Chapter II

. First it makes them cheaper to buy, and thus increases the quantity that will be bought. It is this that is parallel to the effect of an increased demand for mutton in making it more profitable to breed sheep. But it also serves to increase the purchasing power with which to buy commodities, because it increases the aggregate real wealth of the community, and it thus serves to raise the whole demand curve. This last consideration is so important as to make it overwhelmingly probable, apart from the evidence of history, that an increase in the supply of capital (and the same may be said of an increase in the supply of the other agents of production) will on balance increase the demand for labor. The evidence of history points to the same conclusion. The history of the last hundred years displays an unprecedented accumulation of capital, and an unprecedented extension of machinery, associated with an unprecedented improvement in the standard of living throughout the whole community. This is powerful testimony in favor of the view that an increase in the supply of capital and the use of machinery will usually enhance on balance the demand for labor. Moreover, though this is not conclusive, there is little room for doubt that an obstructive attitude towards the extension of machinery in a particular country, or a particular district, is misguided. For its effect must be to make production more costly there than it is elsewhere, and to lead, slowly perhaps, but very surely, to the transference of the industry to other regions.

§6. _Conclusions as to Joint Supply and Joint Demand_. Here, however, we are beginning to digress. Let us sum up in a general form our conclusions as to the way in which changes in the supply or demand of a commodity react upon the demand or supply of the other things with which it is jointly demanded or supplied. Everything turns, as we have seen, on the possibility of variation in the proportions in which the things are used or produced together; and this, it is also clear, is a matter of degree. Our conclusions, therefore, had best take the following form:--

LAW VII. When two or more things are jointly demanded, in proportions which cannot easily be varied, the tendency will be for an increase (or decrease) in the supply of one of them to increase (or decrease) the demand for the others. These results will be more certain, and more marked, the more difficult it is to vary the proportions in which the things are used.

Similarly, when two or more things are jointly supplied, in proportions which cannot easily be varied, the tendency will be for an increase (or decrease) in the demand for one of them to increase (or decrease) the supply of the others. These results again will be more certain and more marked, the more difficult it is to vary the proportions in which the things are supplied.

§7. _Composite Supply and Composite Demand_. Joint Demand and Joint Supply do not complete the list of relations between the demand and supply of different things. Between tea and coffee, or beef and mutton there is a relation of a different kind. These things are in large measure what we call "substitutes" for one another. An increased supply, and a lower price of mutton, will probably induce us to consume less beef. This relation it is convenient to describe as Composite Supply. Beef and mutton make up a composite supply of meat; tea and coffee a composite supply of a certain type of beverage. For any group of things, between which the relation of Composite Supply exists, we can say, with complete generality, that an increased supply of one of them will tend to diminish the demand for the others. Parallel to the relation of Composite Supply is that of Composite Demand. There are frequently several alternative uses in which a commodity or service can be employed; and these alternative uses make up a composite demand for the thing in question. Thus railways, gasworks, private households and a great variety of industries contribute to a Composite Demand for coal. It is worth noting that there is frequently an association in practice between Joint Demand and Composite Supply on the one hand; and between Joint Supply and Composite Demand on the other. Wool and mutton, for instance, we have described as an instance of Joint Supply; but, in so far as the proportions of wool and mutton can be varied, we can regard these things as constituting a Composite Demand for sheep. And this conception may help us to retain a clearer and more orderly picture of the problems we have discussed above. We can regard the fact that wool and mutton are produced together as their Joint Supply aspect, and the fact that these proportions can be varied as their Composite Demand aspect; and the question as to whether an increased demand for mutton will increase the supply of wool turns upon whether the former aspect is more important than the latter. Similarly labor and machinery, employed together for the same purpose, form an instance of Joint Demand; but in so far as they can be substituted for one another, they constitute a Composite Supply of alternative agents of production.

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

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

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