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and profit in every department. *** There is likewise in every society or neighborhood an ordinary or average rate of rent. * * These ordinary or average rates may be called the natural rates of wages, profit and rent, at the time and place in which they may commonly prevail.

"When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labor, and the profits of the stock employed in raising, preparing, and bringing it to market, according to those natural rates, the commodity is then sold for what may be called the natural price. The commodity is then sold precisely for what it is worth, or for what it really costs the person who brought it to market, for though in common language what is called the prime cost of any commodity does not comprehend the profit of the person who is to sell it again, yet if he sells it at a price which does not allow him the ordinary rate of profit in the neighborhood, he is evidently a loser by the trade; since by employing his stock (capital) in some other way he might have made that profit.

Market Price.-"The actual price at which any commodity is commonly sold is called the market price.

"The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labor, and profit, which must be paid in order to bring it thither. Such people may be called the effectual demanders, and their demand the effectual demand; since it may be sufficient to effectuate the bringing of the commodity to market. It is different from the absolute demand. A very poor man may be said in some sense to have a demand for a coach and six; he might like to have it, but his demand is not an effectual demand.

Supply and Demand.-"When the supply of any com

modity falls short of the effectual demand" some will be willing to give more than the natural price and "a competition will immediately begin among them, and the market price will rise more or less above the natural price, according as either the greatness of the deficiency, or the wealth and wanton luxury of the competitors, happens to animate more or less the eagerness of the competition.

"When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither. Some part must be sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole. The market price will sink more or less below the natural price, according as the greatness of the excess increases more or less the competition of the sellers, or according as it happens to be more or less important to them to get immediately rid of the commodity. The same excess in the importation of perishable, will occasion a much greater competition to get rid of, than in that of durable commodities.

"When the quantity brought to market is just sufficient to supply the effectual demand and no more, the market price naturally comes to be either exactly, or as nearly as can be judged of, the same with the natural price.

"The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating. Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them down even somewhat below it. But whatever may be the obstacles which hinder them from settling in this center of repose and its continuance, they are eventually tending towards it."1

1

Book I, Chapter VII. The italics and the words in parenthesis are the writer's.

III

Adam Smith's definition of a fair or "natural" price is as good as any that can be found in so many words, but while the paragraphs referred to seem to lead to definite conclusions because they are precise in terms, careful analysis shows they are little more than graphic descriptions of what takes place under the eyes of every housewife who buys of her grocer. She pays the price asked for the things she wants; whether that price covers cost or not she does not know or care, all she knows is that if she sells eggs she receives what she thinks is the highest market price, if she buys butter she pays what she thinks is the lowest market price-she may find out too late that prices vary considerably in the next street, or that a neighbor the same day received more for her eggs and paid less for her butter.

IV

The "Wealth of Nations" was published in 1776. Let us skip a century and a quarter and see what, if any, advance has been made over Adam Smith's propositions.

A recent writer1 sums up the law of supply and demand as follows:

"1. As the price of an article increases the quantity demanded tends to diminish and the quantity offered tends to increase. There will thus in ordinary cases be a certain price which 'clears the market' and makes the two equal.

"2. This price will, theoretically, be reached by free competition. For so long as the supply is in excess of the

'President Hadley of Yale, in the Dictionary of Philosophy and Psychology, vol. II, pp. 623-4. Compare also article on Value, vol. XXII, Encyclopedia Britannica, 11th edition.

demand, sellers will be in danger of having unsold goods left on their hands, and will compete to bring prices down; but if the demand is in excess of the supply, buyers will be in danger of having wants unsatisfied, and thus competition will force prices up, thus producing an equation of supply and demand.

"3. The prices thus fixed tend to be proportional to the expense of producing the several articles in the market. For if the market price of one article offers a higher rate of profit than the market price of another, investors will gradually abandon the production of unprofitable goods, and put their capital into the line which promises the higher rate, thus increasing the supply and diminishing the price at which it can be sold.

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4. The equation of supply and demand is thus a double process. First, a temporary adjustment of the demand to the supply by the commercial, competition of merchants, which lowers (or, in the converse case, raises) the price until it corresponds to the marginal utility, i. e., until it becomes just worth while for customers to take the whole supply at the price in question. Then there is a more permanent though less accurate and universal adjustment of the supply to the demand, by the individual competition of investors, which lowers, or raises, the price until it becomes proportionate to the marginal expense of production, i. e., until it becomes just worth while for producers to meet the whole demand at the price in question.

"This is the theory of supply and demand as developed by the English economists from Smith to Cairnes."

'President Hadley refers to the mathematical form of expression attempted by Cournot (1838), Jevons (1871), and Marshall (1890). See also "Measurement of General Exchange Value," by C. M. Walsh.

V

From the foregoing summary of the work of a century and a quarter it is plain the theory of supply and demand and of price has not advanced a hair's breadth beyond that formulated by Adam Smith; subsequent writers have simply rung the changes on the theme he furnished; his comparatively simple propositions have been almost lost in a wealth of ingenious refinement. He was content to describe things as he saw them and formulate certain general propositions; his successors, most of them, have retired from the market place, from actual observations of daily happenings, and in the seclusion of the closet attempted to reduce his generalizations to mathematical propositions and give them the semblance of laws.

When the interminable discussion of the "theory" and the so-called "laws" of supply and demand ceases for a moment the producer who is selling below cost facing ruin, or the buyer who cannot get what he needs except at exorbitant prices, asks, "Well, gentlemen, what then? Granting all you say, how does it help my case ?"

The professional economist rouses himself from his abstractions long enough to reply, "My dear man, you must not bother me, I am not interested in you individually, you simply happen to be one of the many victims of the free competition that is essential to the proper operation of the law of supply and demand, your ruin is merely an incident of economic progress.'

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"But I don't wish to lose all I have in the world."

"Naturally, but it can't be helped, free competition—" "D—— free competition.'

"Oh-oh-that is blasphemy."

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