The vertical lines are called ordinates, and 0 X the axis of the ordinates. Distances along 0 X are called abscissæ. Each point on the curve simply marks the intersection of these, of the ordinates and the abscissæ. This is true of the point a, for example, where the perpendicular denotes the price (1) and the other line the number of units sold, in this case VI.
Though in the diagram we have considered the ordinates to represent price and the abscissæ quantities, the reverse notation would work equally well.
[1126] Mathematical economics also studies other forms of equilibrium which are much more complicated and not quite so important perhaps, relating as they do to conditions of unstable equilibrium.
[1127] Note Pareto’s terms of appreciation (Économie pure, 1902, p. 11): “Walras was the first to show the importance of these equations, especially in the case of free competition. This capital discovery entitles him to all the praise that we can give him. The science has developed a good deal since then, and will undoubtedly develop still more in the future, but that will not take away from the importance of Walras’s discovery. Astronomy has progressed very considerably since Newton published his Principia, but far from detracting from the merits of the earlier work it has rather enhanced its reputation.”
[1128] If this is to be taken as literally true, we have this curious result: the entrepreneur, receiving for the products which he sells just exactly what he paid for producing them, makes no profit at all.
Both Walras and Pareto fully admit the paradoxical nature of the statement. Of course it is understood that it can only happen under a régime of perfectly free competition, care being also taken to distinguish between profits and interest, a thing that is never done, apparently, by English economists, who treat both interest and profit as constituent elements of cost of production.
But this is not so wonderful as it seems at first sight. It simply means a return to the well-known formula that under a régime of free competition selling price must necessarily coincide with cost of production.
This does not prevent our recognising the existence of actual profits. Profits are to be regarded as the result of incessant oscillations of a system round some fixed point with which it never has the good fortune actually to coincide. According to this conception they are but the waves of the sea. But the existence of waves is no reason for denying a mean level of the ocean or for not taking that mean level as a basis for measuring other heights. Some day, perhaps, equilibrium will become a fact, and profits will vanish. But if that day ever does dawn either upon the physical or the economic world, all activity will suddenly cease, and the world itself will come to a standstill.
[1129] A full exposition of Walras’s system involves the supposition not only of two but of three markets interwoven together. On the actual market where goods are exchanged the quantity of these commodities depends upon the quantity of productive services, land, capital, and labour, and the quantity of these productive services, at least the quantity of capital, depends to a certain extent upon the creation of new capital, which in turn depends upon the amount of saving. The third market, then, is that of capitalisation. Since the new capital can only be paid for out of savings, i.e. out of that part of the revenue which has been employed in other ways than in buying consumable commodities, the price of capital must be such as to equal the quantity saved and the quantity of new capital demanded. If saving exceeds the demand the price will fall, etc.
To say that the price of capital has gone up is to say that the rate of interest or the reward of saving has fallen. But a fall in the rate of interest will check saving. The result will be a change of equilibrium, the price of new capital will fall, the rate of interest will go up, etc.