Essentials of Economic Theory / As Applied to Modern Problems of Industry and Public Policy

by John Bates Clark

The Effect of Substituting one Consumers' Good for Others.—Reducing the cost of everything would cause an absolute increase in the consumption of everything; but reducing the cost of a single thing always causes, as we have seen, a relative increase in the consumption of that one product. While the demand for other articles may not grow absolutely less, it becomes relatively less because of the comparative cheapness of the one product.[2] A substitution of one article for another in the lists of goods used by the public is a universal phenomenon attending an improvement which affects the production of one article only. When the cost of A´´´ causes it to stand just outside of the purchase limit of a large class of persons, a moderate reduction in the cost of it will make it a more desirable subject of purchase than the articles which have stood just within that limit, and it will be bought instead of one or more of these things. The securing of new customers for a finished product by means of a fall in the price of it is largely brought about by such substitutions. When the new article is added to a consumer's list, the one which has stood as his marginal or least desirable purchase is taken off from it. It is the relative desirability of buying one or the other of these articles that influences a buyer in his decision between them, and that cannot fail to be changed by anything that lowers the cost of one, leaving that of the other unchanged.

If the cost of a unit of each of ten articles be represented by the lines falling from the letters A, B, C, etc., to the base of the figure, a considerable fall in the cost of A would put it below the cost of each of the other articles represented. If in the case of a large class of persons who did not formerly buy any of the A it is as desirable as any of these goods, it will take its place as the most desirable subject of purchase instead of the least desirable. Those whose available means enabled them to acquire all the articles from J to B inclusive, but did not suffice for A, will now take the A and omit the B. Those whose acquisitions stopped with C will substitute A for that article, and in general every buyer of any of these things who has not heretofore acquired A will now put this in the place of the one which it was least worth while to acquire.

Substitutions caused by a Cheapening of one Utility in an Article which is a Composite of Several.—When different goods cost unlike amounts but are objects of equally strong desires, only one of them is a marginal purchase, and the others afford a personal gain to the consumer which is not offset by a cost. We have seen that this rule applies to the different utilities in a single good. In the case of every article several grades of which are sold, there is one component element or one utility which is worth to the buyer exactly what it costs, while the others afford a consumers' surplus. If the letters in the diagram represent, not whole articles, but utilities in articles, as discussed in Chapter VI, it will accurately express the essential facts. In such cases, which are very numerous, it is only necessary to reduce the price of the one utility which is now just worth its cost in order to induce more consumers to buy the grade containing this utility, instead of a lower grade of the same thing. In doing this, they forego the purchase of something else altogether, or content themselves with a lower grade of that other commodity. If jeweled watch cases should become cheaper, some persons would substitute them for plain cases and would forego buying, say, pictures which were just within their purchase limit, or would content themselves with cheaper pictures. This taking of one thing within the margin of consumption and discarding others is far less frequently done than is the taking of a lower grade of one kind of goods for the sake of securing a higher grade of another.

Why Substitutions reduce the Displacements of Labor.—The question will, indeed, arise why the burden caused by the change may not be merely transferred to men in industries the products of which are displaced by the substitution. Something of this kind would occur if, in consequence of the cheapening of one article, any one other were generally discarded. The important fact is that it is not any one thing, but a wide range of things which are consumed in smaller quantities in consequence of the change; and the effect on the makers of any one of them is small. If a thousand men begin to buy the A´´´ of the table we have frequently used, some of them will forego B´´´, some C´´´, and so on through the list; and the market for no one of these things will be much affected. Moreover, the nearly universal fact is that a man who begins to buy one article that he never before used will save the price of it by contenting himself with a slightly cheaper quality of a number of others. He will give up a dozen utilities in as many entire commodities in order to be able to buy the one entire commodity that he adds to his purchasing list. The reduction of demand is so extensively subdivided that it causes relatively few displacements of labor.

Substitution a Prominent Cause of Varying Sales of Goods.—Substitution is, then, the general rule whenever the cheapening of a commodity wins new purchasers of it. This practice is not indeed universal in the case of those who formerly consumed these goods. Former purchasers of an article which has become cheaper may make no change except to buy more of it or a better quality of it for the same amount which they have been accustomed to spend for the inferior quality. They are not then obliged to economize in any other direction, and the change does not trench on their consumption of other goods. On the other hand, it is sometimes the case that they continue to use the original amount of the article that has become cheaper and use the liberated means of purchase—the "money," as it would ordinarily be termed—in buying other goods. The cheapening of A´´´ thus even enlarges the demand for B´´´, C´´´, etc. There are thus two cases in which a reduction in the cost of one thing would not decrease the use of other things.

Substitution More General in the Case of New Consumers.—The substitution of a cheapened article for others is the dominant fact in the case of new consumers of such an article, while an increased consumption of other things sometimes occurs in the case of old consumers. This does not have as large commercial effects as the other change. If we produce cheaper shoes, we make it easier to acquire good ones, and those who formerly contented themselves with an inferior kind take a better one. That means that they add to their purchase lists the higher utility which is present in the one grade and absent in the other. They buy a new element in goods rather than more of those goods, and while they may not always change their consumption of articles of other kinds they more frequently do so. Those who begin to use something which formerly they went without altogether usually give up the use of some good or some quality in it, or get on with a smaller quantity of it in order to make the new indulgence practicable. The man who, when bicycles became cheap, bought the first one he ever owned probably gave up some other gratification.

How the Sale of Goods which wear out in the Using increases as the Price Falls.—When goods deteriorate as they grow older, users have to buy new ones often if they are not willing to use those which are worn out and inferior. If we want always to wear clothes of good quality, we refrain from wearing a suit too long. We discard many things when they have somewhat deteriorated, and this forces us to buy, in a term of years, a larger number of them than we should otherwise do. We discard carpets and upholstery early when they are so cheap that we can afford to do so. We thus improve our goods qualitatively by adding to them quantitatively.

Substitutions a Protection for Labor against Undue Displacements.—Now, not only are the substitutions we have cited of commercial importance, but they act in the direction of retaining labor in a group where "labor saving" has been effected. They help to prevent this process from being equivalent to labor expelling in so far as either a general group or a subgroup is concerned, since they increase the social demand for the products of the group in question and cause a relative diminution of the demand for other things. Quite evidently there is, for these reasons, the more need for labor within this group and less need of it elsewhere. Cheap shoes may thus never mean fewer shoemakers and cheap watches may not ever mean fewer watchmakers.

Substitutions of One Capital Good for Others.—It is not merely in the realm of consumption that the demand for a particular good may increase greatly in consequence of cheapness. The same thing happens in the realm of production, but here the substitution of one thing for others is an even more prominent cause of the increased use of the particular commodity. Aluminum and copper are rivals as carriers of electrical power, with the advantage at present somewhat in favor of copper. As soon as the cost of making aluminum shall be reduced by a moderate fraction it will become the cheaper material for such uses and, unless there is a fall in the price of copper, will thrust itself into use for trolley wires and other conductors of electricity. The possession of an enormous market by the one or the other material depends on their relative costs, and these may easily so change as to transfer most of the demand from the one material to the other. A further fall in the cost of aluminum would make it available for sheathing the hulls of ships and would bring it into general use for many household implements, while a sufficient fall would make it a leading building material and give it a limitless market for the framing and finishing of substantial structures. In these various uses it would substitute itself, not only for copper, but for steel, stone, wood and other materials, and the change would be extensive enough to give it an enormous market without requiring a correspondingly great reduction in its cost. Lowering the cost of aluminum by a third might, by merely making it the favorite carrier of electricity, multiply the present use of it by ten, and lowering it by two thirds might multiply the present use of it by a hundred. If this should take place, saving labor would be anything rather than expelling it from its position in the aluminum-making group. When less labor came to be needed for making a ton of the metal, more labor would be used in the industry that makes it.