This fundamental resemblance between two such apparently incommensurable things as the buying of material commodities and the borrowing of capital is highly significant; it is another instance of that order in the economic world, of which the reader may now be growing weary. But so difficult is it to see clearly and fully something which one sees, as it were, every day of one's life, that a few more moments of reflection on the special case of capital will be time well spent. Let us revert then to our fantasy of a world socialist commonwealth; and humbly submit another poser to its supreme executive. The question this time will be whether some great constructional work, such, let us say, as the recently mooted Severn barrage scheme, should or should not be undertaken. Let us suppose that the costs and future benefits of the undertaking can be estimated accurately; and that the problem reduces itself to one of expending now a sum, let us say, of $100,000,000, with the prospects of obtaining in the future an income of power, or whatever it may be, worth $5,000,000 per annum. I have assumed for the sake of simplicity that we shall still be reckoning in terms of money, though possibly the executive may have substituted Marxian labor units; but it is quite immaterial to the present argument what the measuring rod may be. The point to be observed is, that it is impossible to tackle the problem at all without the conception of a rate of interest. For suppose that you tried to do without it, and said, "We shall take a long view. The interests of the future are no less our concern than those of the present; we shall not discriminate between them. We shall regard as an enterprise worthy to be undertaken whatever promises to yield in the course of time a return larger than the outlay." Where will this lead you? The particular proposal set out above would clearly pass the test; for in twenty years the resultant benefits would have added up to a figure equivalent to the initial cost. But equally clearly, the cost might have been more than $100,000,000; it might have been $250,000,000, $500,000,000, whatever figure you care to take, and if you extend the period similarly to fifty or one hundred years, sooner or later the gains would top the cost. Now there is no limit to the enterprises which would pay their way on this basis; and it would be quite impossible to undertake them all. For they would swallow up all and more than all your labor and your materials, and would leave you with no resources with which to meet the recurrent daily wants of men. Clearly, then, in some way or other, you must pick and choose, you must reject some enterprises as insufficiently worth while. But how would you proceed to choose? Without a clear principle, a simple criterion to guide you, you would be plunged in utter chaos. You could not say, "Let all proposals involving capital expenditure be submitted to a central committee, who shall compare them with one another in a sort of competitive examination and, after deciding the number of applications they can pass on the basis of the volume of resources which they can devote to the future, award the places to those which head the list." Such a prospect is a nightmare of officialism and delay. You would be driven to formulate a simple, intelligible rule or measure, and leave that rule to be applied by the unfettered judgment of innumerable men to individual problems, as and when they arose. And for such a rule or measure, you could not do better than a rate of interest; you would have to lay it down that only those projects should be approved which promised a return of 6 per cent, or whatever it might be. Even in deciding what it should be, the limits of your choice would be narrowly confined. If, for instance, you fixed on 1 or 2 per cent, you would probably discover that you had not achieved your object, that the undertakings for distant returns which passed this test, still consumed far more resources than you could spare. You would be compelled then to raise the rate until it had cut these enterprises down within manageable limits. But, once more, what essentially would you be doing? You would be using the instrument of the rate of interest to adjust the demand for and supply of capital, though indeed the interest might not be paid away as now to private individuals. You would be reproducing by the method of deliberate trial and error, the adjustments which occur automatically as things are, in the actual world. Once again the most perfectly contrived Utopia would be compelled to pay to the unorganized coöperation of our epoch the sincerest flattery of imitation.
§6. The Fundamental Character of many Economic Laws. But again perhaps a word of warning may be desirable. There is much controversy in these days about something called "Capitalism" or "The capitalist system." When these words are used with any precision, they usually refer to the arrangement so prevalent at present, whereby the ownership and sole ultimate control of a business rests with those who hold its stocks and shares. There is much to be said upon the merits and demerits of this system; something will perhaps be said upon the matter in the fifth volume of this series; but I shall not discuss it here. Nothing that I have said so far has any real bearing on it whatsoever; to suppose that it has, is indeed to miss the whole point of this chapter.
The order, which I have sought to reveal, pervading and moving the most diverse phenomena of the economic world, would be a far less noteworthy and impressive thing were it merely the peculiar product of capitalism. Merchant adventurers, companies, and trusts; Guilds, Governments and Soviets may come and go. But under them all, and, if need be, in spite of them all, the profound adjustments of supply and demand will work themselves out and work themselves out again for so long as the lot of man is darkened by the curse of Adam.
Chapter II
The General Laws of Supply and Demand
§1. Preliminary Statement of Three Laws. The recognition of order in any branch of natural phenomena is but the prelude to the formulation of a set of laws, the simpler as the order is more universal, which describe, and as we say, explain it. Thus the perception of the even, elliptical courses of the heavenly bodies led to the statement of the law of gravitation and the laws of motion.
In economics, similar laws have long since been enunciated, and have proved themselves such valuable instruments for the understanding of the daily problems of the workaday world, that they have been woven into the texture of our ordinary speech and thought. I have already touched upon them in the preceding chapter. But it is now desirable to set them out in order, in the most concise and formal manner possible.
I. When, at the price ruling, demand exceeds supply, the price tends to rise. Conversely when supply exceeds demand the price tends to fall.
II. A rise in price tends, sooner or later, to decrease demand and to increase supply. Conversely a fall in price tends, sooner or later, to increase demand and to decrease supply.