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Demand as the Director of Industry

( Originally Published Early 1900's )

31. THE members of the community generally believe that the public interests are deeply affected by the way in which people spend their money. This belief arises from the supposition that the spender confers a marked benefit on the person from whom he buys. It is supposed that if he spends his money in clothing, tailors are benefited ; if he spends it in shoes, shoemakers are benefited ; if he carries it abroad, the whole community lose the benefit he might have conferred upon it if be employs Chinese cheap labor, the Anglo-Saxon race are the losers; and if he invests it, nobody but himself gets any benefit from it. In what respects these current popular doctrines are erroneous will appear subsequently. We begin by considering the question of the effects of different kinds of expenditure from an economic point of view, without reference to preconceived opinions. The investigation is one of the most intricate in economics, and requires for its prosecution that we have clearly in mind a number of conclusions already drawn in previous chapters. These conclusions we shall now restate for the sake of clearness.

I. The necessary conditions of general prosperity are that a sufficiency of the necessaries of life to support the whole community should be produced, and that each member should be able to command such portion as he is entitled to under the laws which govern the social organism. A sufficiency of a commodity is all that is required. There is no need of piling up more food than the whole community can eat, nor of making more clothes than they can wear out. Therefore increasing prosperity is marked, not by an unlimited increase of the more common necessaries of life, but by gradual improvements in the quality of these necessaries, and in the quantity of those articles which are commonly considered luxuries. It will of course be understood that no line can be drawn between necessaries and luxuries. These do not form two classes of things, but the quality of being a luxury must be regarded as one which different objects possess in different degrees. When a man makes the first step upward in the social scale, it is not by sleeping in two straw beds after having formerly slept in one, but by sleeping in a better kind of bed. He substitutes finer for coarser clothing, and a family carriage for a cart. As he advances, a silver watch comes into his possession, which, in time, is replaced by a gold one. He may have no more chairs than he had before, but they are of better quality; and books and pictures are added to the embellishments of his house. Lace curtains take the place of the cotton ones on his windows, and his books at last go into a walnut case. The prosperity of any one man is improved when he can add comforts possessing in a higher degree the quality of luxuries; and any class of men is prosperous when all of its members are prosperous. Since, by the natural laws of supply and demand, those things are made which people most want and can best afford to buy, it follows that general prosperity is marked by a general increase in the effectiveness of industry, and that we must expect this increase of industry to show itself in the production of articles which to the lowest grade of men would appear luxuries.

So much for production in so far as it concerns the ability of each man to get command of his share of the product. We have already shown that in the state of things which now exists in this country it is scarcely possible for any industrious man to suffer for the necessaries of life. The only persons who can so suffer are those so weak, miserable, and worthless that they cannot or will not do anything which anybody else wants to have done, or who set so high a price on their services that they can get nobody to employ them.

II. We call to mind that the primary form of capital may be considered as sustenance for laborers ; that is, food for them to eat, clothing for them to wear, and houses for them to live in. In an economic sense the class laborer includes every person who gains a living by his own exertions, and does not live off the interest of his money, or the profits on his investments. Clergymen and teachers are therefore included in the class, as well as mechanics and hod-carriers.

We also call to mind that when the laborer receives money in exchange for work done, this money may be regarded as an order on owners of sustenance to supply the laborer with a corresponding quantity of that sustenance. This order is ad-dressed to the house-owner, who receives it as rent ; to the owner of flour, who gives flour in exchange for it; and to the clothier, who gives clothes for it.

In order that the work of the laborer may be profitable, the value of his product, whatever it may be, must exceed the value of all the sustenance which lie and his family consume. The measure of the laborer's prosperity is the quality of the sustenance which he is able to command.

III. The demand for various kinds of commodities fluctuates from month to month and from year to year. There is there-fore a corresponding fluctuation in the industry which produces those commodities. It has been shown that these fluctuations in industry may be represented by supposing laborers who are engaged in producing one class of goods to change their occupation and produce the other class. This change can be effected either directly, by laborers changing their occupation, or indirectly, by employing more new labor in the new occupation. The result is the same in the two cases (as shown in II. 49). The restrictions to which this change of industry is subject have also been pointed out, and it has been shown that the only case in which any difficulty is met with in effecting the change. of employment arises when a higher order of skill is demanded.

IV. It is also necessary that the reader should have clearly in mind the monetary circulation as described in the last two chapters, and the distinction between the current measure of demand and the absolute measure. The main proposition to be had in mind in this connection is that demand depends upon the ratio between the flow of the circulation and the price asked ; that when the flow diminishes, either through a diminution of the volume of currency, or, what amounts to the same thing, through a diminution of its rapidity of circulation, a general falling off in the demand for commodities in general is a necessary result ; also that this falling off has its natural remedy in a corresponding diminution in the general scale of prices, which will immediately restore the demand without any general change in the. ability of different classes of men to command the means of subsistence.

If in the monetary circulation we consider a payment from one person A to another person B, we may inquire what B does with the identical money he thus receives, and may, in imagination, trace it through the different streams passing from B to other members of the community. From each member the stream will subdivide itself amongst other members, and so on indefinitely, but its total magnitude will remain unchanged. For example, we. may imagine that a sum of five dollars being paid to B, he pays one dollar of it to each of five persons. If each of these persons divides it among four other persons, there will be twenty in all who will each receive twenty-five cents of that money. If each of these twenty persons divide the money among five others, we shall have one hundred persons each receiving five cents. In every case the total volume of all the little streams which we consider amounts constantly to five dollars. Of course in practice the division would be unequal, but this would not affect the result when we add up all the payments.

It may be asked, How shall we distinguish this particular five dollars from all the other money flowing from B ? The latter was perhaps in receipt of hundreds of dollars from other parties ; he puts the five dollars he receives from A into his general fund, and thus mixes it up in such a way that we cannot distinguish between this particular sum and the other money.

The answer to this is that we learn what B does with that particular five dollars by inquiring in what streams the deficiency would have been found had he not received that five dollars from A. It is mathematically certain that if he had not received it he would have had that much the less to pay out to others ; so that, taking all his payees together, it is certain that five dollars more are received than would have been received by them had À not made this payment. What is true of these payees is true of their payees ; there is a deficiency in the stream amounting to this sum, how far soever we trace it.

Having thus considered the effects of cutting off this stream, so far as it concerns those to whom it would have flowed had it not been cut off, let us consider the consequence in another direction. If A had not made that payment to B he would have had five dollars more either to keep or to spend for some other purpose. Let us first consider the case in which he spends it in some other way. Then his flow to some third person, C for example, would have been increased by the same amount that his flow to B. is diminished. He pays either to B or to C, but not to both. We may in imagination trace the pay-ment from A through C and then see it subdivided amongst different classes of persons in the same way that we did when it went through B.

The conception that we must now form is this: We imagine A holding his five dollars and deliberating whether he shall issue it to B or to C. Whichever of the two he decides shall receive it, we may trace it from the receiver as it subdivides itself among other members of the community. We may suppose it, after two or three payments, to be subdivided among the same persons, whether paid to B or to C. After it reaches those same persons the effects will be the same. Any economic difference that may result from the two directions will take place while the streams are divided, and before they join by reaching the same parties. This conception of the stream ultimately reaching the same persons in whichever way paid is introduced for simplicity. As a matter of fact and reason, when divided among so many men that each one's share is in-considerable, we may consider it as having reached the same persons.

Purchase of Commodities and Demand for Labor. In all that precedes we have made no classification of payments according to their object. A distinction is, however, made by economists between payments to laborers for their services and payments for commodities already produced. The ground of this distinction is this : the capital with which commodities are produced is not the money received for selling them, but the sustenance which the laborers consumed while making them. Hence the payments which support labor are not those made to the seller of goods, but those made to laborers to enable them to purchase sustenance. If, then, we consider only the latter class of payments, we must follow the stream of currency through the parties who sell goods until we find it to reach laborers who receive it as wages and who purchase sustenance with it.

This is what we have done in the preceding chapter, where we have shown that every payment for goods purchased may be considered as divided as wages and interest among those instrumental in their production.

Let us now return to the question how we may suppose a payment from A to B to be divided by the latter amongst his employés with a view of finding what laborer it reaches. It is an obvious rule of business that if a manufacturer finds he cannot sell a particular class of goods, he stops making those goods. If he finds goods sell well, he spends the money which he receives for them in helping his operatives to replace the stock which is sold out. Since manufacturers will not allow unsold goods to accumulate without limit, and indeed will make none except what they can sell, we may consider every person who purchases goods of any particular class as placing in the manufacturer's hands the power and inducement to replace these goods by employing men to make a fresh supply of them.

We now reach the following fundamental law of employment A change of demand from one commodity to another may always be met by a corresponding change of labor from the production of the one commodity to that of the other in so far as this change is possible.

The way in which the change is brought about, and the conditions to which it is subject, have been set forth in II. 49, 50. Let A be an agent who has money to spend, M a shoemaker, and T a tailor. Also let S be the collection of the individuals from whom the tailors and shoemakers may purchase their sup-plies. Then if the agent purchases from the tailors, the latter will spend the money so received for food, clothing, and other necessaries, as well as for the means of continuing their business. This expenditure is repeated by a continuation of the stream from M to S, S representing the community in general. But suppose the spender, instead of purchasing clothes, purchases shoes. Then his money, instead of going to the tailor T, will go to the shoemaker M. If now the equilibrium of supply and demand was exact when the purchase was made from the tailor, then the result of buying from the shoemaker will be that a certain amount of tailoring industry is left out of employment, while there is a demand for an additional supply of the labor of shoemakers. To fix the idea, let us suppose that A represents a number of persons such that the demand in question will be represented by the services of a single person. If then a single tailor can change his business to that of making shoes, he will receive the same money as before, and will spend most of it among the same people as before. The supply and demand will then be perfectly equalized, and the monetary circulation among all the people of the community will be the same as before. What A has done has been to change the industry of one man from that of shoemaking to that of making clothes.

We have already shown how and under what conditions this change can be brought about. We call to mind that there is no necessity that any individual tailor should change his occupation for that of a shoemaker. Some third person may have adopted the trade of shoemaker, and the tailor may take his place, or there may be a series of changes, as already explained in treating of changes of occupation. Finally, some tailor may die and the person who otherwise would have filled his place may learn to make shoes. But in whatever way the change comes about, the final result will be the same as if some one tailor had changed his occupation to that of a shoemaker.

The effect of this change of expenditure is shown in the diagram, which now includes not merely a single flow, as our former diagrams have, but two alternate flows. On the right hand the accented letters Q represent the flows which formerly tail-ors went through the tailors. From the agent A went the flow a' to the tail-ors, among whom of course we include the merchants who sold the clothes. This flow subdivides itself into two, b' and c', the former being the payment for the subsistence of the tailors, and the latter that portion of the payment which went to the parties who supplied the cloth and the wool. These parties got the wool from certain sheep-raisers, and the flow d' represents the payment to them.

Now when A ceases to buy these particular clothes, the latter flows all stop. In lieu of a' we have an equal flow a going to the shoemakers. We therefore suppose a passage of certain men from the ranks of the tailors to those of the shoemakers. To show that this passage may be indirect, we draw a blank circle between them, which may be considered as rep-resenting the community at large, or that portion of the community which is looking for something to do. The unemployed tailors pass into that class, and the shoemakers pass out of it, so that it remains unchanged in number.

Since shoemakers consume the same subsistence as tailors, the flow b for that subsistence is the same as the flow b', so that the interests of society at large are unaffected. In lieu of the flow e' to the cloth and wool-dealers, we have a flow c to the leather-makers. Therefore there must be a change from the business of dealing in wool to that of making or dealing in leather.

In lieu of the flow d' to the sheep-raisers, we have the flow d to the cattle-raisers. It is as easy to raise cattle as sheep, and the balance is made good by a sufficient number of cattle being substituted for sheep.

The point mainly to be kept in mind is that the totality of demand is unchanged by the change of expenditure. There is a greater demand for those classes of services or commodities on the left side of the diagram, and a less demand for those on the right side. The compensation is effected by the passage of a limited number of men from those on the right to those on the left, and the interests of society at large remain unchanged.

Case of non-competing Groups. The question may arise, What would be the effect if the change of expenditure by A, instead of being directed to commodities made by the same classes of men as before, should be directed to those made by a non-competing group whose ranks tailors could not join ? Suppose, for example, that in lieu of shoemakers the parties employed were professors of Sanscrit and Hebrew. Not only could the tailors never learn to teach Sanscrit or He-brew, but it is not likely that there could be any relation by which the tailor should take any place occupied by such a teacher in the blank circle. The result would be a general falling off: in the demand for the work of tailors, and an in-crease in the demand for professors of Sanscrit.

It may appear that since the professors of Sanscrit must be clothed, there will be a flow from them to the tailors to compensate for the loss of the flow from A. But examination will show us that such is. not the case. The professors of Sanscrit must have been clad before, and will need few or no more clothes after their change of employment than they did before. Moreover, their entire income is, by hypothesis, taken out of the flow which formerly went to the tailors, and under any circumstances they spend but a small fraction of that income for clothes. There is therefore an, actual increase in the, demand for the labor of teaching Sanscrit, and a diminished demand for that of making clothes, which, so far as this particular operation is concerned, cannot be compensated.

To learn the complete effect. of the change upon society we ought to know what the professors were doing before A employed them. They probably left some other employer, E, and thus the flow to them from E was stopped, to be replaced by the flow from A. If, after the change, this flow from E should pass to tailors, shoemakers, etc.,. the compensation would be complete, the only change being that the professors of Sanscrit would now be paid out of a new flow. But this would be really no change at all, so far as. the interests of classes are concerned, but only an interchange of two flows. What we are considering, however, is not a change of this sort, but an actual change by A from demanding clothes to demanding the teaching of Sanscrit, uncompensated by any reverse change by other people. The undoubted result is that. already set forth. So far as immediate income is concerned, one class . is better and another worse off. There are indeed ulterior effects, but these are to be considered in subsequent chapters.

36. Other Forms of Expenditure. We have been comparing the effects of different modes of expenditure, and we have shown that the sum total of the demand for labor is the same whether one spends his. money for one kind of labor or sustenance or another kind. But there are still two cases to be considered. What will the effect be ?

I. When A, instead of spending his money by demanding services from the social organism to which he belongs, sends it abroad, or melts it into jewelry that is, when he simply stops the flow a from himself, and so employs nobody in place of the tailors ?

2. When, instead of spending, he invests it in some form of capital ?

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