 Apendix G of Principles of Economics. This is a LibriVox recording. All LibriVox recordings are in the public domain. For more information or to volunteer, please visit LibriVox.org. Principles of Economics by Alfred Marshall Apendix G Taito, the incidence of local rates with some suggestions as to policy. We have seen, note 65, that the incidence of a new local tax on printing would differ from that of a national tax, mainly by causing such parts of the local printing industry as could conveniently migrate beyond the boundaries of the local tax. To do so, those customers who needed their printing to be done in the locality would pay rather higher for it. Compositors would migrate till only enough remained to find employment locally at about the same wages as before. And some printing offices would be transferred to other industries. The incidence of general local rates on imuwebu property follows different lines in some respects. The power of migration beyond the boundaries of the rates is a very important factor here as in the case of a local tax on printing. But of perhaps even greater importance is the fact that a large part of the local rates is spent in ways that conduce directly to the comfort of those very residents and workers in the locality who might otherwise be driven away. Here, two technical terms are needed. Honorous rates are those which yield no compensating benefit to the persons who pay them. An extreme case is that of rates devoted to paying interest on a loan incurred by a municipality for an enterprise which failed and has been abandoned. A more representative case is that of a poor rate levied mainly from the world to do. Honorous rates tend of course to drive away those persons on whom they would fall. On the other hand, beneficial or remunerative rates are those spent on lighting, draining and other purposes. So as to supply the people who pay the rates with certain necessaries, comforts and luxuries of life which can be provided by the local authority more cheaply than in any other way. Such rates, ably and honestly administered, may confer a net benefit on those who pay them and an increase in them may attract population and industry instead of repelling it. Of course, a rate may be honorous to one class of the population and beneficial to another. A high rate spent on providing good primary and secondary schools may attract artisan residents while repelling the world to do. Services which are prepoderantly national in character are generally honorous. While those which are prepoderantly local in character generally confer upon rate payers a direct and peculiar benefit more or less commensurate with the burden, note 66. But the term rate payer needs to be interpreted differently in regard to different kinds of local expenditure. Rates spent on watering the streets are remunerative to the occupier. But of course, those spent on permanent improvements yield only a part of their return to him. The greater part accrues in the long run to the landlord. The occupier generally regards the rates which are collected from him as forming a single aggregate with his rent. But he makes his reckoning also for the amenities of life which are secured by remunerative local expenditure of rates. That is, he tends other things equal to select districts in which the aggregate of rents and honorous rates is low. But there is great difficulty in estimating the extent. To which migration is actually governed by this consideration. It is probably hindered less than is commonly supposed by ignorance and indifference. But it is much hindered by the special requirements of each individual. Low rates in Devonshire will not draw there people who prefer London life. And certain classes of manufacturers have practically little choice as to the place in which they settle. To say nothing of personal and business ties. The tenant is further hindered by the expense and trouble of moving. And if that were the equivalent of two years rent, he would lose by moving unless the advantage which he secured in rates amounted to two shillings in the pound for 30 years. When, however, a person is changing his abode for any reason, he is likely to allow their full weight to all considerations as to the present and prospective rates in different localities which may be suitable for his purpose. The mobility of the working class is in some respects greater than that of the world to do. But when rates are compounded, friction sometimes acts on the side of the tenant and delays the transference to him of his share of new burdens. The manufacturer is often affected as much by the rates on his workmen's dwellings as by those on his own premises. And though high rates may be among the causes which have driven some manufacturers out of large towns, it is doubtful whether when economically administered they have had much net effect in this direction. For most new expenditure from the rates when underable and upright management materially increases local comforts or lessens local discomforts from the point of view of the work people if not of the manufacturer himself. Further, although the balance of evidence goes to show that leziz consider carefully the present and probable immediate future of local rates yet they cannot see far ahead and they seldom even try to do so. Not 67. Any analysis that is offered of the incidence of rates must be taken to refer to general tendencies rather than actual facts. The causes which prevent these tendencies from being applied in prediction resemble those which prevent mathematical reasonings from being applied to the cost of a ball on the deck of a ship that is rolling and pitching in crosses. If the ship would but stay at one inclination the movement of the ball could be calculated but before any one tendency has had time to produce much result it will have ceased to exist and its successor cannot be predicted. Just so though economists settled once for all nearly a century ago the general tendencies of the shifting of taxation yet the relative weight of onerous rates in different places often changes so rapidly that a tendency may make but little headway before it is stopped or even reversed by changes which cannot be predicted. Paragraph 2 We have already seen that the ground rent which a builder is willing to pay for any site is governed by his estimate of the additional value which that site will give to the buildings erected on it before taking the lease his capital and that which he will borrow for the purpose is free and expressed in terms of money. The anticipated income from his investment is expressed also in money. He sets on the one side his outlay for building and on the other side the excess of the rental value of the building with each site over the ground rent to which he is about to commit himself. He walks out perhaps roughly and by instinct rather than definite arithmetical calculations the present discounted value of this excess for the say 99 years of his lease. Finally, he takes the lease if he sees his way to a good margin of profit and no better opening for his enterprise is at hand. Note 68 he contrives to the best of his ability that the site and the house or other building which he puts upon it shall be permanently appropriate the one to the other. Insofar as he succeeds the rent of the property at any future time is the sum of its annual site value and the annual value of the building and this he expects to yield him full profits on his outlay allowing for insurance against the risks of a rather hazardous industry. This second part of the rent is commonly do perhaps not restrict property called the annual building value or the building rent of the house. As time goes on the purchasing power of money may change the class of house for which that site is suitable is likely to change and the technique of building is certain to be improved. Consequently the total annual value of the property at a later date consists of its annual site value together with profits on the cost of building the house giving accommodation equally desirable at that date with the existing house but all this is subject to the dominant condition that the general character of the house has remained appropriate to each site. If it has not no precise statement as to the relation between total value, site value and building value can be made. If for instance a warehouse or a dwelling house of quite a different character is needed to develop the full resources of the site the total value of the property assistance may be less than each site value alone for the site value cannot be developed without pulling down those buildings and erecting new and the value of the old material in those buildings may be less than the cost of pulling them down allow us being made for the obstruction and loss of time incident there too. Paragraph 3 as between two buildings equally eligible in other respects the occupier will pay for that which has the better situation and annual sum equivalent to its special advantages but he does not care what part of the sum goes as rent and what as taxes therefore onerous taxes on site values tend to be deducted from the rental which the owner or lesi receives and they are accordingly deducted insofar as they can be foreseen from the ground rent which a builder or anyone else is willing to pay for a building lease such local rates as are renumerative are in the long run paid by the occupier but are no real burden to him the condition in the long run is essential for instance rates levied on account of interest and sinking fund on eternal improvement which will for several years to come to stop the public tarifas and yield none of its good fruit will be onerous to the occupier if he pays it in strict justice it should be deducted from his rent because when the improvement is in full working order and especially when the debt has been paid off so that the rate in question lapses the owner of the property will reap the benefits of the onerous task of the onerous rates levied on account of it from the first note 69 paragraph 4 taxes on building values are on a different footing if uniform all over the country they do not alter the differential advantages of favort sites and therefore do not directly act list make the builder or anyone else less willing to pay a high ground rent for a good site if they are so heavy as materially to narrow the area of ground built upon they will indeed lower the value of all building ground and special site values will fall with the rest but their effect in this direction is so small that no great error is made by saying that uniform taxes on building values do not fall on the ground owner the building insofar as he anticipates such taxes adjusts his plans to them he aims at putting up buildings of only such expense as can be led to tenants at rents that will yield him normal profits while the tenant pays the rates he may of course miscalculate but in the long run builders as a class like all other able businessmen are nearly right in their calculations and in the long run uniform taxes on building values fall upon the occupier or at the last on his customers if he uses the building for trade purposes and his competitors are subjects to similar rates but the case is quite different in regard to special high on euros local rates on building values and here comes in the chief difference between the incidents of national taxes on immovable property and local rates on it bremu narrative expenditure from the rates which adds more to the conveniences of life than the equivalent of its cost do not of course repel the occupier that part of them which is assessed on building values is paid by him but is no real burden on him as we have seen in the case of renumerative rates on side values but that part of the rates on building values which is on euros and in excess of corresponding charges in other localities does not fall mainly on the occupiers any exceptional pressure will curse them to migrate beyond its reach in sufficient numbers to reduce the demand for houses and other buildings in the locality till the burden of these exceptional rates falls upon the lesees or owners build us therefore insofar as they can foresee the future deduct the equivalent of these exceptional on euros rates on building values together with all rates and taxes on side values from the ground rents which they are willing to pay but the cases in which great deductions of this kind are made are not numerous and important for permanent inequalities of on euros rates though considerable are less than is commonly thought and many of them are due to accidents which cannot easily be foreseen such as mismanagement by a particular group of local administrators there is indeed one broad and perhaps permanent cause which throws its shadow before namely the tendency of the world to do to move away from crowded districts to roomy and fashionable suburbs thus leaving the working classes to bear an undue share of the national duties towards the very poor but no sooner does this evil become conspicuous than legislation is invoked to remedy it by widening the areas of rating for some purposes so as to include poor and rich districts under the same budget and in other ways it is of greater importance to remember that exceptional on euros rates on building values while tending to lower side rents and to lower the ground rents on new leases in the districts to which they apply are not as great a burden on the whole body of owners of land as seems at first sight for much of the building enterprise which is checked by such rates is not destroyed but directed to other districts and raises the competition for building new leases there paragraph 5 the incidence of a long established rate is little affected by its being collected from the tenant and not from the owners though it is vitally affected by the proportions in which the rate is assessed on site and building values respectively on the other hand the incidence for the first few years of an increase in on euros rates is much affected by the mode of collection the occupier bears more of the new burden than he would if part of the rates were collected from the owners or he were allowed to deduct a part of them from his rent this applies only to neighborhoods that are making progress where the population is receding and building has ceased on euros rates tends to press upon owners but in such places economic friction is generally strong it seems probable that the total pressure of on euros rates on the enterprise of building speculators and other interim owners is not very great and that many rates of which they have complained have really enriched them but vicissitudes of the rates increase slightly the great risks of the building trade and inevitably the community pays for such risks more than their actual equivalent all this points to the grievous evils which arise from great and sudden increases in the rates especially in regard to premises the rateable value of which is high relatively to the net income of the occupier the trader especially if a shop is often able to throw some part of the burden of his rates on his customers at all events if he deals in things which cannot be easily got from a distance but the shop keepers rates are very large relatively to his income and some of that expenditure from the rates which is remunerative from the point of view of well-to-do residents appears on euros to him his work belongs to that group in which economic progress is raising supply relatively to demand a little while ago his remuneration was artificially high at the expense of society but now it is falling to a lower and perhaps more equitable level and he is slow to recognize the new conditions his mind fastens on the real injustice which he suffers when rates are suddenly raised much and he attributes to that some of the pressure on him which is really due to the percoses his sense of injustice is sharpened by the fact that he does not always bargain on quite even terms with his landlord for to say nothing of the cost of fixtures and the general expense of a change he might lose a great part of his custom by moving to equally good premises even a little way off it must however be remembered that the shop keeper does migrate sometimes that his mind is a lot and he takes full account of the rates and thus after a few years he shifts the burden of onerous rates onto the owners and customers more fully than a man of almost any other class does parenthesis open the hotel and lodging housekeeper may rank here with the shopkeeper parenthesis close apendix G continued of principles of economics this is a LibriVox recording all LibriVox recordings are in the public domain for more information or to volunteer please visit LibriVox.org principles of economics by Alfred Marshall apendix G continued paragraph 6 land near to a growing town which is still used for agriculture may yield very little net rent and yet be a valuable property for its future ground rents are anticipated in its capital value and further its ownership is likely to yield an income of satisfaction outside of the money rent received for it in this case it is apt to be under assessed even when rated at its full rental value and the question arises whether it should not be assessed at a percentage on its capital value instead of at a percentage on its rent such a plan would hasten on building and thus tend to glut the market for buildings therefore rents would tend to fall and builders would be unable to take building leases on high ground rents the change would therefore transfer to the people in large some part of the public value of land which now goes to owners of land that is built upon or is likely to be built upon but unless accompanied by energetic action on the part of urban authorities in planning out the lines on which towns should grow it would result in hasty and inappropriate building a mistake for which coming generations would pay a high price and the loss of beauty and perhaps of health the principle which lies at the base of this scheme is capable of larger application and something may be said as to one suggestion of an extreme character which has recently attracted some attention to the effect that in future rates should be assessed mainly or even wholly on site values with little or no reference to the value of the buildings its immediate effect would be an addition to the value of some properties at the expense of others in particular it would raise the value of high and expensive buildings in districts in which the rates were heavy even more than those in which they were low because it would afford relief from a greater burden but it would lower the value of low obsolete buildings on large sites in heavily rated districts after a time the amount of building put upon a site would vary generally subject to the bylaws with its advantages of situation instead of as now partly in proportion to these advantages and partly inversely as the rates this would increase concentration and tend to raise gross site values in advantageous districts but it would also increase the aggregate expenditure from the rates and as this would fall on site values the net site values might be very low whether on the whole the concentration of population would be increased it is difficult to say for the most active building would probably be in the suburbs where vacant land no longer escaped heavy rating much would depend on the building bylaws the concentration might be much lessened by a rigorous rule that there should be a large free space at the back as well as in front of all high buildings note 70 paragraph 7 reference has already been made to the latent partnership between tenant and landlord in British agriculture generally note 71 competition is less effective in rural than in urban districts but on the other hand the contributions which the landlord makes to the effective capital of the firm higher elastic and liable to variation according to the stress of circumstances these adjustments obscure the incidents of agricultural rates as the eddies of wind rushing past the house will often carry snowflakes upwards overbearing but not destroying the tendency of gravitation and hence arises the common saying that the farmer will pay both his and the landlord's share of new rates if the competition for farms is strong while the landlord will pay all if he has reason to fear that farms will be thrown on his hands however rural populations probably bear less onerous rates than is commonly supposed they have gained by improved police service and the abolition of Tompikes and they have increasing access to advantages purchased by rates in the neighboring towns to which they do not contribute and which are generally much higher than their own rates insofar as the rates are remunerative in the immediate present they are no net burden to the occupier though he pays them but rates are a considerable percentage on the farmer's net income and the burden on him is apt to be heavy in those very rare cases in which onerous rural rates are increased greatly as already indicated an onerous rate confined to one district is likely to press more heavily on the local landlords and farmers than if general throughout the country note 72 paragraph 8 this volume is mainly occupied with scientific enquiries but yet not without some glances at the practical issues which supply a motive to economic studies note 73 and here some consideration of policy seems desirable in regard to rates for all economists are agreed that land in an old country resembles other forms of wealth in many respects and that it differs in orders and in some recent controversial writings there has appeared a tendency to really get the points of difference to a secondary place and to give almost exclusive prominence to those of similarity a moderate tendency in that direction might be judicious if the points of similarity alone were of high importance in urgent practical issues but the contrary is a fact and therefore it may be well to consider some great issues of administrative finance in which a leading part is played by those attributes of land which are not largely shared by other forms of wealth but first a little must be said as to equity when a special tax is levied for a particular purpose and the case is not won for any interference by public authority with existing rights of ownership as for instance when an arterial system of land drainage is created the owners of the properties to be benefitted may fitly be assessed on the joint stock principle according to which calls are made from shareholders in proportion to their stake in the common venture the equity of every such charge must be judged separately but on the other hand all onerous taxes and rates must be judged in equity as a whole almost every onerous tax taken by itself presses with undue weight on some class or order but this is of no moment so long as the inequalities of each are compensated by those of orders and variations in the several parts synchronize if that difficult condition is satisfied the system may be equitable though any one part of it regarded alone may be inevitable secondly there is a general agreement that a system of taxation should be adjusted in more or less steep graduation to people's incomes or better still to their expenditures for that part of a man's income which he saves contributes again to the exchequer consumed by expenditure consequently when considering the fact that our present system of taxation general and local bears heavily on houses it should be remembered that large expenditure generally requires large house room and that while taxes and especially graduated taxes on expenditure in general present great technical difficulties to tax collector and further cost much more to the consumer directly and indirectly than they bring into the revenue taxes on houses are technically simple cheap in collection not liable to evasion and easy of graduation note 74 but thirdly this argument does not apply to buildings other than houses and for that reason it may be equitable to tax shops warehouses factories etc on a lower scale than houses at all events as far as new rates are concerned the burdens of old rates is already shifted to the occupiers of business premises partly on to their landlords and partly on to their customers this process of shifting is constantly going on and therefore no great hardship would be inflicted on the trading classes in urban districts if they were charged at once with a farthing for every penny of new rates while a part or the whole of the remaining three fattens were left to be added to their burden gradually by small annual percentages it may be that some such plan would be necessary if the expenses of urban local government continued to increase fast these considerations lead us to repeat that wether in an old or a new country a farthing statesman will feel a greater responsibility to future generations when legislating has to land than has to other forms of wealth and that from the economic and from the ethical point of view land must everywhere and always be classed as a thing by itself if from the first the state had retained true rents in its own hands the vigor of industry and accumulation need not have been impaired though in a very few cases the settlement of new countries might have been delayed a little nothing at all like this can be said of the incomes derived from property made by man but the very greatness of the public interests concerned makes it specially necessary to bear in mind when discussing the equities of the public value of land that a sudden appropriation by the state of any incomes from property the private ownership of which had once been recognized by it would destroy security and shake the foundations of society sudden and extreme measures would be inequitable and partly but not solely for that reason they would be unbusiness like and even foolish caution is necessary but the curse of high side values is that concentration of population which is threatening a scarcity of fresh air and light and playroom so grievous as to lower the vigor and the joyousness of the rising generation thus reach private gains are true not merely true causes which are public and private in their character but also at the expense of one of the chief forms of public wealth large expenditure is needed to secure air and light and playroom and the most appropriate source from which that expense can be deferred seems to be those extreme rights of private property in land which have grown up almost imperceptibly from the time when the king representing the state was the sole land owner private persons were but land holders subjects to the obligation to work for the public well-being they have no equitable right to mar that well-being by congested building paragraph 9 accordingly the following practical suggestions seems to emerge as regards old rates a sudden change in the person from whom they are collected seems unadvisable but additional rates should as far as may be convenient be collected from the person on whom they are ultimately to fall unless like the income tax under schedule A they are collected from the tenant with the instruction that they are to be deducted from his rent the reasons for this are that nearly the whole of that part of old rates which is accessed on public or side valley of land is already born by owners including leses so far as those rates go which do old were not anticipated when their leses were taken and nearly all the remainder of it is born by tenants or their customers this result would not be very greatly disturbed by allowing the tenant to deduct a half or even the whole of his rates from his rent though such a law would run some risk of handing over some of the property of the owners to leses who had reckoned for paying those old rates when taking their leses on the other hand a provision for the division of new that is additional rates would have great advantages the occupier whether of a firm or business premises or a house would deduct one half of the new rates from his rent his immediate landlord would deduct in proportion from his payment to the superior holder next to him and so on and in addition new local taxes on business premises of all kinds might be assessed as has just been suggested less than full rates in the first instance and gradually increased by these provisions farmers shopkeepers and other traders would be relieved from the occasional injustice and the constant fear of injustice which are now associated with sudden disproportionate additions to the public burdens thrown upon particular classes in regard to side values it would seem well to rule that all land whether technically urban or not should be regarded as having a special side value if when cleared of buildings it could be sold at even a moderately high price say 200 units an acre it might then be subjected to a general rate assessed on its capital value and in addition to a fresh air rate to be spent by local authority under full central control for the purposes indicated above this fresh air rate would not be a very heavy burden on owners for a good deal of it would be returned to them in the form of higher values for those building sites which remained as it is the expenditure of such private societies as the Metropolitan Public Gardens Association and much of the rates raised on building values for public improvements is really a free gift of wealth to owners who are already fortunate for rural and urban districts alike after recommending for the initial rates on land the remainder of the necessary funds would perhaps best be obtained by rates on imuwebu property supplemented by some minor local taxes at the description of the local authorities the inhabited house duty might be suppressed unless it was needed for any great new expenditure such as old age pensions and the main rates might be graduated as a present inhabited house duty is but more gently for houses of moderate size and more severely for very large houses but no one should be exempted altogether for so long as a person retains the right of voting on the living and expenditure of rates it is not safe that he should only escape their pressure it may however be safe and reasonable to return to him or his children the equivalent of his payments in such benefits as will increase physical and mental health and vigor and will not tend towards political corruption note 75 notes for machao principles of economics appendix g note 64 c pages 453 and 659 note 65 above chapter 5 section 9 paragraph 1 this appendix is largely based on the memorandum that I mentioned note 66 final report of royal commission on local taxation 1901 page 12 note 67 a good deal of evidence on these points was taken by the commission just named page 794 note 68 see above chapter 5 section 11 paragraphs 3 and 8 the builder generally looks to sell his lease before much of it has run out but the price which he expects to get is the discounted excess of the rental value of the property over the ground rent for the remaining years therefore the substance of his calculations is nearly the same as it would be if he intended to keep the property in his own hands note 69 this assumes that the land is assessed to the tax at the same amount whatever the use to which it is put the case of an extra tax for a special use can be treated as in page 5 section 10 paragraph 6 if agricultural land were exempt from the tax then the tenant of a house or factory in the country would escape that part of the site tax which is assessed on the excess of the value of the land for building uses over its value for agriculture this might slightly increase concentration in towns and first take a little from the burden on site owners in them but it would not materially affect the values of sites in the center of towns see also below note 70 for instance suppose an area of a million square feet to be covered with rows of parallel buildings 40 feet high and 40 feet deep a bylaw that the sky must subtend half a right angle to the ground looking straight back as well as front will cost the distance between each row and the next to be 40 feet and the aggregate volume of building will be 40 feet multiplied into half the total area that is 20 million cubic feet now suppose the height of the buildings to be crebled under the same bylaw those distances between the rows must be 120 feet and on the supposition that it is not convenient to increase the debt of the houses beyond 40 feet the aggregate volume of building will be 120 feet multiplied into a quarter of the total area that is 30 million cubic feet first the total accommodation will be increased by only one half instead of being trebled as would have been the case if the old distances of 40 feet between the rows had been maintained note 71 see chapter 6 section 10 paragraph 10 note 72 see above page 437 note 73 see chapter 1 section 4 paragraphs 2 to 4 note 74 in old times the windows of a house were taken as representative of the house and were taxed heavily but the tax did not strike and was not intended to strike persons as owners and users of windows only it was intended to strike them and did strike them as owners and users of houses and just as the window is a more or less good representative of the house so the house is a representative perhaps a better representative of a certain scale and style of household expenditure in general and when houses are taxed the tax is and is intended to be a tax upon the ownership and use of the means of living in certain general conditions of comfort and social position if part of the tax accessed on houses were removed and the deficit made up by taxes the true incidence of the taxes would be nearly the same as now note 75 the recent commission on local taxation was much occupied with the difficulty of assessing side values and with the even greater difficulty of making add-in-terim arrangements by which an equitable share parenthesis opened whether more or less parenthesis closes of the rates which were designed in the long run to be paid by the ultimate land owners might be transferred from the occupiers to leziz parenthesis open see especially page 153 to 176 of the final reports parenthesis close the difficulty of assessment do undoubtedly very great is of a kind to be diminished rapidly by experience the first thousand such assessments might probably give more trouble and yet be less accurately made than the next 20,000 end of appendix G appendix H of principles of economics this is a LibriVox recording all LibriVox recordings are in the public domain for more information or to volunteer please visit LibriVox.org principles of economics by Alfred Marshall appendix H limitations of the use of statistical assumptions in regard to increasing return some hints have already been given of the difficulties which beset the theory of equilibrium in regard to commodities which obey the law of increasing return these hints are now to be developed a little the central point is that the term margin of production has no significance for long periods in relation to commodities the cost of production of which diminishes with a gradual increase in the output and a tendency to increasing return does not exist generally for short periods therefore when we are discussing the special conditions of value of those commodities which conform to that tendency the term margin should be avoided it may be used of course for those commodities as for all others with regard to a short and quick fluctuation in demand because in relation to such fluctuations the production of those commodities as well as others conforms to the law of diminishing and not increasing return but in problems in which the tendency to increasing return is in effective force there is no clearly defined marginal product in such problems our units have to be larger we have to consider the conditions of the representative firm rather than a given individual firm and above all we have to consider the cost of a whole process of production without any attempt to isolate that of a single commodity such as a single rifle or yard of cloth it is true that when nearly the whole of any branch of industry is in the hands of a few giant businesses none of them can be fairly described as representative if these businesses are fused in a trust or even closely combined with one another the term normal expenses of production ceases to have a precise meaning and as will be fully argued in a later volume it must be regarded as primifasha a monopoly and its procedure must be analyzed in the lines of book 5 chapter 14 though the last years of the 19th century and the early years of this have shown that even in such cases competition has a much greater force and the use of the term normal is less inappropriate than seemed probable a priori let us return the instance of an increased demand for aneroid barometers caused by a movement of fashion which after a while had led to improved organization and to a lower supply price when it last the force of fashion died away and the demand for aneroids was again based solely on their real utility this price might be either greater or less than the normal demand price for the corresponding scale of production in the former case capital and labor would avoid that trade of the firms already started some might pursue their course though with less net gains than they had hoped but others would try to edge their way into some nearly related branch production that was more prosperous and as old firms dwindled there would be few new ones to take their place the scale of production would dwindle again and the old position of equilibrium would have shown itself fairly stable against assaults but now let us turn to the other case in which the long period supply price for the increased output fell so far that the demand price remained above it in that case undertakers looking forward to the life of a firm started in that trade considering its chances of prosperity and decay discounting its future outlays and its future incomings would conclude that the latter showed a good balance over the former capital and labor would stream rapidly into the trade and the production might perhaps be increased ten fold before the fall in the demand price became as great as the fall in the long period supply price and a position of stable equilibrium had been found for indeed though in the account of the oscillations of demand and supply about a position of stable equilibrium which was given in the third chapter it was tacitly implied as is commonly done that there could be only one position of stable equilibrium in a market yet in fact under certain conceivable though rare conditions there can be two or more positions of real equilibrium of demand and supply any one of which is equally consistent with the general circumstances of the market and any one of which if once reached would be stable until some great disturbance occurred just however be admitted that this theory is out of touch with real conditions of life insofar as it assumes that if the normal production of a commodity increases and afterwards again diminishes to its old amount the demand price and the supply price will return to their old positions for that amount whether a commodity conforms to the law of diminishing or increasing return the increase in consumption arising from a fall in price is gradual and further habits which have once grown up around the use of a commodity while its price is low are not quickly abandoned when its price rises again if therefore after the supply has gradually increased some of the sources from which it is derived should be closed or any other cause should occur to make the commodity scarce many consumers will be reluctant to depart from their wanted ways for instance the price of cotton during the American war was higher than it would have been if the previous low price had not brought cotton into common use to meet wants many of which had been created by the low price thus then the list of demand prices which holds for the forward movement of the production of a commodity will seldom hold for the return movement but will in general require to be raised again the list of supply prices may have fairly represented the actual fall in the supply price of the thing that takes place when the supply is being increased but if the demand should fall off or if for any other reason the supply should have to be diminished the supply price would not move back by the course by which it would come but would take a lower course the list of supply prices which had held for the forward movement would not hold for the backward movement but would have to be replaced by a lower schedule this is true whether the production of the commodity obeys the law of diminishing or increasing return but it is of a special importance in the latter case because the fact that the production does obey this law proves that its increase leads to great improvements in organization for when any casual disturbance has caused a great increase in the production of any commodity and thereby has led to the introduction of extensive economies these economies are not readily lost developments of mechanical appliances of division of labor and of the means of transport and improved organization of all kinds when they have been once obtained are not readily abandoned capital and labor when they have been once devoted to any particular industry may indeed become depreciated in value if there is a falling off in the demand for the wares which they produce but they cannot quickly be converted to other occupations and their competition will for a time prevent a diminished demand from causing an increased price of the wares partly for this reason there are not many cases in which two positions of stable equilibrium would stand out as possible alternatives at one in the same moment even if all the facts of the market could be ascertained by the dealers concerned but when the conditions of a branch of manufacturer are such that the supply price would fall very rapidly if there should be any great increase in the scale of production then a passing disturbance by which the demand for the commodity was increased might cause a very great fall in the stable equilibrium price a very much larger amount than before being hence forward produced for sale at a very much lower price this is always possible when if we could trace the list of demand and supply prices far ahead we should find them keeping close together for if the supply prices for largely increased amounts are but very little above the corresponding demand prices a moderate increase in demand or a comparatively slight new invention or other cheapening of production may bring supply and demand prices together and make a new equilibrium such a change resembles in some respects a movement from one alternative position of stable equilibrium to another but differs from the latter in that it cannot occur except when there is some change in the conditions of normal demand or normal supply the unsatisfactory character of these results is partly due to the imperfections of our analytical methods and may conceivably be much diminished in a later age by the gradual improvement of our scientific machinery we should have made a great advance if we could represent the normal demand price and supply price as functions both of the amount normally produced and of the time at which that amount became normal let us revert to the distinction between average values and normal values in a stationary state the income earned by every appliance of production being truly anticipated beforehand would represent the normal measure of the efforts and sacrifices required to call it into existence the aggregate expenses of production might then be found either by multiplying these marginal expenses by the number of units of the commodity or by adding together all the actual expenses of production of its several parts and adding in all the rents earned by differential advantages for production the aggregate expenses of production being determined by either of these routes the average expenses could be deduced by dividing out the amount of the commodity and the result would be the normal supply price whether for long periods or for short but in the world in which we lived the term average expenses of production is somewhat misleading for most of the appliances of production material and personal by which a commodity was made came into existence long before their values are therefore not likely to be just what the producers expected them to be originally but some of their values will be greater and others less thus present incomes earned by them will be governed by the general relations between the demand for and the supply of their products and their values will be arrived at by capitalizing these incomes and therefore when making out a list of normal supply prices which in conjunction with the list of normal demand prices is to determine the equilibrium position of normal value we cannot take for granted the values of these appliances for production without reasoning in a circle this caution which is of special importance with regard to industries that tend to increasing return may be emphasized by a diagrammatic presentation of the relations of demand and supply which are possible in a stationary state but only there particular thing bears its proper share of supplementary costs and it would not ever be worthwhile for a producer to accept a particular order at a price other than the total cost in which is to be reckoned a charge for the task of building up the trade connection and external organization of a representative firm the illustration has no positive value it merely guards against a possible error in abstract reasoning end of appendix H