultimate product out of which all the producers are remunerated. An idea of a train of production formed by successive operations directed to an ultimate product may be obtained by watching any factory. Here you have the raw cotton-wool put in, there you see a "sliver" of carded cotton flowing from one machine en route to another, until at the last stage there comes out the finished article. To illustrate the process of distribution, we must now conceive a backward flow of the ultimate product to the several producers. We might imagine each one's share to be conveyed to him by some contrivance like those wondrous little vehicles in the Boston Public Library, which, as if gifted with human intelligence, find their way about the building to the particular 1 Quarterly Journal of Economics, Vol. X. p. 74. place where each book belongs. To illustrate the effect of distance in time on distribution, we must further modify the model presented by an ordinary factory. We must suppose the interval of time between the processes to be greatly magnified, months being substituted for minutes. Then there will come into view the circumstance to which attention is particularly directed,—that a larger share will be conveyed to each producer (other things being equal), the greater his distance from the final stage. There will thus be a continual flow of materials in process of manufacture onwards and of products ready for consumption backwards, if the work at each stage is steadily maintained,— provided that there is a continual stream of raw material, and that the machines are continually renewed.1 Considering the continuous round of production and consumption, we realise the important truth which Mill has thus expressed :— 66 The miller, the reaper, the ploughman, the plough-maker, the wagoner and wagon-maker, and the sailor and ship-builder, when employed, derive their remuneration from the ultimate product, the bread made from the corn on which they have severally operated or supplied the instruments for operating." 4 To represent the continual expansion of value as the present ripens into the future, a series of concentric circles has been happily employed by Professor Böhm-Bawerk. Varying his illustration, let us suppose the circles to be drawn on ground which rises uniformly from the outmost circle towards the centre O in the accompanying diagram at which the apex tapers to a needle-point. The circles are drawn at equal distances as measured on the surface, and therefore, in a bird's-eye view which the diagram is intended to represent, become huddled together in the neighbourhood of the central height. Across the circles, down the hill, flow streams with uniform velocity, so as to pass from circle to circle in a unit of time. The breadth of a stream increases with its length,—not in direct proportion to the length, but according to the law of accumulated price.5 The volume of the stream is proportioned to its breadth and to its depth (not shown on the figure). The stream takes its rise at some position on the channel (e. g. at aa's), the flow per unit of time at that point being proportioned to the energy put forth in pumping 1 Cp. p. 46, below. 2 Political Economy, Book I. chap. ii. §§ 1, 2. 3 Positive Theory, Book II. chap. v. The series of highering circles is not shown in the diagram after the fifth circle. 5 Marshall, as cited above, p. 19, note 2. |