Sir Hubert Douglas Henderson

“ We may rather doubt, in view of the reactions of poverty on physical and mental efficiency, on social harmony, even possibly on population, whether we to-day would have been really injured as much as might appear. How, then, can we suppose that the sum of the amounts which it suits individuals to save will bear any close relation to the resources which the community can properly devote to future ends? Are we to regard an unjust distribution of wealth as a mysterious dispensation of Providence for securing perfect harmony between the future and the present? ”

“ If we know only that a housewife will buy weekly 5 pounds of sugar at 8 cents per pound, but 6 pounds at 7 cents, we know nothing of the total utility of sugar to her. We do not know how much she might be prepared to pay rather than go without 3 pounds, 2 pounds, or any sugar at all. But we do know that, when she buys 6 pounds, the marginal utility of sugar is in her judgment worth something which does not differ greatly from the price. We can, therefore, say in general terms that the price of a commodity measures approximately its marginal utility to the purchaser. ”

“ A great business, like a nation, may cherish visions of self-sufficiency, may stretch its tentacles forward to the consumer and backwards to its supplies of raw material; but each fresh extension of its activities serves only to multiply its points of contact with the outside world. When those points are reached, the largest business, like the smallest, is out on the open sea of an economic system immeasurably larger and more powerful than itself. ”

“ Interest is the price paid simply for the use of capital. But what is capital, and in what does its use consist? What claim has it to be regarded as an independent factor of production? Our very familiarity with the term, our habit of employing it with the rich looseness of every-day life is an obstacle to the clearness of thought, which is again essential. We recognize, most of us, clearly enough that capital, although we reckon it in terms of money, consists, like income, of real things; factories, machinery, materials and the like. ”

“ 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. ”

“ You would be using the instrument of the rate of interest to adjust the demand for and supply of capital, though indeed the interest might not be paid away as now to private individuals. You would be reproducing by the method of deliberate trial and error, the adjustments which occur automatically as things are, in the actual world. Once again the most perfectly contrived Utopia would be compelled to pay to the unorganized coöperation of our epoch the sincerest flattery of imitation. ”

“ This is the real cost to the community, which attaches to the products of any industry, in virtue of the land which it occupies; not any human labors or sacrifices required to produce the land itself, but the curtailment of the natural resources available for productive use elsewhere. This is the real cost of which rent is the money measure, and generally speaking an accurate measure at the margin of transference between one occupation and another. ”

“ 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. ”

“ It is clear enough that at places like Monte Carlo people are prepared to have the odds unmistakably against them, apparently for the sheer pleasure and exhilaration of taking risks. Moreover, though for most people play at Monte Carlo represents a mere holiday indulgence, it would be unsafe to assume that what appeals to them there will not also appeal to them in their business affairs. But what exactly is the secret of the charm of Monte Carlo? It is the great attractive force of a small chance of a large gain, as compared with the deterrent force of a large chance of a small loss. ”

“ To some extent indeed the demand for labor would almost certainly be increased. The supply of Capital may expand, perhaps proportionately, perhaps more than proportionately to the increase in population. But one factor of production, as we have seen, is not capable of such expansion. This is the factor of Land, or Natural Resources. It is the limitation of this factor which gives rise to what we have most of us heard of as The Law of Diminishing Returns. It is this that is the essence of the problem of Population, portrayed in somber hues more than a hundred years ago by Malthus. ”

“ When prices are falling the roles are reversed, and we are likely to see the sellers tumbling over one another in a frantic eagerness to sell, the buyers wary and aloof. Sooner or later, indeed, these tendencies must dissolve and disappear; but they may persist for a longer period than might seem probable at first. For the raw material of one trade is, as we say, the finished product of another. The demand for one thing gives rise to a demand for other things, for the labor with which to make them, and so on in an expanding circle. ”

“ It is vital to appreciate this truth, because, as we shall see, by no means all the saving of the world is done by individuals. There are many forms of "collective saving," which take place in actual fact; still more which we are often urged to undertake. And it is of practical importance to realize that the very considerations, which call most urgently for individual thrift, forbid a great indulgence in such projects. A time of national poverty is not a time when it is suitable for the State to embark on large schemes of capital development: we require our resources for more immediate ends. ”

“ But while, as this illustration indicates, the phenomenon of surplus profits becomes of very great importance when we seek to study the distribution of wealth, it need not detain us here. For the surplus element arises only in so far as the costs of a business are lower than the marginal costs; and it is the marginal costs, which, with good reason, we are now endeavoring to analyze. The marginal costs must include a normal profit, i.e. a profit which will cover earnings of management, the reward of risk and enterprise, interest on capital, but nothing further. ”

“ This is the element of payment for risk, or rather the reward of risk-bearing. Risk is inherent in all business, as it is inherent in all life. The vagaries of nature and the vagaries of man are alike responsible. The farmer may find his harvest ruined by a drought or by a deluge; the coal or the gold, for the extraction of which you have perhaps set up an extensive mining plant, may come to an end which is unexpectedly abrupt. You may put your money into roller-skating rinks and find that cinemas have become the rage with the fickle public ”

“ We preach insurance to our neighbors as the core of self-regarding duty, and, if ever we feel a twinge of uneasiness, it is lest we, too, may have omitted in some particular to practice what we preach.
The significance of this is unmistakable. Be our psychology what it may, however deep and irrepressible our taste for derring-do, however inadequate the scope which the dull routine of modern life affords for our adventurous impulses, we are most of us anxious to avoid the risk of great financial loss. We are very glad to find someone to take it off our shoulders if we can ”

“ The truth of this proposition is demonstrated by the existence of institutions more impressive than Monte Carlo—the Insurance Companies, which play so large a part in the economic life of modern times. Every year, and upon an ever-growing scale, both private individuals and business concerns pay sums of money, which reach in the aggregate a colossal sum, as premiums to insure themselves against loss by Fire, Shipwreck, Burglary, Death, Death Duties, against every risk which Insurance Companies will cover. Now Insurance Companies are not, as we say, in business for their health. ”

“ The rent which a manufacturer or farmer has to pay for his land he naturally includes in his cost of production. But does this money cost to the individual correspond to, and measure, any real cost to the community as a whole? Here let us note in the first place that if only we could disregard the variety of uses to which land is put, if we could suppose that all industry was agriculture, and that agriculture was a single industry with a single product, we could argue that rent does not enter into marginal costs at all. ”

“ Rent is thus logically the simpler, price the more complex thing. It is well, therefore, to analyze in the first instance the principles of rent, if we live in a country where the practice of leasing land for annual rent is less common than it is in Great Britain, even if, for whatever reason, it is the price of land with which we are concerned in practice. The problem of price contains two distinct elements which it is not easy to handle when mixed up together. For the rate of interest represents in itself an important branch of economics, which will require a separate chapter to itself. ”

“ But cost of production is the chief factor which, in the case of commodities, ultimately determines the conditions of supply. Utility, similarly, is the chief factor which ultimately determines the conditions of demand. Must not then the symmetrical relations between demand and supply be reflected in a corresponding symmetry between the utility and the costs which underlie them? Demand springs obviously from utility; the only motive for buying anything is that it will serve some real or fancied use. Can we then accord to demand so dignified and to utility so subordinate a place? ”

“ That it would not be well for the community to employ land in the city of London for corn-growing purposes, however desirable might be a revival of home agriculture, is so obvious that it may seem to have no bearing on the present issue. But it is only an extreme indication of the absurd and wasteful use of our natural resources, which would grow up slowly but surely, if we dispensed with ideas of rent and price as sordid irrelevancies, and allocated our land on the basis of a balancing of the loftiest arguments of a vague and sentimental character. ”

“ If, for example, a new enterprise is to be undertaken, the special knowledge and experience which its promoters possess is a vital factor in determining their estimate of the risk involved. An outsider with no special knowledge would necessarily require to estimate the risk far more highly if we were to form a rational opinion on the basis of his knowledge. So great, indeed, would be the risk to him, that we can lay it down as a sound maxim that people are extremely rash who invest their money in risky undertakings about which they know very little. ”

“ It is conceivable, therefore, that we might consume all non-durable things the moment they were ready, and the degree to which we approximate to this ideal is a mark of the efficiency of our economic system. A large store of consumable goods is thus not a fundamental necessity of a prosperous society.
What is necessary is plainly the power to produce these things in large quantities as they are required. And this power is furnished by the durable instruments of production, which we thus rightly regard as the true representatives of modern capital. ”

“ For we could regard the marginal producer as the one working on a marginal farm, whereas we have seen there is no pure rent. The rent which other producers have to pay would thus represent merely the destination of the surplus profits which arise wherever actual costs fall short of marginal costs. This way of looking at the matter has proved attractive to some thinkers, not in the least because of a desire to palliate the effects of landlordism, but because it fits in so well with our general sense of rent as a "surplus," and a surplus as something distinct from a necessary price. ”

“ The humblest inhabitant of the United States or Great Britain depends for the satisfaction of his simplest needs upon the activities of innumerable people, in every walk of life and in every corner of the globe. The ordinary commodities which appear upon his dinner table represent the final product of the labors of a medley of merchants, farmers, seamen, engineers, workers of almost every craft. But there is no human authority presiding over this great complex of labor, organizing the various units, and directing them towards the common ends which they subserve. ”

“ It is well to note, as an inexorable corollary of Law I, that prices can rise only if demand exceeds supply, and fall only if supply exceeds demand; and hence that it is only through the agency of changes in the demand for and supply of commodities and services that an inflation or deflation of the currency can influence the price level. Further, since a condition of things in which supply generally exceeds demand spells what we know and fear as a trade depression, it may be well to note at once that falling prices and unemployment are inseparable bedfellows. ”

“ A failure to realize it lies at the root of our bewildered muddling of many crucial problems of the day. In the matter of housing, for instance, we know we cannot build houses at less than two or three times their prewar cost, and yet we cannot endure to see the owners of pre-war houses obtaining a commensurate increase of rent. And so, in Great Britain, we pass Rent Restriction Acts, and Housing Acts, and then, in a fit of economy we suspend the latter, and let the former stand, while the housing shortage becomes steadily more acute. ”

“ Demand and supply, as we have seen, are dependent upon price; but equally clearly they are dependent upon other things as well. Demand depends upon the needs, tastes and habits of the people, as well as upon the length of their purse; supply depends upon such things as the cost of production in the case of commodities. None of these things are constant factors, all of them are liable to change, and it may well happen that we shall want to consider in some concrete problem the probable consequences of such a change. ”

“ When we hand the railways back from State control to private hands, our horror at the idea of the companies receiving larger money profits than they did before the war leads us to lay down principles for the fixing of fares and freight charges, which take no account of post-war construction costs; and then, in alarm lest we may have thereby made it unprofitable for the companies to spend a single penny of fresh capital upon further development, we seek to provide for capital expenditure by cumbrous and dubious expedients. ”

“ The order, which I have sought to reveal, pervading and moving the most diverse phenomena of the economic world, would be a far less noteworthy and impressive thing were it merely the peculiar product of capitalism. Merchant adventurers, companies, and trusts; Guilds, Governments and Soviets may come and go. But under them all, and, if need be, in spite of them all, the profound adjustments of supply and demand will work themselves out and work themselves out again for so long as the lot of man is darkened by the curse of Adam. ”