The Principles of Economics

The Principles of Economics

by Alfred Marshall

Book III

On Wants and Their Satisfaction

Chapter 1

Introductory

    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.

Chapter 2

Wants in Relation to Activities

    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*)

NOTES:

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.

Chapter 3

Gradations of Consumers' Demand

    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 Rs100 a year will walk to business in a heavier rain

than the clerk with Rs300 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*)

NOTES:

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 1o 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.

Chapter 4

The Elasticity of Wants

    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*)

NOTES:

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      1.0         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.

Chapter 5

Choice between Different Uses of the Same Thing. Immediate and

Deferred Uses.

    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 Rs1 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*)

NOTES:

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.

Chapter 6

Value and Utility

    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.

NOTES:

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) Rs100 a year is

worth (say) Rs1000 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 Rs30 represent necessaries, a person's

satisfaction from his income will begin at that point; and when

it has reached Rs40, an additional Rs1 will add a tenth to the Rs10

which represents its happiness-yielding power. But if his income

were Rs100, that is Rs70 above the level of necessaries, an

additional Rs7 would be required to add as much to his happiness

as Rs1 if his income were Rs40: while if his income were Rs10,000,

an additional Rs1000 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 Rs1 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 Rs600 makes a fair even bet

of Rs100, has now an expectation of happiness equal to half that

derived from Rs700, and half that derived from Rs500; and this is

less than the certain expectation of the happiness derived from

Rs600, because by hypothesis the difference between the happiness

got from Rs600 and Rs500 is greater than the difference between the

happiness got from Rs700 and Rs600. (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.

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