 Book 3, Chapter 1 of Principles of Economics. This is a LibriVox recording. All LibriVox recordings are in the public domain. For more information or to volunteer, visit LibriVox.org. This reading by Karl Manchester, 2007. Principles of Economics by Alfred Marshall. Book 3, On Wants and Their Satisfaction. The older definitions of economics described it as the science which is concerned with the production, the distribution, the exchange and the consumption of wealth. Later experience has shown that the problems of distribution and exchange are so closely connected that it is doubtful whether anything is to be gained by the attempt to keep them separate. There is however a good deal of general reasoning with regard to the relation of demand and supply which is required as a basis for the practical problems of value and which acts as an underlying backbone giving unity and consistency to the main body of economic reasoning. Its very breadth and generality mark it off from the more concrete problems of distribution and exchange to which it is subservient and therefore it is put together in Book 5 on the general theory of demand and supply which prepares the way for distribution and exchange or value. But first comes the present Book 3, a study of wants and their satisfaction i.e. of demand and consumption. And then Book 4, a study of the agents of production that is the agents by whose means wants are satisfied including man himself, the chief agent and the sole aim of production. Book 4 corresponds in general character to that discussion of production to which a large place has been given in nearly all English treatises on general economics during the last two generations although its relation to the problem of demand and supply has not been made sufficiently clear. Section 2. Until recently the subject of demand or consumption has been somewhat neglected. 4. Important as is the inquiry how to turn our resources to the best account. It is not one which lends itself so far as the expenditure of private individuals is concerned to the methods of economics. 5. The common sense of a person who has had a large experience of life will give him more guidance in such a matter than he can gain from subtle economic analyses. 6. And until recently economists said little on the subject because they really had not much to say that was not the common property of all sensible people. 7. But recently several causes have combined to give the subject a greater prominence in economic discussions. 8. The first of these is the growing belief that harm was done by Ricardo's habit of laying disproportionate stress on the side of cost of production when analysing the causes that determine exchange value. 9. For although he and his chief followers were aware that the conditions of demand played as important a part as those of supply in determining value, yet they did not express their meaning with sufficient clearness and they have been misunderstood by all but the most careful readers. 10. Secondly the growth of exact habits of thought in economics is making people more careful to state distinctly the premises on which they reason. 11. This increased care is partly due to the application by some writers of mathematical language and mathematical habits of thought. 12. It is indeed doubtful whether much has been gained by the use of complex mathematical formulae, but the application of mathematical habits of thought has been of great service. 13. For it has led people to refuse to consider a problem until they are quite sure what the problem is and to insist on knowing what is and what is not intended to be assumed before proceeding further. 14. This has in its turn compelled a more careful analysis of all the leading conceptions of economics and especially of demand. For the mere attempt to state clearly how the demand for a thing is to be measured opens up new aspects of the main problems of economics. 15. And though the theory of demand is yet in its infancy, we can already see that it may be possible to collect and arrange statistics of consumption in such a way as to throw light on difficult questions of great importance to public wellbeing. 16. Lastly, the spirit of the age induces a closer attention to the question whether our increasing wealth may not be made to go further than it does in promoting the general wellbeing. 17. And this again compels us to examine how far the exchange value of any element of wealth, whether in collective or individual use, represents accurately the addition which it makes to happiness and wellbeing. 18. We will begin this book with a short study of the variety of human wants, considered in their relation to human efforts and activities. 19. For the progressive nature of man is one whole. It is only temporarily and provisionally that we can with profit isolate for study the economic side of his life and we ought to be careful to take together in one view the whole of that side. 20. There is a special need to insist on this just now, because the reaction against the comparative neglect of the study of wants by Ricardo and his followers show signs of being carried to the opposite extreme. 21. It is important still to assert the great truth on which they dwelt somewhat too exclusively, vis that while wants are the rulers of life among the lower animals, it is to changes in the forms of efforts and activities that we must turn when in search of the keynotes of the history of mankind. End of Book 3, Chapter 1 Chapter 2 of Principles of Economics, Book 3 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, Book 3 by Alfred Marshall Chapter 2 Human wants and desires are countless in number and very various in kind, but they are generally limited and capable of being satisfied. The uncivilized man indeed has not many more than the brute animal, but every step in his progress upwards increases the variety of his needs together with the variety in his methods of satisfying them. He desires not merely larger quantities of the things he has been accustomed to consume, but better qualities of those things. He desires a greater choice of things and things that will satisfy new wants growing up in him. Thus though the brute and the savage alike have their preferences for choice morsels, neither of them cares much for variety for its own sake. As, however, man rises in civilization, as his mind becomes developed, and even his animal passions begin to associate themselves with mental activities, his wants become rapidly more subtle and more various, and in the minor details of life he begins to desire change for the sake of change, long before he has consciously escaped from the yoke of custom. The first great step in this direction comes with the art of making a fire. Gradually he gets to accustomed himself to many different kinds of food and drink cooked in many different ways, and before long monotony begins to become irksome to him and he finds it a great hardship when accident compels him to live for a long time exclusively on one or two kinds of food. As a man's riches increase, his food and drink become more various and costly, but his appetite is limited by nature, and when his expenditure on food is extravagant it is more often to gratify the desires of hospitality and display than to indulge his own senses. This brings us to remark with senior that, strong as is the desire for variety, it is weak compared with the desire for distinction. A feeling, which if we consider its universality and its constancy, that it affects all men at all times, that it comes with us from the cradle and never leaves us till we go into the grave, may be pronounced to be the most powerful of human passions. This great half-truth is well illustrated by a comparison of the desire for choice and various food with that for choice and various dress. That the need for dress, which is the result of natural causes, varies with the climate and the season of year and a little with the nature of a person's occupations. But in dress, conventional ones overshadow those which are natural. Thus in many of the earlier stages of civilization, the sumptuary mandates of law and custom have rigidly prescribed to the members of each caste or industrial grade, the style and the standard of expense up to which their dress must reach and beyond which they may not go. And part of the substance of these mandates remains now, though subject to rapid change. In Scotland, for instance, in Adam Smith's time, many persons were allowed by custom to go abroad without shoes and stockings who may not do so now, and many may still do it in Scotland who might not in England. Again, in England, now a well-to-do labourer is expected to appear on Sunday in a black coat and in some places in a silk hat, though these would have subjected him to ridicule but a short time ago. There is a constant increase both in that variety and expansiveness which custom requires as a minimum and in that which it tolerates as a maximum. And the efforts to obtain distinction by dress are extending themselves throughout the lower grades of English society. But in the upper grades, though the dress of women is still various and costly, that of men is simple and inexpensive as compared with what it was in Europe not long ago and is today in the East. For those men who are most truly distinguished on their own account have a natural dislike to seem to claim attention by their dress and they have set the fashion. House-room satisfies the imperative need for shelter from the weather, but that need plays a very little part in the effective demand for house-room. For though a small but well-built cabin gives excellent shelter, its stifling atmosphere, its necessary uncleanliness and its want of the decencies and the quiet of life are great evils. It is not so much that they cause physical discomfort as they tend to stunt the faculties and limit people's higher activities. With every increase in these activities, the demand for larger house-room becomes more urgent. And therefore relatively large and well-appointed house-room is, even in the lowest social ranks, at once unnecessary for efficiency and the most convenient and obvious way of advancing a material claim to social distinction. And even in those grades in which everyone has a house-room sufficient for the higher activities of himself and his family, a yet further and almost unlimited increase is desired as a requisite for the exercise of many of the higher social activities. It is again the desire for the exercise and development of activities, spreading through every rank of society, which leads not only to the pursuit of science, literature and art for their own sake, but to the rapidly increasing demand for the work of those who pursue them as professions. Leisure is used less and less as an opportunity for mere stagnation, and there is a growing desire for those amusements, such as athletic games and traveling, which develop activities rather than indulge in any sensuous craving. For indeed, the desire for excellence for its own sake is almost as wide in its range as the lower desire for distinction. Just as the desire for distinction graduates down from the ambition of those who may hope that their names will be in men's mouths in distant lands and in distant times, to the hope of the country last that the new ribbon she puts on for Easter may not pass unnoticed by her neighbors, So the desire for excellence for its own sake graduates down from that of a Newton or a Stradivarius to that of a fisherman, who, even when no one is looking and he is not in a hurry, delights in handling his craft well and in the fact that she is well built and responds properly to his guidance. Desires of this kind exert a great influence on the supply of the highest faculties and the greatest inventions, and they are not unimportant on the side of demand. For a large part of the demand for the most highly skilled professional services and the best work of the mechanical artisan arises from the delight that people have in the training of their own faculties and in exercising them by aid of the most delicately adjusted and responsive implements. Speaking broadly therefore, although it is man's wants in the earliest stages of his development that give rise to his activities, yet afterwards each new step upwards is to be regarded as the development of new activities giving rise to new wants, rather than of new wants giving rise to new activities. We see this clearly if we look away from the healthy conditions of life where new activities are constantly being developed and watch the West Indian Negro using his new freedom and wealth not to get the means of satisfying new wants but in idle stagnation that is not rest. Or again, look at that rapidly lessening part of the English working classes who have no ambition and no pride or delight in the growth of their faculties and activities and spend on drink whatever surplus their wages afford over the bare necessaries of a squalid life. It is not true therefore that the theory of consumption is the scientific basis of economics, for much that is of chief interest in the science of wants is borrowed from the science of efforts and activities. These two supplement one another, either is incomplete without the other. But if either more than the other may claim to be the interpreter of the history of man, whether on the economic side or any other, it is the science of activities and not that of wants. And McCullough indicated their true relations when discussing the progressive nature of man, he said, The gratification of a want or a desire is merely a step to some new pursuit. In every stage of his progress he is destined to contrive and invent, to engage in new undertakings, and when these are accomplished to enter with fresh energy upon others. From this it follows that such a discussion of demand as is possible at this stage of our work must be confined to an elementary analysis of an almost purely formal kind. The higher study of consumption must come after and not before the main body of economic analysis. And though it may have its beginning with the proper domain of economics, it cannot find its conclusion there, but must extend far beyond. Principles of Economics When a trader or a manufacturer buys anything to be used in production, or be sold again, his demand is based on his anticipations of the profits which he can derive from it. These profits depend at any time on speculative risks and on other causes which will need to be considered later on. But in the long run, the price which a trader or manufacturer can afford to pay for a thing depends on the prices which consumers will pay for it, or for the things made by aid of it. The ultimate regulator of all demand is therefore consumer's demand, and it is with that almost exclusively that we shall be concerned in the present book. Utility is taken to be correlative to desire or want. It has been already argued that desires cannot be measured directly, but only indirectly by the outward phenomena to which they give rise, and that in those cases with which economics is chiefly concerned, the measure is found in the price which a person is willing to pay for the fulfillment or satisfaction of his desire. He may have desires and aspirations which are not consciously set for any satisfaction, but for the present we are concerned chiefly with those which do so aim. And we assume that the resulting satisfaction corresponds in general fairly well to that which was anticipated when the purchase was made. There is an endless variety of wants, but there is a limit to each separate want. This familiar and fundamental tendency of human nature may be stated in the law of satiable wants or of diminishing utility. Thus the total utility of a thing to anyone, that is the total pleasure or other benefit it yields him, increases with every increase in his stock of it, but not as fast as his stock increases. If his stock of it increases at a uniform rate, the benefit derived from it increases at a diminishing rate. In other words, the additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has. That part of the thing which he is only just induced to purchase may be called his marginal purchase, because he is on the margin of doubt whether it is worth his while to incur the outlay required to obtain it. And the utility of his marginal purchase may be called the marginal utility of the thing to him. Or if instead of buying it he makes the thing himself, then its marginal utility is the utility of that part which he thinks it only just worth his while to make. And thus the law just given may be worded, the marginal utility of a thing to anyone diminishes with every increase in the amount of it he already has. There is, however, an implicit condition in this law which should be made clear. It is that we do not suppose time to be allowed for any alteration in the character or tastes of the man himself. It is therefore no exception to the law that the more good music a man hears, the stronger is his taste for it likely to become. That avarice and ambition are often insatiable, or that the virtue of cleanliness and the vice of drunkenness alike grow on what they feed upon. For in such cases our observations range over some period of time, and the man is not the same at the beginning as at the end of it. If we take a man as he is, without allowing time for any change in his character, the marginal utility of a thing to him diminishes steadily with every increase in his supply of it. Now let us translate this law of diminishing utility into terms of price. Let us take an illustration from the case of a commodity such as tea which is in constant demand and which can be purchased in small quantities. We suppose, for instance, that the tea of a certain quality is to be had at two shillings per pound. A person might be willing to give ten shillings for a single pound once a year rather than go without it altogether. While if he could have any amount of it for nothing he would perhaps not care to use more than thirty pounds in the year. As it is, he buys perhaps ten pounds in the year, that is to say the difference between the satisfaction he gets from buying nine pounds and ten pounds is enough for him to be willing to pay two shillings for it. While the fact that he does not buy an eleventh pound shows that he does not think that it would be worth an extra two shillings to him. That is, two shillings a pound measures the utility to him of the tea which lies at the margin or terminus or end of his purchases. It measures the marginal utility to him. If the price which he is just willing to pay for any pound be called his demand price then two shillings is his marginal demand price. And our law may be worded, The larger the amount of a thing that a person has the less other things being equal for instance the purchasing power of money and the amount of money at his command being equal will be the price which he will pay for a little more of it. Or in other words his marginal demand price for it diminishes. His demand becomes efficient only when the price which he is willing to offer reaches that at which others are willing to sell. This last sentence reminds us that we have as yet taken no account of changes in the marginal utility of money or general purchasing power. At one and the same time a person's material resources being unchanged the marginal utility of money to him is a fixed quantity so that the prices he is just willing to pay for two commodities are to one another in the same ratio as the utility of those two commodities. A greater utility will be required to induce him to buy a thing if he is poor than if he is rich. We have seen how the clerk with one hundred pounds a year will walk to business in a heavier reign than the clerk with three hundred pounds a year. But although the utility or the benefit that is measured in the poorer man's mind by two pence is greater than that measured by it in the richer man's mind, yet if the richer man rides a hundred times in the year and the poorer man twenty times then the utility of the hundredth ride which the richer man is only just induced to take is measured to him by two pence and the utility of the twentieth ride which the poorer man is just induced to take is measured to him by two pence. For each of them the marginal utility is measured by two pence. But this marginal utility is greater in the case of the poorer man than in that of the richer. In other words, the richer a man becomes the less is the marginal utility of money to him. Every increase in his resources increases the price which he is willing to pay for any given benefit. And in the same way every diminution of his resources increases the marginal utility of money to him and diminishes the price that he is willing to pay for any benefit. To obtain complete knowledge of demand for anything we should have to ascertain how much of it he would be willing to purchase at each of the prices at which it is likely to be offered. And the circumstance of his demand for say T can be best expressed by a list of prices which he is willing to pay, that is by his several demand prices for different amounts of it. This list may be called his demand schedule. Thus for instance we may find that he would buy 6 pounds at 50 pence per pound, 7 pounds at 40 pence per pound, 8 pounds at 33 pence per pound, 9 pounds at 28 pence per pound, 10 pounds at 24 pence per pound, 11 pounds at 21 pence per pound, 12 pounds at 19 pence per pound, 13 pounds at 17 pence per pound. If corresponding prices were filled in for all intermediate amounts we should have an exact statement of his demand. We cannot express a person's demand for a thing by the amount he is willing to buy or by the intensity of his eagerness to buy a certain amount without reference to the prices at which he will buy that amount or other amounts. We can represent it exactly only by lists of the prices at which he is willing to buy different amounts. When we say that a person's demand for anything increases we mean that he will buy more of it than he would before at the same price and that he will buy as much of it as before at a higher price. A general increase in his demand is an increase throughout the whole list of prices at which he is willing to purchase different amounts of it and not merely that he is willing to buy more of it at the current prices. So far we have looked at the demand of a single individual and in the particular case of such a thing as T the demand of a single person is fairly representative of the general demand of a whole market. For the demand for T is a constant one and since it can be purchased in small quantities every variation in its price is likely to affect the amount which he will buy. But even among those things which are in constant use there are many for which the demand on the part of any single individual cannot vary continuously with every small change in price but can move only by great leaps. For instance a small fall in the price of hats or watches will not affect the action of everyone but it will induce a few persons who are in doubt whether or not to get a new hat or a new watch to decide in favor of doing so. There are many classes of things the need for which on the part of any individual is inconsistent, fitful and irregular. There can be no list of individual demand prices for wedding cakes or the services of an expert surgeon but the economist has little concern with particular incidents in the lives of individuals. He studies rather the course of action that may be expected under certain conditions from the members of an industrial group in so far as the motives of that action are measurable by a money price. And in these broad results the variety and fickleness of individual action are merged in the comparatively regular aggregate of the action of many. In large markets then, where rich and poor, old and young, men and women, persons of all varieties of tastes, temperaments and occupations are mingled together, the peculiarities and the wants of individuals will compensate one another in a comparatively regular gradation of total demand. Every fall, however slight in the price of a commodity in general use, will, other things being equal, increase the total sales of it. Just as an unhealthy autumn increases the mortality of a large town, though many persons are uninjured by it. And therefore, if we had the requisite knowledge, we could make a list of prices at which each amount of it could find purchasers in a given place during, say, a year. The total demand in the place, for, say, tea, is the sum of the demands of all the individuals there. Some will be richer and some poorer than the individual consumer whose demand we have just written down. Some will have a greater and others a smaller liking for tea than he has. Let us suppose that there are in the place a million purchasers of tea, and that their average consumption is equal to his at each several price. Then the demand of that place is represented by the same list of prices as before, if we write a million pounds of tea instead of one pound. There is then one general law of demand. The greater the amount to be sold, the smaller must be the price at which it is offered, in order that it may find purchasers. Or in other words, the amount demanded increases with a fall in price, and diminishes with a rise in price. There will not be any uniform relation between the fall in price and the increase of demand. A fall of one tenth in the price may increase the sales by a twentieth or by a quarter, or it may double them. But as the numbers in the left hand column of the demand schedule increase, those in the right hand column will always diminish. The price will measure the marginal utility of the commodity to each purchaser individually. We cannot speak of price as measuring marginal utility in general, because the ones and circumstances of different people are different. The demand prices in our list are those at which various quantities of a thing can be sold in a market during a given time and under given conditions. If the conditions vary in any respect, the prices will probably require to be changed. And this has constantly to be done when the desire for anything is materially altered by a variation of custom, or by a cheapening of the supply of a rival commodity, or by the invention of a new one. For instance, the list of demand prices for tea is drawn out on the assumption that the price of coffee is known. But a failure of the coffee harvest would raise the prices for tea. The demand for gas is liable to be reduced by an improvement in electric lighting. And in the same way, a fall in the price of a particular kind of tea may cause it to be substituted for an inferior but cheaper variety. Our next step will be to consider the general character of demand in the cases of some important commodities ready for immediate consumption. We shall thus be continuing the inquiry made in the preceding chapter as to the variety and satiability of wants. But we shall be treating it from a rather different point of view, namely that of price statistics. CHAPTER IV. THE ELASTICITY OF WANTS We have seen that the only universal law as to a person's desire for a commodity is that it diminishes, other things being equal, with every increase in his supply of that commodity. But this diminution may be slow or rapid. If it is slow, the price that he will give for the commodity will not fall much in consequence of a considerable increase in his supply of it, and a small fall in price will cause a comparatively large increase in his purchases. But if it is rapid, a small fall in price will cause only a very small increase in his purchases. In the former case, his willingness to purchase the thing stretches itself out a great deal under the action of a small inducement. The elasticity of his wants, we may say, is great. In the latter case, the extra inducement given by the fall in price causes hardly any extension of his desire to purchase. The elasticity of his demand is small. If a fall in price from, say, 16 pence to 15 pence per pound of tea would much increase his purchases, then a rise in price from 15 pence to 16 pence would much diminish them. That is, when the demand is elastic for a fall in price, it is elastic also for a rise. And us, with the demand of one person, so with that of a whole market. And we may say generally that elasticity or responsiveness of demand in a market is great or small according as the amount demanded increases much or little for a given fall in price and diminishes much or little for a given rise in price. 2. The price which is so high relatively to the poor man, as to be almost prohibitive, may be scarcely felt by the rich. The poor man, for instance, never tastes wine, but the very rich man may drink as much of it as he has a fancy for without giving himself a thought of its cost. We shall therefore get the clearest notion of the law of the elasticity of demand by considering one class of society at a time. Of course, there are many degrees of richness among the rich and of poverty among the poor, but for the present we may neglect these minor subdivisions. When the price of a thing is very high relatively to any class, they will buy but little of it, and in some cases custom and habit may prevent them from using it freely even after its price has fallen a good deal. It may still remain set apart for a limited number of special occasions or for use in extreme illness, etc., but such cases, though not infrequent, do not form the general rule, and anyhow, as soon as it has been taken into common use, any considerable fall in its price causes a great increase in the demand for it. The elasticity of demand is great for high prices and great, or at least considerable, for medium prices, but it declines as the price falls and gradually fades away if the fall goes so far that satiety level is reached. This rule appears to hold with regard to nearly all commodities and with regard to the demand of every class, save only that the level at which high prices end and low prices begin is different for different classes, and so again is the level at which low prices end and very low prices begin. There are however many varieties in detail, arising chiefly from the fact that there are some commodities with which people are easily satiated and others, chiefly things used for display, for which their desire is almost unlimited. For the latter, the elasticity of demand remains considerable, however low the price may fall, while for the former, the demand loses nearly all its elasticity as soon as a low price has once been reached. There are some things the current prices of which in this country are very low relatively even to the poorer classes, such are for instance salt and many kinds of savers and flavors and also cheap medicines. It is doubtful whether any fall in price would induce a considerable increase in the consumption of these. The current prices of meat, milk and butter, wool, tobacco, imported fruits and of ordinary medical attendants are such that every variation in price makes a great change in the consumption of them by the working classes and the lower half of the middle classes. But the rich would not much increase their own personal consumption of them however cheaply they were to be had. In other words, the direct demand for these commodities is very elastic on the part of the working and lower middle classes though not on the part of the rich. But the working class is so numerous that their consumption of such things as are well within their reach is much greater than that of the rich and therefore the aggregate demand for all things of the kind is very elastic. A little while ago sugar belonged to this group of commodities but its price in England has now fallen so far as to be low relatively even to the working classes and the demand for it is therefore not elastic. The current prices of wall fruit, of the better kinds of fish and other moderately expensive luxuries are such as to make the consumption of them by the middle class increase much with every fallen price. In other words, the middle class demand for them is very elastic while the demand on the part of the rich and on the part of the working class is much less elastic, the former because it is already nearly satiated, the latter because the price is still too high. The current prices of such things as rare wines, food out of season, highly skilled medical and legal assistance are so high that there is but little demand for them except from the rich, but what demand there is often has considerable elasticity. Part of the demand for the more expensive kinds of food is really a demand for the means of obtaining social distinction and is almost insatiable. 4. The case of necessaries is exceptional. When the price of wheat is very high and again when it is very low, the demand has very little elasticity. At all events if we assume that wheat, even when scarce, is the cheapest food for man and that even when most plentiful it is not consumed in any other way. We know that a fall in the price of the quarter loaf from six pence to four pence has scarcely any effect in increasing the consumption of bread. With regard to the other end of the scale, it is more difficult to speak with certainty because there has been no approach to a scarcity in England since the repeal of the Corn Laws. But availing ourselves of the experience of a less happy time, we may suppose that deficits in the supply of one, two, three, four or five-tenths would cause a rise in price of three, eight, sixteen, twenty-eight or forty-five-tenths respectively. Much greater variations in prices indeed than this have not been uncommon. Thus wheat sold in London for ten shillings a bushel in thirteen thirty-five, but in the following year it sold for ten pence. There may be even more violent changes than this in the price of a thing which is not necessary if it is perishable and the demand for it is inelastic. Thus fish may be very dear one day and sold for manure two or three days later. Water is one of the few things, the consumption of which we are able to observe at all prices from the very highest down to nothing at all. At moderate prices the demand for it is very elastic but the uses to which it can be put are capable of being completely filled and as its price sinks towards zero the demand for it loses its elasticity. Nearly the same may be said of salt. Its price in England is so low that the demand for it as an article of food is very inelastic but in India the price is comparatively high and the demand is comparatively elastic. The price of house room on the other hand has never fallen very low except when a locality is being deserted by its inhabitants. Where the condition of society is healthy and there is no check to general prosperity there seems always to be an elastic demand for house room on account both of the real conveniences and the social distinction which it affords. The desire for those kinds of clothing which are not used for the purpose of display is satiable when their price is low the demand for them has scarcely any elasticity. The demand for things of a higher quality depends much on sensibility. Some people care little for a refined flavor in their wine provided they can get plenty of it. Others crave a high quality but are easily satiated. In the ordinary working class districts the inferior and the better joints are sold at nearly the same price but some well paid artisans in the north of England have developed a liking for the best meat and will pay for it nearly as high a price as can be got in the west end of London where the price is kept artificially high by the necessity of sending the inferior joints away for sale elsewhere. Use also gives rise to acquired distaste as well as to acquired tastes. Illustrations which make a book attractive to many readers will repel those whose familiarity with better work has rendered them fastidious. A person of high musical sensibility in a large town will avoid bad concerts though he might go to them gladly if he lived in a small town where no good concerts are to be heard because there are not enough persons willing to pay the high price required to cover their expenses. The effective demand for first rate music is elastic only in large towns. For second rate music it is elastic both in large and small towns. Generally speaking those things have the most elastic demand which are capable of being applied to many different uses. Water for instance is needed first as food then for cooking then for washing of various kinds and so on. When there is no special drought but water is sold by the pailful the price may be low enough to enable even the poorer classes to drink as much of it as they are inclined. While for cooking they sometimes use the same water twice over and they apply it very scantily in washing. The middle classes will perhaps not use any of it twice for cooking but they will make a pail of water go a good deal further for washing purposes than if they had an unlimited supply at command. When water is supplied by pipes and charged at a very low rate by meter many people use as much of it even for washing as they feel at all inclined to do. And when the water is supplied not by meter but at a fixed annual charge and is laid on in every place where it is wanted the use of it for every purpose is carried to the full satiety limit. On the other hand demand is generally speaking very inelastic firstly for absolute necessaries as distinguished from conventional necessaries and necessaries for efficiency and secondly for some of those luxuries of the rich which do not absorb much of their income. So far we have taken no account of the difficulties of getting exact lists of demand prices and interpreting them correctly. The first which we have to consider arises from the element of time the source of many of the greatest difficulties in economics. Thus while a list of demand prices represents the changes in the price at which a commodity can be sold consequent on changes in the amount offered for sale other things being equal yet other things seldom are equal in fact over periods of time sufficiently long for the collection of full and trustworthy statistics. There are always occurring disturbing causes whose effects are commingled with and cannot easily be separated from the effects of that particular cause which we desire to isolate. This difficulty is aggravated by the fact that in economics the full effects of a cause seldom come at once but often spread themselves out after it has ceased to exist. To begin with the purchasing power of money is continually changing and rendering necessary a correction of the results obtained on our assumption that money retains a uniform value. This difficulty can however be overcome fairly well since we can ascertain with tolerable accuracy the broader changes in the purchasing power of money. Next come the changes in the general prosperity and in the total purchasing power at the disposal of the community at large. The influence of these changes is important but perhaps less so than is generally supposed. For when the wave of prosperity is descending prices fall and this increases the resources of those with fixed incomes at the expense of those whose incomes depend on the profits of business. The downward fluctuation of prosperity is popularly measured almost entirely by the conspicuous losses of this last class. But the statistics of the total consumption of such commodities as tea, sugar, butter, wool, etc. prove that the total purchasing power of the people does not meanwhile fall very fast. Still there is a fall and the allowance to be made for it must be ascertained by comparing the prices and the consumption of as many things as possible. Next come the changes due to the gradual growth of population and wealth. For these an easy numerical correction can be made when the facts are known. Next allowance must be made for changes in fashion and taste and habit for the opening out of new uses of a commodity for the discovery or improvement or cheapening of other things that can be applied to the same uses with it. In all these cases there is great difficulty in allowing for the time that elapses between the economic cause and its effect. For time is required to enable a rise in the price of a commodity to exert its full influence on consumption. Time is required for consumers to become familiar with substitutes that can be used instead of it and perhaps for producers to get into the habit of producing them in sufficient quantities. Time may be also wanted for the growth of habits of familiarity with the new commodities and the discovery of methods of economizing them. For instance, when wood and charcoal became deer in England, familiarity with coal as a fuel grew slowly, fireplaces were but slowly adapted to its use, and an organized traffic in it did not spring up quickly even to places to which it could be easily carried by water. The invention of processes by which it could be used as a substitute for charcoal in manufacture went even more slowly and is indeed hardly yet complete. Again, when in recent years the price of coal became very high, a great stimulus was given to the invention of economies and its use, especially in the production of iron and steam, but few of these inventions bore much practical fruit till after the high price had passed away. Again, when a new tramway or suburban railway is opened, even those who live near the line do not get into the habit of making the most of its assistance at once, and a good deal more time elapses before many of those whose places of business are near one end of the line change their home so as to live near the other end. Again, when petroleum first became plentiful, few people were ready to use it freely. Gradually, petroleum and petroleum lamps have become familiar to all classes of society. Too much influence would therefore be attributed to the fall in price which has occurred since then, if it were credited with all the increase of consumption. Another difficulty of the same kind arises from the fact that there are many purchases which can easily be put off for a short time, but not for a long time. This is often the case with regard to clothes and other things which are worn out gradually and which can be made to serve a little longer than usual under the pressure of high prices. For instance, at the beginning of the cotton famine, the recorded consumption of cotton in England was very small. This was partly because retail dealers reduced their stock, but chiefly because people generally made shift to do as long as they could without buying new cotton goods. In 1864, however, many found themselves unable to wait longer, and a good deal more cotton was entered for home consumption in that year, though the price was then much higher than in either of the preceding years. For commodities of this kind then, a sudden scarcity does not immediately raise the price fully up to the level which properly corresponds to the reduced supply. Similarly, after the Great Commercial Depression in the United States in 1873, it was noticed that the boot trade revived before the general clothing trade because there is a great deal of reserve wear in the coats and hats that are thrown aside in prosperous times as worn out, but not so much in the boots. 7. The above difficulties are fundamental, but there are others which do not lie deeper than the more or less inevitable faults of our statistical returns. We desire to obtain, if possible, a series of prices at which different amounts of a commodity can find purchasers during a given time in a market. A perfect market is a district, small or large, in which there are many buyers and many sellers also keenly on alert and so well acquainted with one another's affairs that the price of a commodity is always practically the same for the whole of the district. But independently of the fact that those who buy for their own consumption and not for the purposes of trade are not always on the lookout for every change in the market, there is no means of ascertaining exactly what prices are paid in many transactions. Again, the geographical limits of a market are seldom clearly drawn, except when they are marked out by the sea or by custom house barriers, and no country has accurate statistics of commodities produced in it for home consumption. Again, there is generally some ambiguity even in such statistics as are to be had. They commonly show goods as entered for consumption as soon as they pass into the hands of dealers, and consequently, an increase of dealer's stocks cannot easily be distinguished from an increase of consumption. But the two are governed by different causes. A rise of prices tends to check consumption, but if the rise is expected to continue, it will probably, this has already been noticed, lead dealers to increase their stocks. Next, it is difficult to ensure that the commodities referred to are always of the same quality. After a dry summer, what wheat there is is exceptionally good, and the prices for the next harvest year appear to be higher than they really are. It is possible to make allowance for this, particularly now that dry Californian wheat affords a standard, but it is almost impossible to allow properly for the changes in quality of many kinds of manufactured goods. This difficulty occurs even in the case of such a thing as tea. The substitution in recent years of the stronger Indian tea for the weaker Chinese tea has made the real increase of consumption greater than that which is shown by the statistics. Note on statistics of consumption. 8. General statistics of consumption are published by many governments with regard to certain classes of commodities, but partly for the reasons just indicated, they are a very little service in helping us to trace either a casual connection between variations in prices and variations in the amounts which people will buy, or in the distribution of different kinds of consumption among the different classes of the community. As regards the first of these objects, that is the discovery of the laws connecting variations in consumption consequent on variations in price, there seems much to be gained by working out a hint given by Jevons, theory pages 11 and 12, with regard to shopkeepers books. A shopkeeper, or the manager of a cooperative store, in the working man's quarter of a manufacturing town, has often the means of ascertaining with tolerable accuracy the financial position of the great body of his customers. He can find out how many factories are at work, and for how many hours in the week, and he can hear about all the important changes in the rate of wages. In fact, he makes it his business to do so. And as a rule, his customers are quick in finding out changes in the price of things which they commonly use. He will therefore often find cases in which an increased consumption of a commodity is brought about by a fall in its price, the cause acting quickly, and acting alone without any admixture of disturbing causes. Even where disturbing causes are present, he will often be able to allow for their influence. For instance, he will know that as the winter comes on, the prices of butter and vegetables rise, but the cold weather makes people desire butter more and vegetables less than before, and therefore when the prices of both vegetables and butter rise towards the winter, he will expect a greater falling off of consumption in the case of vegetables than should properly be attributed to the rise in price taken alone, but a less falling off in the case of butter. If, however, in two neighboring winters, his customers have been about equally numerous and in receipt of about the same rate of wages, and if in the one the price of butter was a good deal higher than in the other, then a comparison of his books for the two winters will afford a very accurate indication of the influence of changes in price on consumption. Shopkeepers who supply other classes of society must occasionally be in a position to furnish similar facts relating to the consumption of their customers. If a sufficient number of tables of demand by different sections of society could be obtained, they would afford the means of estimating indirectly the variations in total demand that would result from extreme variations in price, and thus attaining an end which is inaccessible by any other route. For, as a general rule, the price of a commodity fluctuates within but narrow limits, and therefore statistics afford us no direct means of guessing what the consumption of it would be, if its price were either five-fold or a fifth part of what it actually is. But we know that its consumption would be confined almost entirely to the rich if its price were very high, and that if its price were very low, the great body of its consumption would in most cases be among the working classes. If, then, the present price is very high relatively to the middle or to the working classes, we may be able to infer from the laws of their demand at the present prices what would be the demand of the rich if the price were so raised so as to be very high relatively even to their means. On the other hand, if the present price is moderate relatively to the means of the rich, we may be able to infer from their demand what would be the demand of the working classes if the price were to fall to a level which is moderate relatively to their means. It is only by thus piecing together fragmentary laws of demand that we can hope to get any approach to an accurate law relating to widely different prices. That is to say, the general demand curve for a commodity cannot be drawn with confidence except in the immediate neighborhood of the current price until we are able to piece it together out of the fragmentary demand curves of different classes of society. Compare the second section of this chapter. When some progress has been made in reducing to definite law the demand for commodities that are destined for immediate consumption, then, but not till then, will there be use in attempting a similar task with regard to those secondary demands which are dependent on these, the demands namely for the labor of artisans and others who take part in the production of things for sale, and again the demand for machines, factories, railway material and other instruments of production. The demand for the work of medical men, of domestic servants, and of all those whose services are rendered direct to the consumer is similar in character to the demand for commodities for immediate consumption, and its laws may be investigated in the same manner. It is a very important but also difficult task to ascertain the proportions in which the different classes of society distribute their expenditure between necessaries, comforts and luxuries, between things that provide only present pleasure and those that build up stores of physical and moral strength, and lastly between those which gratify the lower wants and those which stimulate and educate the higher wants. Several endeavors have been made in this direction on the continent during the last fifty years, and laterally the subject has been investigated with increasing vigor not only there, but also in America and in England. Principles of Economics, Book III by Alfred Marshall CHAPTER V CHOICE BETWEEN DIFFERENT USES OF THE SAME THING immediate and deferred uses The primitive housewife finding that she has a limited number of hanks of yarn from the years shearing considers all the domestic wants for clothing and tries to distribute the yarn between them in such a way as to contribute as much as possible to the family well-being. She will think she has failed if when it is done she has reason to regret that she did not apply more to making, say, socks and less to vests. That would mean she had miscalculated the points at which to suspend the making of socks and vests, respectively, that she had gone too far in the case of vests and not far enough in that of socks, and that therefore at the points at which she actually did stop the utility of yarn turned into socks was greater than that of yarn turned into vests. But if, on the other hand, she hit on the right points to stop at, then she made just so many socks and vests that she got an equal amount of good out of the last bundle of yarn that she applied to socks and the last she applied to vests. This illustrates a general principle which may be expressed thus. If a person has a thing which he can put to several uses he will distribute it among these uses in such a way that it has the same marginal utility in all. For if it had a greater marginal utility in one use than another he would gain by taking away some of it from the second use and applying it to the first. Footnote. Our illustration belongs indeed properly to domestic production rather than to domestic consumption. But that was almost inevitable, for there are very few things ready for immediate consumption which are available for many different uses. And the doctrine of the distribution of means between different uses has less important and less interesting applications in the science of demand than in that of supply. End footnote. One great disadvantage of a primitive economy in which there is but little free exchange is that a person may easily have so much of one thing, say wool, that when he has applied it to every possible use its marginal utility in each case is low. And at the same time he may have so little of some other thing, say wood, that its marginal utility for him is very high. Meanwhile some of his neighbors may be in great need of wool and have more wood than they can turn to good account. If each gives up that which has for him the lower utility and receives that which has the higher each will gain by the exchange. But to make such an adjustment by barter would be tedious and difficult. The difficulty of barter is indeed not so very great where there are but a few simple commodities each capable of being adapted by domestic work to several uses. The weaving wife and the spinster daughters adjusting rightly the marginal utilities of the different uses of the wool while the husband and the sons do the same for the wood. But when commodities have become very numerous and highly specialized there is an urgent need for the free use of money or general purchasing power for that alone can be applied easily in an unlimited variety of purchases. And in a money economy good management is shown by so adjusting the margins of suspense on each line of expenditure that the marginal utility of a shillings worth of goods on each line shall be the same. And this result each one will attain by constantly watching to see whether there is anything on which he is spending so much that he would gain by taking a little away from that line of expenditure and putting it on some other line. Thus for instance the clerk who is in doubt whether to ride to town or to walk and have some little extra indulgent at his lunch is weighing against one another the marginal utilities of two different modes of spending his money. And when an experienced housekeeper urges on a young couple the importance of keeping accounts carefully a chief motive of the advice is that they may avoid spending impulsively a great deal of money on furniture and other things. For though some quantity of these is really needful yet when bought lavishly they do not give high marginal utilities in proportion to their cost. And when the young pair look over their years budget at the end of the year and find perhaps that it is necessary to curtail their expenditure somewhere else. They compare the marginal utilities of different items weighing the loss of utility that would result from taking away a pounds expenditure here with that which they would lose by taking it away there. They strive to adjust their pairings down so that the aggregate loss of utility may be a minimum and the aggregate of utility that remains to them may be a maximum. Footnote. The working class budgets which were mentioned in Chapter 4 may render the most important services in helping people to distribute their resources wisely between different uses so that the marginal utility for each purpose shall be the same. But the vital problems of domestic economy relate as much to wise action as to wise spending. The English and the American housewife make limited means go a less way towards satisfying the wants than the French housewife does. Not because they do not know how to buy but because they cannot produce as good finished commodities out of the raw materials of inexpensive joints, vegetables, etc. as she can. Domestic economy is often spoken of as belonging to the science of consumption but that is only half true. The greatest faults in domestic economy among the sober portion of the Anglo-Saxon working classes at all events are faults of production rather than of consumption. End footnote. The different uses between which a commodity is distributed need not be all present uses. Some may be present and some future. A prudent person will endeavor to distribute his means between all their several uses, present and future, in such a way that they will have in each the same marginal utility. But in estimating the present marginal utility of a distant source of pleasure a two-fold allowance must be made. Firstly, for its uncertainty, this is an objective property which all well-informed persons would estimate in the same way and secondly for the difference in the value to them of a distant as compared with a present pleasure. This is a subjective property which different people would estimate in different ways according to their individual characters and their circumstances at the time. If people regarded future benefits as equally desirable with similar benefits at the present time, they would probably endeavor to distribute their pleasures and other satisfactions evenly throughout their lives. They would therefore generally be willing to give up a present pleasure for the sake of an equal pleasure in the future, provided they could be certain of having it. But in fact human nature is so constituted that in estimating the present value of a future benefit, most people generally make a second deduction from its future value in the form of what we may call a discount that increases with the period for which the benefit is deferred. One will reckon a distant benefit at nearly the same value which it would have for him if it were present. While another who has less power of realizing the future, less patience and self-control, will care comparatively little for any benefit that is not near at hand. And the same person will vary in his mood, being at one time impatient and greedy for present enjoyment, while at another his mind dwells on the future and he is willing to postpone all enjoyments that can conveniently be made to wait. Sometimes he is in a mood to care little for anything else. Sometimes he is like the children who pick the plums out of their pudding to eat them at once. Sometimes like those who put them aside to be eaten last. And in any case, when calculating the rate at which a future benefit is discounted, we must be careful to make allowance for the pleasures of expectation. The rates at which different people discount the future affect not only their tendency to save, as the term is ordinarily understood, but also their tendency to buy things which will be a lasting source of pleasure, rather than those which give a stronger but more transient enjoyment, to buy a new coat rather than to indulge in drinking bout, or to choose simple furniture that will wear well, rather than showy furniture that will soon fall to pieces. It is in regard to these things especially that the pleasure of possession makes itself felt. Many people derive from the mere feeling of ownership a stronger satisfaction than they derive from ordinary pleasures in the narrower sense of the term. For example, the delight in the possession of land will often induce people to pay for it so high a price that it yields to them but a very poor return on their investment. There is a delight in ownership for its own sake, and there is a delight in ownership on account of the distinction it yields. Sometimes the latter is stronger than the former, sometimes weaker, and perhaps no one knows himself or other people well enough to be able to draw the line quite certainly between the two. As has already been urged, we cannot compare the quantities of two benefits which are enjoyed at different times even by the same person. When a person postpones a pleasure-giving event he does not postpone the pleasure, but he gives up a present pleasure and takes in its place another, or an expectation of getting another at a future date, and we cannot tell whether he expects the future pleasure to be greater than the one which he is giving up, unless we know all the circumstances of the case. And therefore, even though we know the rate at which he discounts future pleasurable events, such as spending one pound on immediate gratifications, we yet do not know the rate at which he discounts future pleasures. In classifying some pleasures as more urgent than others, it is often forgotten that the postponement of a pleasurable event may alter the circumstances under which it occurs, and therefore alter the character of the pleasure itself. For instance, it may be said that a young man discounts at a very high rate the pleasure of the alpine tours which he hopes to be able to afford himself when he has made his fortune. He would much rather have them now, partly because they would give him much greater pleasure now. Again it may happen that the postponement of a pleasurable event involves an unequal distribution in time of a certain good, and that the law of diminution of marginal utility acts strongly in the case of this particular good. For instance, it is sometimes said that the pleasures of eating are especially urgent, and it is undoubtedly true that if a man goes dinnerless for six days in the week, and eats seven dinners on the seventh, he loses very much, because when postponing six dinners he does not postpone the pleasures of eating six separate dinners, but substitutes for them the pleasure of one day's excessive eating. Again when a person puts away eggs for the winter, he does not expect that they will be better flavored than than now. He expects that they will be scarce, and that therefore their utility will be higher than now. This shows the importance of drawing a clear distinction between discounting a future pleasure and discounting the pleasure derived from the future enjoyment of a certain amount of a commodity. For in the latter case we must make separate allowance for differences between the marginal utilities of the commodity at the two times, but in the former this has been allowed for once in estimating the amount of the pleasure, and it must not be allowed for again. End footnote. We can, however, get an artificial measure of the rate at which he discounts future benefits by making two assumptions. These are, firstly, that he expects to be about as rich at the future date as he is now, and secondly that his capacity for deriving benefit from the things which money will buy will on the whole remain unchanged, though it may have increased in some directions and diminished in others. On these assumptions, if he is willing, but only just willing, to spare a pound from his expenditure now with the certainty of having, for the disposal of himself or his heirs, a guinea one year hence, we may fairly say that he discounts future benefits that are perfectly secure, subject only to the conditions of human mortality at the rate of five percent per annum. And on these assumptions the rate at which he discounts future certain benefits will be the rate at which he can discount money in the money market. Footnote. It is important to remember that, except on these assumptions there is no direct connection between the rate of discount on the loan of money and the rate at which future pleasures are discounted. A man may be so impatient of delay that a certain promise of a pleasure ten years hence will not induce him to give up one close at hand which he regards as a quarter is great. And yet if he should fear that ten years hence money may be so scarce with him and its marginal utility therefore so high that half a crown then may give him more pleasure or save him more pain than a pound now, he will save something for the future even though he have to hoard it. On the same principle that he might store eggs for the winter. But we are here straying into questions that are more closely connected with supply than with demand. We shall have to consider them again from different points of view in connection with the accumulation of wealth and later again in connection with the causes that determine the rate of interest. We may, however, consider here how to measure numerically the present value of a future pleasure on the supposition that we know one, its amount, two, the date at which it will come, if it comes at all, three, the chance that it will come, and four, the rate at which the person in question discounts future pleasures. If the probability that a pleasure will be enjoyed is three to one so that three chances out of four are in its favor, the value of its expectation is three-fourths of what it would be if it were certain. If the probability that it will be enjoyed were only seven to five so that only seven chances out of twelve are in its favor, the value of its expectation is only seven-twelfths of what it would be if the event were certain, and so on. This is its actuarial value, but further allowance may have to be made for the fact that the true value to any one of an earned certain gain is generally less than its actuarial value. If the anticipated pleasure is both uncertain and distant, we have a two-fold deduction to make from its full value. We will suppose, for instance, that a person would give ten shillings for gratification if it were present and certain, but that it is due a year hence and the probability of its happening is then three to one. Suppose also that he discounts the future at the rate of twenty percent per annum. Then the value to him of the anticipation of it is three-quarters times eighty out of a hundred times ten shillings, i.e. six shillings. Compare the introductory chapter of Jeven's theory of political economy. End note. So far we have considered each pleasure singly, but a great many of the things which people buy are durable, i.e. are not consumed in a single use. A durable good, such as a piano, is the probable source of many pleasures, more or less remote, and its value to a purchaser is the aggregate of the use sense or worth to him of all these pleasures, allowance being made for their uncertainty and for their distance. Footnote. Of course this estimate is formed by a rough instinct, and in any attempt to reduce it to a numerical accuracy, c. note five in the appendix, we must recollect what has been said in this end in the preceding section. As to the impossibility of comparing accurately pleasures or other satisfactions that do not occur at the same time, and also as to the assumption of uniformity involved in supposing the discount of future pleasures to obey the exponential law. End footnote.