The Measure of Demand by Absolute Value
( Originally Published Early 1900's )
MOST of the economic causes which we have heretofore considered produce their effect by or through their influence upon demand. Although the theory of this influence may be regarded as entirely contained in the separate results of the preceding chapters, yet, in order to give entire precision to our conclusions, it is necessary to bring our separate results together, and show how they coalesce into a single theory of demand as a mathematical quantity. Let us begin by repeating our definitions and conclusions respecting demand given in the opening chapter on that subject.
The demand for a specific commodity, considered as a mathematical quantity, means how much of that commodity can be sold in a definite market, say New York, Chicago, or the entire country.
During a fixed period of time, say one year.
In a certain condition of society or state of the market, And at a certain price.
Regarding the principal places or combination of places which we take as our market, and the period of time, as fixed quantities whose changes we have no need to consider, we see that the amount of the demand will depend upon and vary with the third and fourth conditions, namely, (1) the price charged, and (2) the condition or wants of the public in relation to that commodity. These innumerable varying conditions may be summarized under the single comprehensive and there-fore somewhat ill-defined terni state of the market.
With regard to the first cause we have found the law to be a very simple one, namely, the higher the price the less the quantity demanded. We may assume the action of this cause to be thoroughly understood, and to need no further elucidation. It is the second group of causes, comprehended in the term " state of the market," with which we are concerned. In accordance with a general principle of scientific inquiry, we have to investigate the action of this cause on the supposition that all other conditions are equal. We must therefore sup-pose that in our market, and during the period which we consider, a fixed and invariable price is put upon the commodity. The quantity sold will then vary only with the state of the market. If more people are buying flour at five dollars per barrel this month than last month, it will show that there has been some change : perhaps a foreign demand; perhaps some new use for flour ; perhaps greater ability on the part of the public to buy ; perhaps any other of an innumerable series of causes. We thus get an idea of a demand which does not mean quantity really sold, but the quantity which would be sold supposing the price to be fixed and invariable. This is the ordinary mercantile meaning of demand as a quantity, and must not be confounded with the definition formerly given. An example will make the distinction clear.
The producers of nickel may be able and willing to turn out the same number of pounds of that commodity annually, year after year. Then if, from any cause whatever, the state of the market so changes that there is an increased demand, the producers will raise the price until the demand is brought down, as before, to the supply, which we suppose to remain invariable. We should then have the demand, and price rising and falling together, in accordance with the second law as laid down in III. 16. The difference between the two definitions of demand will then be seen in this form : Since, by our hypothesis, the quantity really sold is the same in the two cases, the actual demand, as above defined, has remained the same. But, in mercantile language, there has been a change in the state of the market, such that more nickel would have been demanded at a fixed price than before, and thus, by the second method of, measurement, demand has increased. We see, then, that there are two distinct ways of measuring demand between which we must carefully distinguish. Both are perfectly legitimate, and may-be useful if we do not confound them. A clear conception of each is all that is necessary to avoid confusion. These conceptions may be assisted by calling the one the actual demand, or the quantity sold, and the other the market demand, which expresses the wants of the public. The market demand will then be a hypothetical quantity, expressing the apparent want of the public for a commodity, and the actual demand will be the quantity really sold.
The relation of these two measures of demand can be made quite clear by the use of algebraic symbols. It has been pointed out (III. 15) that the general average relation between demand and price may be approximately expressed by saying that demand varies inversely as price. The fact that two quantities vary inversely is expressed algebraically by saying that one is equal to some constant quantity divided by the other (III. 7). Hence if we put P, the price at which a commodity is offered, D, the quantity which will be bought at that price, then the relation between D and P will be expressed by such an equation as where we put M for some constant quantity. So long as M remains unchanged, D will increase as P diminishes, and diminish when P increases.
In order to learn how much of the commodity can be sold at a given price, say $3 per pound, we must know M as well as P. Our equation will be, in this case, MD= M.
The quantity M is what we have called the market demand, or the public want for the commodity. If we suppose P to stand fixed at $3, then D will increase when M increases, and vice versa. The greater the number of people, the more they want the commodity, and the better able they are to buy, the larger M will be. It therefore depends on all the circumstances which induce people to buy, except the price charged for the commodity.
We have already seen that in the long-run, and omitting certain exceptional cases, the quantity of each commodity sold is necessarily equal to the quantity produced. Hence when we speak of the actual demand we cannot correctly talk about variations in that demand without corresponding variations in the supply, because that demand is equal to the supply. We cannot correctly say that any cause will increase the demand unless it increases the quantity of a commodity brought to market and sold. Since, in the discussion alluded to in the beginning of this chapter, what is called demand is the desire of the public for certain services or commodities which are sup-posed not to depend upon the quantity of those commodities produced, but upon the state of the market, it follows that it is the market demand which is there considered. We shall there-fore in the present chapter use the term demand to signify the market demand, and so shall suppose it to express a certain condition of the market, having no reference to the real market price, but expressing how much of the commodity can be sold in a fixed period of time at a fixed price.
Accepting this definition, we have pointed out a cause which immediately affects demand. With every addition to the flow of the currency there is an increased demand for all commodities, no matter whether the augmentation of the flow arises from an increase in V or in R. Hence we may say the market demand for things in general is proportional to the flow of the currency, as already defined.
We have called the market demand hypothetical. The reason is clear. The quantity actually sold cannot exceed the supply. Therefore if we suppose a constant and rapid increase of the currency constantly going on, without any increase of supply, while the price is fixed, the whole supply of goods on hand might be speedily sold out and the operation of buying would have to stop. In actual trade the price always. rises under such circumstances. Hence the case of a fixed price is necessarily hypothetical. But though hypothetical, it affords us a method of measuring a certain quantity, namely, the ability and willingness of the public to buy, which is measured by the quantity they would buy at a fixed price.
The question now arises, Is this measure of ability and will a true one? are the public really any more able and willing to buy when the flow of the currency is increased than they were before ? The answer is that this depends on how we are to measure this ability and willingness. In a certain sense they are more so ; and in another, and perhaps more exact sense, they are not more so. We have here our former case of measures by a varying foot-rule. If we agree to measure by a foot-rule which increases and diminishes in length from day to day in spite of all we can do, it is certain that any object that we measure will contain more feet one day than another. But if we consider length measured by an absolute standard, we may regard objects in general as being invariable in length. It may then be perfectly true that a piece of timber would measure more feet one day than another, although its real length should remain unchanged.
So in the present case. If we measure the ability of the public to buy by the quantity of a commodity which they will purchase in a year at a price fixed in dollars, then the measure of that ability will undoubtedly increase with the flow of the currency. With every increase in the flow they will be able to buy more, because they have more dollars to buy with ; with every diminution in the flow they will be able to buy less; just as when we measure a piece of timber, the shorter the foot the greater the measure.
But if we adopt an absolute standard, if we consider the quantity which can be bought, not at a price fixed in dollars, but at a price fixed by a tabular standard of value, as described in Chapter II., then there can be no change in the general ability of the public to buy produced by changes in the flow of the currency, because the money price will then keep pace with the flow.
These same statements apply to our measures of market demand. Let us recall the definition of this term. When the quantity of goods which can be sold at a fixed 'price increases, we say that the market demand increases; when this quantity diminishes, we say that the market demand diminishes. Now if by the words " fixed price" we mean a fixed number of dollars, without reference to the absolute value of those dollars, then evidently our measure of the market demand becomes deceptive. Suppose, for example, that the volume of the currency is doubled, and that in consequence all measures of value in currency have doubled. Then every seller would meet a great rush of people to buy his goods. He might therefore say, "The market demand for my goods has doubled." But in reality he would be offering his goods at half the old price, and he could at any time cause the same rush of buyers by reducing his prices to one half. Hence in order to compare two states of the market at different times with respect to any commodity we must reduce the two prices of the commodity to the same tabular standard of value. When we find that a certain cause stimulates demand we must ascertain whether it does this merely by increasing the flow of the currency or by bringing other causes into play.
We now recognize two measures of market demand: the current measure, expressed by money, and varying with everything that affects either the volume or rapidity of circulation ; and the absolute measure, which is- expressed, not in money, but by the general average prices of commodities and services. It is necessary to have this distinction clearly in mind in all our discussions of the effect of economic causes upon demand. Causes which act through the general circulation by adding to its volume or stimulating its rapidity affect the current demand, but not the absolute demand. Causes which act through supply, or by changing the wants of the community, by opening up new markets or by finding new uses for things change the absolute demand.
This distinction may be made clear by returning to the algebraic equation and again considering the market demand M. The fact that this quantity varies directly as the flow of the currency is expressed by saying that it is equal to some constant quantity multiplied by that flow (II. 6). If we put N, this constant quantity, F, the flow of the currency, we shall therefore have, in equation (1), M=NXF
Thus if we call P' the quotient P/F, we shall have D =N/P.
Now let us notice the relation of these quantities. Equation (a) expresses the fact that if the flow F of currency increases the market demand M will also increase. But this presupposes that we measure this market demand by the amount we can sell at a-fixed price in current dollars. When the flow of the currency increases, these dollars become less valuable ; so that the price in absolute measure is P/F, or P'. Hence the equation (e) expresses the actual demand when the price is reduced to absolute-measure by allowing for changes in the absolute value of the dollar, and this demand is independent of the flow of the currency.
The conceptions of the three measures of demand just described are of such fundamental significance that we shall re-capitulate and condense them.
The current market demand for a commodity is the quantity of that commodity which a community would purchase in a year at a price fixed in dollars.
The absolute market demand is the quantity the community would purchase at a price varying to keep pace with the absolute value of the dollar.
The actual demand is the quantity which, as a matter of history, the community really does purchase.
The great importance of the above principles arises from the fact that the public look upon increased demand as an economic good, and upon diminished demand as an economic evil, and are thus prone to consider demand as a measure of prosperity. When the merchant finds more people coming to his store for his goods, and the laborer finds more people to pay him what he considers fair wages, there is a feeling on the part of both that they are benefited. Of course there is no corresponding feeling on the part of the buyers and the employers that they are injured, because if they had such a feeling they would not come forward with their demands. The fact that they do come forward demanding goods or labor shows that they expect to reap an advantage thereby.
The reverse is true when the employer ceases to come forward, and the customer, having spent his money, stays away from the store. The merchant and laborer then feel that their prosperity is diminishing.
Thus arises a feeling on the part of the community at large that those economic causes which stimulate demand should in some way be promoted, as being beneficial, and that those which diminish it should be avoided, as productive of evil. Since, then, with every increase in the volume or rapidity of the currency there is an increased market demand when measured in the usual way, and in fact in the only way in which we can practically measure it for the time being, it follows that, by a natural process, there is in society a certain tendency to favor every measure which will increase the volume or rapidity of the circulation.
Both of these cases indicate changes in the current market demand, but we cannot tell whether they indicate changes in the absolute market demand until we know the causes at
We have just spoken of measuring demand in currency as the only practical way of doing it for the time being. This is necessarily the case. We have no way of measuring demand at the moment in absolute measure, because it requires an elaborate statistical investigation of the prices of commodities, which there is no authority to undertake. We are in the position of a community which has no other than the varying foot-rule with which to measure its piece of timber, and which is therefore obliged to accept those measures for the time being, and to conclude upon absolute lengths, not directly from the measures, but from long-continued observation of their variations. So in economics, although we are obliged to measure the current intensity of demand in terms of the circulation, yet we know that we are thus liable to be deceived, and that we must refer it to absolute measure whenever we are to get correct results.
We have now to show that changes in demand arising from changes in the flow of the currency neither lessen any avoidable evils nor lead to any attainable benefits. We say " avoidable evils " and " attainable benefits," because with these alone are we concerned in economics. If we look closely, we shall see that the current aspirations on the subject are directed towards a Utopia. People have in mind a certain ideal state of things, in which every laborer is constantly employed, every merchant has as many customers as he can wait upon, and every railway as much freight as it can carry. I say this idea is purely utopian, for changes in the demand and supply of various commodities are absolutely unavoidable. The people want more of one thing today and more of another thing to-morrow; next year they will leave off wearing something that they wore this year and take to something new. One month they will lay in a three months' supply of goods, and perhaps save their money for the two months following. Thus, as already shown, the processes of production do not go on in a continuous stream, but by a series of waves. Necessarily the employment of la-borers who are carrying on the processes vary in the same way. Now this class finds itself with nothing to do, and now that class. There is therefore but one possible way of insuring that every laborer shall be constantly employed. It is to require that he shall work every day for any wages that he can get, whether it is ten cents or ten dollars, and shall be put at work by the authorities if he is any morning found idle after the hour for commencing work. Thus the idea of remedying this evil is purely utopian. No practical benefit can arise from discussing any measures looking to finding employment for everybody all the time.
What we are to remember in this connection is that the difference between the two measures of demand for labor corresponds to a difference in the measure of the wages of labor. That is, we may measure the wages of the laborer either by
The amount of money which he can receive for a week's work, or
The quantity of commodities which he can buy with a week's wages.
The first is the popular method of measuring. When we say that wages are higher in America than in England, we mean that the laborer can get more money for a week's work in America than in England. But it needs no argument to show that this is not the true measure of his prosperity, and that the real question is, How much sustenance can he command in the respective countries ? It is also evident that any cause which enables him to command more money for a day's work, but which at the same time increases the amount which he must pay for his week's food and clothing, does not really do him any good. He may indeed, through his ignorance of economics, be deceived into thinking that he is benefited by the higher wages ; but this is a kind of deception which he will not long submit to. Now a very little examination will show us that an increase of the flow of the currency can at best only raise the laborer's wages in money and cannot increase the amount of subsistence which he is able to command with his day's work. That this must be so will be seen by looking at the subject from the communistic point of view (II. 54). The community at large, of which laborers of some kind form the largest portion, can be fed only with the food actually raised, and clothed only with the cloth actually made. But these actual quantities are dependent upon and limited by physical circumstances and cannot be altered by changes in the currency.
To show how the same result follows from the point of view we have been taking in the present chapter, suppose an increase in the flow of the currency to take place just as an unemployed laborer has made up his mind how many dollars he considers an equivalent for his week's work. If he gets employment under the stimulus of the increase and goes to work, then, be-fore he can spend his week's wages prices have risen a little. They rise still more before he can spend his second week's wages, and thus he continuously finds himself able to buy less and less. He is therefore no better off than if he had gone to work in the beginning on unsatisfactory terms, and is obliged to demand an increase of wages, and probably. be thrown out of employment, just as he was before in his efforts to get the present rate. He is therefore in no manner benefited by the increase of wages.
So also with the general prosperity. An increase in the flow of the currency will cause a temporary wave in the flow of goods from the manufactories to the consumers. But this wave will inevitably be followed by a depression, and is therefore solely temporary in its effects. The only causes which permanently advance national prosperity are the slightly increasing improvements in production, new railways, new farms, new warehouses, improved machinery, improved organization of labor.