Supply and Demand

by Sir Hubert Douglas Henderson

These four relations of Joint Demand, Joint Supply, Composite Demand and Composite Supply are well worth remembering and distinguishing from one another. They are of immense importance in every branch of economic affairs. There are hardly any economic problems upon which we are fitted to express an opinion, unless we have a lively sense of the far-reaching ramifications of cause and consequence, of the subtle and often unexpected interconnections between different industries and different markets. To gape at these complexities in a confused stupor is as foolish as it is to ignore them. But confusion and stupor are only too likely to represent our final state of mind, if we attempt to deal with these complications, one by one as they occur to us, in a piecemeal and haphazard fashion. We need a clear method, a systematic plan by which we may search them out, and fit them into place. The four relations which we have enumerated supply us with such a plan and method. For they represent something more than a series of pompous names for familiar notions. They constitute a classification of the various ways in which the demand and supply of one thing can affect the demand and supply of others; a classification which is exhaustive when we add the relation of derived demand, and an analogous relation on the supply side which we must now notice.

§8. Ultimate Real Costs. Just as the utility of "producers' goods" is derived from that of the "consumers' goods" which they help to make; so the cost of any commodity is derived from the cost of the things which help to make it. Moreover, just as we recognize that the utility of "consumers' goods" lies at the back of all demand, and constitutes the ultimate end of all production; so we cannot but feel, however obscurely, that behind the phenomena of money costs, there must lie certain ultimate costs, of which all money costs are but the measure. But when we try to explain what the nature of these real costs may be, we are plunged in difficulty. Wages, it may indeed seem at first sight, present no trouble. There is the effort and the fatigue, the unpleasantness of human labor, to represent real costs. But can we suppose that these things are measured with any approach to accuracy by the wages which are paid in actual fact? Is it true, even as a broad general rule, that the services which are most arduous and most disagreeable command the highest price? And wages are not the only ingredient of money costs. There are profits: to what real costs do profits correspond? More difficult still, to what does rent correspond? These plainly are not questions upon which he who runs may read. It will be necessary to devote the next four chapters to their elucidation.

Chapter VI

Land

§1. The Special Characteristics of Land. In the great process of co-operation by which the wants of mankind are supplied, Nature is an indispensable participant. She renders her assistance in an infinite variety of ways, of which the properties of the soil which man cultivates form only one; but the sunshine and rain which enable the farmer to grow his crops; the coal and iron ore beneath the surface of the earth, can be regarded for our present purpose as forming part of the land with which they are associated. We can thus concentrate upon land as the representative of the free gifts of nature, which are of economic significance. Land in modern communities is for the most part privately owned. It can be bought and sold for a price, and acquired by inheritance. Moreover, it is a common practice, particularly in the United Kingdom, for an owner who does not wish himself to cultivate or otherwise use the land, not to sell it to the man who does, but to lease it to him for a term of years for an annual payment which we term rent. It is therefore natural and convenient to envisage the problems, which we shall consider in this chapter, as problems concerning the price and rent of land. But, once again, the laws and principles which we shall state and illustrate in terms of the current systems of ownership and tenure, possess a much deeper significance than this terminology might suggest.

The fact that land is a free gift of Nature distinguishes it in various ways from commodities which are produced by man. The peculiarities which are most important from the economic standpoint are (1) that the supply of land is, broadly speaking, fixed and unalterable, and (2) that its quality and value vary, from piece to piece, with a variation which is immense in its range, but fairly continuous in its gradation. These are thus two aspects from which the phenomena of price and rent can be regarded; aspects which it is usual to call, (1) the scarcity aspect, (2) the differential aspect.

§2. The Scarcity Aspect. The fact that the supply of land is fixed has the following significance. If the demand for land increases, the price will tend to rise. This is also true, for a short period at least, of an ordinary commodity. But, in the latter case, there would ensue an increase in supply which would serve to check the rise in price, and possibly, if production on a larger scale led to improved methods of production, bring the price down eventually below its original level. In the case of land, no such reaction is possible. There is nothing, therefore, to restrain the price (and the rent) of land from rising indefinitely, and without limit, if the demand for it should continue to increase. Conversely, if the demand for land falls off, there is nothing to check the consequent fall in price and rent. In the case of ordinary commodities, the supply would be diminished, because most things are either consumed by being used, or wear out in the course of time, and a regular annual production is therefore necessary to sustain their supply at the existing level. But land remains, whether it is used or not; and its supply is, broadly speaking, just as incapable of being diminished, as it is of being increased. Changes in the demand for land in either direction are thus likely to affect its price in a much greater degree than that in which the price of an ordinary commodity will be affected by a corresponding change in its demand.

For most purposes, however, it is of more interest to compare land with other agents of production, especially with capital and labor, rather than with ordinary commodities. Now, as we have already noted, there is some doubt as to the manner in which the supply of capital or labor is likely to be affected by alterations in demand price. But the supply of capital and the supply of labor, even if we suppose them to be as entirely unresponsive to price changes as is the supply of land, are at any rate not fixed. Not only may they vary for many reasons, but they are in fact likely to vary in direct proportion to the population. An increase in population implies an increase in the supply of labor; and it is likely to be accompanied by an increase in the supply of capital; in other words, the supply of these agents will expand, as the demand for them expands. But the supply of land will remain what it was. This fact is enormously important in connection with the broad problem of population, which will form the theme of Volume VI.

But it is important also in other connections. It has been the dominating factor in many absorbing controversies upon high policy regarding the ownership of land, or the taxation of land values, upon which we can touch but lightly here. It has seemed to many writers a reasonable proposition to lay down, that the ordinary course of the progress of society, the increase of population and industry, must mean, as a broad general rule, a constant increase in the demand for land. And, if that be granted, it seems to follow that the price and rent of land will tend constantly to increase. John Stuart Mill, accordingly, in the middle of the last century, asserted that "the ordinary progress of a society, which increases in wealth, is at all times tending to augment the incomes of landlords; to give them both a greater amount and a greater proportion of the wealth of the community, independently of any trouble or outlay, incurred by themselves,"[[1]] and upon the strength of this assertion, he justified the policy of imposing a special tax upon what we have come to call the "unearned increment" of land. But how far does actual experience bear his assertion out? In Great Britain we have seen in the last half-century an undoubted increase in urban rents; but over long periods at least, there was a marked fall in both the prices and rents of agricultural land, despite the fact that the country was "increasing in wealth" as rapidly as ever before. This was due, of course, in the main to the increased supplies of wheat and other foodstuffs coming from the New World: and if, accordingly, we choose to lump together not only our own urban and agricultural land, but the land of other countries as well, and to speak vaguely of the demand for land as a whole, it might seem as though we could argue that Mill's generalization still holds good. But even this is by no means certain and in any case such a generalization is of very little service: what the illustration should rather suggest to us, is the danger of speaking of land vaguely as a whole, and the importance of turning our attention to the variations in value between different kinds and different pieces.