ON THE INFLUENCE OF DEMAND AND SUPPLY ON PRICES.
It is the cost of production which must ultimately regulate the price of
commodities, and not, as has been often said, the proportion between the
supply and demand: the proportion between supply and demand may, indeed,
for a time affect the market value of a commodity, until it is supplied
in greater or less abundance, according as the demand may have increased
or diminished; but this effect will be only of temporary duration.
Diminish the cost of production of hats, and their price will ultimately
fall to their new natural price, although the demand should be doubled,
trebled, or quadrupled. Diminish the cost of subsistence of men, by
diminishing the natural price of the food and clothing, by which life
is sustained, and wages will ultimately fall, notwithstanding that the
demand for labourers may very greatly increase.
The opinion that the price of commodities depends solely on the
proportion of supply to demand, or demand to supply, has become almost
an axiom in political economy, and has been the source of much error in
that science. It is this opinion which has made Mr. Buchanan maintain
that wages are not influenced by a rise or fall in the price of
provisions, but solely by the demand and supply of labour; and that a
tax on the wages of labour would not raise wages, because it would not
alter the proportion of the demand of labourers to the supply.
The demand for a commodity cannot be said to increase, if no additional
quantity of it be purchased or consumed; and yet under such
circumstances its money value may rise. Thus, if the value of money were
to fall, the price of every commodity would rise, for each of the
competitors would be willing to spend more money than before on its
purchase; but though its price rose 10 or 20 per cent. if no more were
bought than before, it would not, I apprehend, be admissible to say,
that the variation in the price of the commodity was caused by the
increased demand for it. Its natural price, its money cost of
production, would be really altered by the altered value of money; and
without any increase of demand, the price of the commodity would be
naturally adjusted to that new value.
"We have seen," says M. Say, "that the cost of production determines the
lowest price to which things can fall: the price below which they cannot
remain for any length of time, because production would then be either
entirely stopped or diminished." Vol. ii. p. 26.
He afterwards says that the demand for gold having increased in a still
greater proportion than the supply, since the discovery of the mines,
"its price in goods, instead of falling in the proportion of ten to one,
fell only in the proportion of four to one;" that is to say, instead of
falling in proportion as its natural price had fallen, fell in
proportion as the supply exceeded the demand.[49] "_The value of every
commodity rises always in a direct ratio to the demand, and in an
inverse ratio to the supply._"
The same opinion is expressed by the Earl of Lauderdale.
"With respect to the variations in value, of which every thing valuable
is susceptible, if we could for a moment suppose that any substance
possessed intrinsic and fixed value, so as to render an assumed quantity
of it constantly, under all circumstances, of an equal value, then the
degree of value of all things, ascertained by such a fixed standard,
would vary according to the proportion _betwixt the quantity of them_,
and the demand for them, and every commodity would of course be subject
to a variation in its value, from four different circumstances.
1. "It would be subject to an increase of its value, from a diminution
of its quantity.
2. "To a diminution of its value, from an augmentation of its quantity.
3. "It might suffer an augmentation in its value, from the circumstance
of an increased demand.
4. "Its value might be diminished by a failure of demand.
"As it will, however, clearly appear that no commodity can possess fixed
and intrinsic value, so as to qualify it for a measure of the value of
other commodities, mankind are induced to select, as a practical measure
of value, that which appears the least liable to any of these four
sources of variations, _which are the sole causes of alteration of
value_.
"When in common language, therefore, we express the _value_ of any
commodity, it may vary at one period from what it is at another, in
consequence of eight different contingencies.
1. "From the four circumstances above stated, in relation to the
commodity of which we mean to express the value.
2. "From the same four circumstances, in relation to the commodity we
have adopted as a measure of value."[50]
This is true of monopolized commodities, and indeed of the market price
of all other commodities for a limited period. If the demand for hats
should be doubled, the price would immediately rise, but that rise would
be only temporary, unless the cost of production of hats, or their
natural price, were raised. If the natural price of bread should fall 50
per cent. from some great discovery in the science of agriculture, the
demand would not greatly increase, for no man would desire more than
would satisfy his wants, and as the demand would not increase, neither
would the supply; for a commodity is not supplied merely because it can
be produced, but because there is a demand for it. Here then we have a
case where the supply and demand have scarcely varied, or if they have
increased they have increased in the same proportion; and yet the price
of bread will have fallen 50 per cent. at a time too when the value of
money had continued invariable.
Commodities which are monopolized, either by an individual, or by a
company, vary according to the law which Lord Lauderdale has laid down:
they fall in proportion as the sellers augment their quantity, and rise
in proportion to the eagerness of the buyers to purchase them; their
price has no necessary connexion with their natural value: but the
prices of commodities, which are subject to competition, and whose
quantity may be increased in any moderate degree, will ultimately
depend, not on the state of demand and supply, but on the increased or
diminished cost of their production.