MARSHA.LLS' ECONOMICS OF INDUSTRY.*
THIS is a very remarkable work. As a systematic treatise on that part of political economy with which it deals, it is no exaggeration to say that, in our judgment, it renders almost obsolete all the current English books. It summarises, in a compendious form, the results of all the latest economic inquiry and speculation on the subjects of Production, Distribution, and Value, and presents the whole with much originality of argument and freshness of illustration. At the same time, Mr. and Mrs. Marshall display groat sobriety of judgment, and though inclined ourselves to a somewhat rigid orthodoxy in economical matters, we have detected very few traces of heresy. In fact, wherever we have found a difficulty in following the authors' reasoning, subsequent reflection has convinced us that the obscurity is due to the great and, as we think, unnecessary condensation which characterises their method. Something seems to have been sacrificed in order to make the book cheap and useful for educational purposes. The paper is thin and the type is close, and, no doubt for the same reason, the argument is often unduly compressed. We are told, in the preface, that "the book was undertaken at the request of a meeting of Cambridge University Extension lecturers, and is designed to meet a want which they have felt." "University Extension" lectures are excellent things, and the lecturers in this instance showed a very sound dis- cretion; but we take leave to suggest that the book is adapted to satisfy a want which is much more widely felt than that which it was intended to supply. We trust that in future editions it will be expanded, both externally and internally, into proportions worthier of the high place which it is destined to take among economic writings.
The present work deals, as we have said, only with Pro- duction, Distribution, and Value, the rest of the subject being held over to a future volume. Within the compass of a review, it is, of course, impossible to traverse such an extensive field, and we shall, therefore, make no apology for confining ourselves to an exposition, for the most part in our own words, of that which is the most peculiar and characteristic feature of the book,—the authors' theory of Normal and Market Value. The Normal Value of any commodity represents its purchasing power, in terms of other commodities, in a market where there is free competition among the dealers. When Normal Value is ex- pressed, as it usually is, in money, it is called Normal Price. In order to determine the law upon which the Normal Price of any given commodity depends, we must ascertain the conditions which regulate the action of the buyers and sellers respectively. Take, first, "the law of the eagerness of buyers," which is called by our authors the "law of demand," but which, to avoid mis- leading associations, might, perhaps, be better named "the law of utility," or of "comparative utilities." The utility of a com- modity to any one who does not, possess it, is the pleasure which he would gain by the acquisition of it. But this pleasure cannot be obtained by merely wishing for it. The desire for that which one has not can only be gratified by parting with that which one has. In other words, a buyer is "one who wishes to obtain a particular commodity, and offers in exchange for it a certain amount of money," or general pur- chasing power. Hence, the first inquiry which is addressed to the seller is,—What price do you ask P The price being named, the question whether or not a sale will take place depends upon the comparative pleasure which the buyer anticipates from the acquisition of the thing, on the one hand, or the retention of the money demanded for it on the other. In making the comparison, he will have regard to the quantity of the com- modity which he already possesses, and to his actual or probable opportunities of obtaining it, or some efficient substitute for it. He will also take into account the extent of his own means, and the number and urgency of his other wants. Supposing lie re- solves on a purchase, the quantity which he will buy will be determined by the same considerations. He will cease buying, 'when the next portion offered to him would be less useful to him than the money which he is asked to pay for it. In other words, the price of a commodity "measures its final utility to each purchaser,—that is, the value in use to him of that por-
The 'economies of Induotry By Alfred Marshall nnd Mary Paley Marshall. London: Macmillan and Co. 1879. tion of it which it is only just worth his while to buy." If, owing to some change in the conditions of production, the price asked by the seller rises, other things remaining the same, the quantity sold will be less, both because each purchaser will take less, and because there will be fewer purchasers. If, for a similar reason, the price asked by the seller falls, other things remaining the same, the quantity sold will be greater, partly be- cause most purchasers will take more, and still more because persons who could not buy before will now become pur- chasers. Effective demand, in short, depends upon a com- parison of utilities ; and as the price of any given com- modity rises or falls, its relative utility is lowered or heightened, and the quantity demanded is diminished or increased. This leads to a consideration of the circumstances which influence the seller in determining the quantity which he will produce, and the price which he will ask. The producer will not go on producing a commodity and sending it into the market, unless he expects to receive in exchange for it such a sum of money, or general purchasing power, as will equal the expenses of pro- duction. Nor can he in the long-run, under a 4gime of free competition, obtain for what he produces a higher price than will cover the expenses of production. Expenses of production, as the authors point out, are not the same as Cost of production. The cost of production of a thing "consists of the efforts and ab- stinence required for producing it." The expenses of production of a thing in any market "are the sum of the prices of the efforts and sacrifices which are required for its production there ; or, in other words, the sum of the expenses which would have to be incurred by a person who should purchase them" (i.e., the efforts and sacrifices), " at their market prices." The expenses of production, as thus defined, comprise the cost of raw material ; the wages of labour, including the employer's remuneration for the work of management ; depreciation and risk in respect of fixed capital ; and interest on the whole capital invested, through- out the period which intervenes between the original outlay and the sale of the produce. The selling price of a commodity will always tend to be such as will just repay these expenses, and the quantity produced and sent into the market will always tend to be such as can just be sold off at that price. If, from a change in the relative utility of the thing, the de- mand for it is increased, the quantity produced remaining the same, the sellers will be able to demand for it a higher price than will cover the expenses of production. Competition among the producers will immediately set in, and the quantity produced will be increased, until the selling price falls again to the level of the expenses of production. If, for a similar reason, the de- mand diminishes, the price will fall until a contraction in the scale of production raises it again to the same level. Thus the "Normal Value of a commodity in any market is equal to its expenses of production there ;" and the Normal Supply is the quantity which can just be sold at a price equal to the expenses of production.
It would thus appear that Normal Price is determined solely by expenses of production, and that the only effect of changes in the condition of demand is to increase or diminish the quantity produced. But as a matter of fact, and in the case of most commodities, the expenses of production themselves vary with the quantity required. Raw produce, and articles in which the material is a more important element than the labour ex- pended on it, obey the law of Diminishing Return. The greater the quantity needed, the greater is the trouble of getting it. Subject, therefore, to the counteracting influence of the pro- gress of discovery and of improvements in the means of communication, every increase in the demand for commodities of this kind involves an addition to the expenses of production, and indirectly raises the Normal Price. On the other hand, articles in the production of which the labour expended is a more important element than the material, obey the law of Increasing Return. The larger the scale on-which they are pro- duced, the greater opportunity is there for improving the pro- cesses of production, by extending the division of labour and the employment of machinery. In the case, therefore, of this class of commodities, the general rule is that in the long-run increased demand leads to a diminution in the average expenses of production, and indirectly lowers the Normal Price. Normal Price, than, varies with the quantity demanded, because ex- penses of production vary with the quantity produced. We are thus led to discard the one-sided theories of Value which have resulted from giving an exclusive or exaggerated attention to single aspects of a complex phenomenon. Utility is in all
cases a condition of value ; and yet the value of a commodity is not determined by its utility, inasmuch as its comparative -utility changes with every variation in the quantity produced and sent into the market. On the other hand, a commodity will not, in the long-run, be sold in a free market at a price either higher or lower than its expenses of production ; and yet its value cannot be said to be determined by expenses of pro- duction alone, inasmuch as they, too, vary with almost every change in its comparative utility. Normal Value, in short, de- pends upon the action and interaction of two sets of circum- stances;—circumstances which affect the comparative utility of an article, and constitute the conditions of demand, and cir-
cumstances which affect the expense of producing it, and consti- tute the conditions of supply.
Such is, in outline, the authors' theory of Normal Value. It -remains to inquire within what limits and subject to what laws the Market prices of a commodity diverge from its Normal price. Market fluctuations arise from two main causes : mis- calculations on the part of dealers and producers, and the absence or imperfect action of competition. As to the first of these, it is difficult to add much to the lucid and elaborate investigations of that admirable economist, the late Professor Cairnes ; but the authors have collected the results of previous inquiry in an in- structive chapter, which is rendered interesting by many apt illustrations. Producers and dealers may err in their forecast either of the probable supply, or of the probable demand. In the case of commodities, such as corn, which are needed to satisfy primary and universal wants, and for which, therefore, the demand is almost constant, the mistake generally con- sists in a miscalculation of the supply, arising from the -uncertain conditions under which they are produced. A bad harvest, for instance, can rarely be foreseen. Fluctuations clue to this cause are small or great, according as the commodity in question can be produced continuously or only at one season, and according as it can be stored up for future use or deteriorates -with keeping. Their range and violence are diminished by all those improvements in the means of communication, and the machinery of transport, which are rapidly making the whole world into a single market, and which supply the deficiency of one country with the surplus produce of another. Changes in price which are due to a mistaken estimate of future demand are sub- ject to like laws. Here, again, we have to look to the conditions'of production. A sudden increase in the demand for calico could be 'quickly met, and the price would not rise high nor remain long above the normal level. It would be otherwise in the case of seal- skins. Sometimes, too, although the change in demand is an- ticipated, the obstacles in the way of adjusting the supply to it are so great, as to lead to strange oscillations:of price in both 'directions. In manufactures, for instance, in which a great deal of fixed capital is employed, production will often be con- tinued long after prices have become too low to make it profit- able, owing to the difficulty and loss which would be involved in the realisation of capital, and the transference of it to other
industries. Such in lately been the case in the cotton trade. i In the same way, n those trades n which not only much costly machinery is necessary, but the work requires great physical i
strength or peculiar dexterity, or s carried on under disagreeable conditions, prices may rule for a considerable time above the normal rate. An illustration may be found in the history of -the coal and iron trades between 1870 and 1873, though there were, no doubt, other reasons as well for the excessive inflation which then took place. Hindrances to free competition among producers and dealers constitute the other main cause of variations in price. Such hindrances, for the most part, arise 'either from the local situation of .particular markets, or from customs affecting special industries or trade in general, or from combinations among the persons engaged in pro- duction and distribution, whether employers or workmen, merchants or shopkeepers. There could not be a better illustration of the influence of locality and custom in this respect, than the diversities which exist between the retail prices of the same or similar articles in a single town. A bonnet is sold in Bond Street for twice the price which it would fetch in Islington. The extra sum which the West-End shopkeeper charges is, no doubt, partly due to the long credits which he gives and the bad debts which he incurs. It is, in some cases, as the authors point out, a remuneration for the superior taste which a fashionable purveyor of luxuries is obliged to possess, and an insurance against the loss which is incident to con- stant changes of stock. But in the main, it is to be ascribed
simply to situation and custom, and in so far as this is the cause, the landlord, and not the shopkeeper, benefits by it. The effect of combinations to keep up prices by limiting supply is carefully discussed by Mr. and Mrs. Marshall. They come to the conclusion that such attempts generally contain within themselves the seeds of their own destruction, and can only be successful when the combination "is able to obtain the adhesion of all or almost all the traders who can supply the market ;" when it can "impose social or pecuniary penalties on any mem- ber who is not faithful to it ;" and when the commodity in question is "one that is in urgent demand, so that its con- sumption will not be much checked by a rise in its price."
Space will not allow us to follow the authors in the appli- cation of their theory of Normal and Market Value to Profits and Wages, or in their elaborate and impartial discussion of the policy of Trade Unions. We have only been able to indicate the general course of their argument in one limited, though very important field of inquiry. We shall look forward with much interest to the appearance of the companions -volume which they intend to give us, on the Economies of Trade and Finance. If the completed work is carried out on the lines and sustains the promise of this first instalment, they will have placed all students and teachers of political economy under a heavy and lasting obligation.
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