§ 3. Commodities limited in Quantity by the law of Demand and Supply: General working of this Law.

These being the three classes, in one or other of which all things that are bought and sold must take their place, we shall consider them in their order. And first, of things absolutely limited in quantity, such as ancient sculptures or pictures.

Of such things it is commonly said that their value depends on their scarcity; others say that the value depends on the demand and supply. But this statement requires much explanation. The supply of a commodity is an intelligible expression: it means the quantity offered for sale; the quantity that is to be had, at a given time and place, by those who wish to purchase it. But what is meant by the demand? Not the mere desire for the commodity. A beggar [pg 255] may desire a diamond; but his desire, however great, will have no influence on the price. Writers have therefore given a more limited sense to demand, and have defined it, the wish to possess, combined with the power of purchasing.207To distinguish demand in this technical sense from the demand which is synonymous with desire, they call the former effectual demand.

General supply consists in the commodities offered in exchange for other commodities; general demand likewise, if no money exists, consists in the commodities offered as purchasing power in exchange for other commodities. That is, one can not increase the demand for certain things without increasing the supply of some articles which will be received in exchange for the desired commodities. Demand is based upon the production of articles having exchange value, in its economic sense; and the measure of this demand is necessarily the quantity of commodities offered in exchange for the desired goods. General demand and supply are thus reciprocal to each other. But as soon as money, or general purchasing power, is introduced, Mr. Cairnes208defines “demand as the desire for commodities or 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.” But many persons find a difficulty because they insist upon separating the idea of supply from that of demand, owing to the fact that producers seem to be a distinct class in the community, different from consumers. That they are in reality the same persons can be easily explained by the following statement: “A certain number of people, A, B, C, D, E, F, etc., are engaged in industrial occupations—A produces for B, C, D, E, F; B for A, C, D, E, F; C for A, B, D, E, F, and so on. In each case the producer and the consumers are distinct, and hence, by a very natural fallacy, it is concluded that the whole body of consumers is distinct from the whole body of producers, whereas they consist of precisely the same persons.”

But in regard to demand and supply of particular commodities (not general demand and supply), the increase of the demand [pg 256] is not necessarily followed by an increased supply, or vice versa. Out of the total production (which constitutes general demand) a varying amount, sometimes more, sometimes less, may be directed by the desires of men to the purchase of some given thing. This should be borne in mind, in connection with the future discussion of over-production. The identity of general demand with general supply shows there can be no general over-production: but so long as there exists the possibility that the demand for a particular commodity may diminish without a corresponding effect being thereby produced on the supply of that commodity, by a necessary connection, we see that there may be over-production of particular commodities; that is, a production in excess of the demand.

The proper mathematical analogy [between demand and supply] is that of an equation. If unequal at any moment, competition equalizes them, and the manner in which this is done is by an adjustment of the value. If the demand increases, the value rises; if the demand diminishes, the value falls; again, if the supply falls off, the value rises; and falls, if the supply is increased. The rise or the fall continues until the demand and supply are again equal to one another: and the value which a commodity will bring in any market is no other than the value which, in that market, gives a demand just sufficient to carry off the existing or expected supply.

Mr. Cairnes209finally defined market value as the price “which is sufficient, and no more than sufficient, to carry the existing supply over, with such a surplus as circumstances may render advisable, to meet the new supplies forthcoming,” which is nothing more than a paraphrase of the words “existing or expected supply” just used by Mr. Mill. It seems unnecessary, therefore, that Mr. Cairnes should have added: “According to Mr. Mill, the actual market price is the price which equalizes supply and demand in a given market; as I view the case, the ‘proper market price’ is the price which equalizes supply and demand, not as existing in the particular market, but in the larger sense which I have assigned to the terms. To this price the actual market price will, according to my view, approximate, in proportion to the intelligence and knowledge of the dealers.”

[pg 257]

Adam Smith, who introduced the expression “effectual demand,” employed it to denote the demand of those who are willing and able to give for the commodity what he calls its natural price—that is, the price which will enable it to be permanently produced and brought to market.210

This, then, is the Law of Value, with respect to all commodities not susceptible of being multiplied at pleasure.