Now, if cost of production determines the value of money, it follows that, while the cost of producing a given quantity of money remains the same, its value remains the same. But it is obvious that the value of money may remain the same in this sense of the term, while, owing to the alterations which may be taking place in the costs of producing the commodities alluded to, the quantity of other things for which it will exchange may be essentially different. Which of the two, then, is the true criterion of the value of money? It is surely most desirable that the student in political economy should not be left in the dark on this subject; yet Mr. Mill gives him no assistance; and he is left to decide between two very different meanings as well as he can.
But, perhaps, the most culpable confusion of terms which Mr. Mill has fallen into, is in relation to demand and supply; and as he has a more original and appropriate claim to this error than any other English writer, and its belief leads to very important consequences, the notice of it is particularly called for.
In the first place, no person can have turned his attention, in the slightest degree, to the language of political economy, either in conversation or books, without being fully aware that the term demand is used in two very distinct senses; one implying the quantity of the commodity consumed, and the other the amount of sacrifice which the purchasers are willing to make in order to obtain a given portion of it. In the former sense, an increase of demand is but very uncertainly connected with an increase of value, or a further encouragement to production, as in general the greatest increase of such kind of demand takes place in consequence of a very abundant supply and a great fall in value. It is the other sense alone to which we refer, when we speak of the demand compared with the supply as determining the values and prices of commodities; and in this latter sense of the term demand, which, perhaps, is in the most frequent use, an increase of supply is so far from increasing demand that it diminishes it, while a diminution of demand increases it.
Secondly, it has been generally agreed, that when the quantity of a commodity brought to market is neither more nor less than sufficient to supply all those who are able and willing to give the natural and necessary price for it, the demand may then, and then only, be said to be equal to the supply; because, if the quantity wanted by those who are able and willing to give the natural price exceed the supply, the demand is said to be greater than the supply, and the price rises above the ordinary costs of production; and if the quantity wanted by those who are able and willing to give the natural price fall short of the supply, the demand is said to be less than the supply, and the price falls below the ordinary costs of production. This is the language of Adam Smith, and of almost all writers on political economy, as well as the language of common conversation when such subjects are discussed. Indeed it is difficult to conceive in what other sense it could, with any propriety, be said, that the supply was equal to the demand, because in any other sense than this, the supply of a commodity might be said to be equal to the demand, whether it were selling at double or the half of its cost.
Thirdly, it must be allowed, that according to the best authorities in books and conversation, what is meant by the glut of a particular commodity is such an abundant supply of it compared with the demand as to make its price fall below the costs of production; and what is meant by a general glut, is such an abundance of a large mass of commodities of different kinds, as to make them all fall below the natural price, or the ordinary costs of production, without any proportionate rise of price in any other equally large mass of commodities.
With these preliminary definitions, we may proceed to examine some of the arguments by which Mr. Mill endeavours to show that demand and supply are always equal in the aggregate; that an over supply of some commodities must always be balanced by a proportionate under supply of others; and that, therefore, a general glut is impossible.
If Mr. Mill had always strictly adhered to that meaning of the term demand for a commodity which signifies the quantity consumed, he might have maintained the position with which he heads the third section of his fourth chapter, namely, that consumption is co-extensive with production. This, however, is, in reality, no more than saying, that if commodities were produced in such abundance as to be sold at half their cost of production, they would still be somehow or other consumed—a truism equally obvious and futile. But Mr. Mill has used the term demand in such a way, that he cannot shelter himself under this truism. He observes, “It is evident that whatever a man has produced, and does not wish to keep for his own consumption, is a stock which he may give in exchange for other commodities. His will, therefore, to purchase, and his means of purchasing, in other words, his demand, is exactly equal to the amount of what he has produced, and does not mean to consume.”[[17]]
Here it is evident that Mr. Mill uses the term demand in the sense of the amount of sacrifice which the purchaser is able to make, in order to obtain the commodity to be sold, or, as Mr. Mill correctly expresses it, his means of purchasing. But it is quite obvious that his means of purchasing other commodities are not proportioned to the quantity of his own commodity which he has produced, and wishes to part with; but to its value in exchange; and unless the value of a commodity in exchange be proportioned to its quantity, it cannot be true that the demand and supply of every individual are always equal to one another. According to the acknowledged laws of demand and supply, an increased quantity will often lower the value of the whole, and actually diminish the means of purchasing other commodities.
Mr. Mill asks, “What is it that is necessarily meant, when we say that the supply and the demand are accommodated to one another? It is this (he says) that goods which have been produced by a certain quantity of labour, exchange for goods which have been produced by an equal quantity of labour. Let this proposition be attended to, and all the rest is clear. Thus, if a pair of shoes is produced by an equal quantity of labour as a hat, so long as a hat exchanges for a pair of shoes, so long the supply and demand are accommodated to one another. If it should so happen that shoes fell in value, as compared with hats, which is the same thing as hats rising in value, as compared with shoes, this would imply that more shoes had been brought to market, as compared with hats. Shoes would then be in more than due abundance. Why? Because in them the produce of a certain quantity of labour would not exchange for the produce of an equal quantity. But for the very same reason, hats would be in less than due abundance, because the produce of a certain quantity of labour in them would exchange for the produce of more than an equal quantity in shoes.”[[18]]
Now, I have duly attended, according to Mr. Mill’s instructions, to the proposition which is to make all the rest clear; and yet the conclusions at which he wishes to arrive, appear to me as much enveloped in darkness as ever. This, indeed, was to be expected from the proposition itself, which obviously involves a most unwarranted definition of what is meant, when we say that the supply and the demand are accommodated to one another. It has already been stated that what has hitherto been meant, both in conversation and in the writings of the highest authority on political economy, by the supply being accommodated to, or equal to the demand, is, that the supply is just sufficient to accommodate all those who are able and willing to pay the natural and necessary price for it, in which case, of course, it will always sell at what Adam Smith calls its natural price.