Aggregate demand

“ It follows from this that the assumption upon which we have worked hitherto, that changes in employment depend solely on changes in aggregate effective demand (in terms of wage-units) , is no better than a first approximation, if we admit that there is more than one way in which an increase of income can be spent. For the way in which we suppose the increase in aggregate demand to be distributed between different commodities may considerably influence the volume of employment. ”

“ At this stage in the analysis the difficulty must be met that even in a position of stable equilibrium, i.e. when the normal demand is just satisfied by the normal supply, the different portions of the aggregate supply may be produced at different costs according to differences in the natural environment or in the availability of different factors of production. In dealing with this difficulty the modern conception of marginal cost is of importance. If a commodity is produced at a uniform cost per unit whatever the amount, then the normal value depends simply on this uniform or normal cost ”

“ For the demand schedules for particular industries can only be constructed on some fixed assumption as to the nature of the demand and supply schedules of other industries and as to the amount of the aggregate effective demand. It is invalid, therefore, to transfer the argument to industry as a whole unless we also transfer our assumption that the aggregate effective demand is fixed. ”

“ In the same way employment may fall off without there having been any change in aggregate demand, if the direction of demand is changed in favour of products having a relatively low elasticity of employment. ”

“ Being, however, only derived from an advance of wages, that increase of their purchasing power must exactly correspond to the decrease of the purchasing power of the capitalists. The aggregate demand for commodities would, therefore, not increase, but the constituent parts of that demand would change. The increasing demand on the one side would be counterbalanced by the decreasing demand on the other side. Thus the aggregate demand remaining stationary, no change whatever could take place in the market prices of commodities. ”

“ But, apart from this, the conclusion that the costs of output are always covered in the aggregate by the sale-proceeds resulting from demand, has great plausibility, because it is difficult to distinguish it from another, similar-looking proposition which is indubitable, namely that the income derived in the aggregate by all the elements in the community concerned in a productive activity necessarily has a value exactly equal to the value of the output. ”

“ As is only to be expected when aggregate demand increases, when higher incomes are available to a greater number of people than even before, and when industry is expanding at a fast rate, our balance of payments experienced some pressure last year. ”

“ The internal actions constituting social functions, exemplify the general principle no less clearly. Supply and demand are continually being adjusted throughout all industrial processes; and this equilibration is interpretable in the same way as preceding ones. The production and distribution of a commodity, is the expression of a certain aggregate of forces causing special kinds and amounts of motion. The price of this commodity, is the measure of a certain other aggregate of forces expended by the labourer who purchases it, in other kinds and amounts of motion. ”

“ They are often rather indirect and negative, for it is only on the basis of price fluctuations that they indicate whether the aggregate of produced commodities falls short of the effective demand or exceeds it. Yet the individual private producers make recurrent use of these experiences of the preceding labour period when they re-engage in reproduction, so that glut or shortage are bound to occur again in the following period. Individual branches of production may develop independently, so that there may be a surplus in one branch and a deficiency in another. ”

“ If, for example, the increased demand is largely directed towards products which have a high elasticity of employment, the aggregate increase in employment will be greater than if it is largely directed towards products which have a low elasticity of employment. ”

“ Because the phenomenon of over-supply and consequent inconvenience or loss to the producer or dealer may exist in the case of any one commodity whatever, many persons, including some distinguished political economists,255 have thought that it may exist with regard to all commodities; that there may be a general over-production of wealth; a supply of commodities in the aggregate surpassing the demand ”

“ When we turn from expenses of production to the aggregate takings from the sale of the several quantities of supply, we shall find a similar irregularity of increase. Elasticity in demand, as tested by the stimulus given to consumption by a fall of price, differs not merely in different commodities, but at different points in a falling scale of prices. ”

“ An alternative, though equivalent, criterion is that at which we have now arrived, namely a situation in which aggregate employment is inelastic in response to an increase in the effective demand for its output. ”

“ For if we overlook this, we may underestimate the heavy drag on the propensity to consume which exists even in conditions where the public is ready to consume a very large proportion of its net income.
Consumption3⁄4to repeat the obvious3⁄4is the sole end and object of all economic activity. Opportunities for employment are necessarily limited by the extent of aggregate demand. Aggregate demand can be derived only from present consumption or from present provision for future consumption. ”

“ Given the optimum amount of roundaboutness, we shall, of course, select the most efficient roundabout processes which we can find up to the required aggregate. But the optimum amount itself should be such as to provide at the appropriate dates for that part of consumers' demand which it is desired to defer. In optimum conditions, that is to say, production should be so organised as to produce in the most efficient manner compatible with delivery at the dates at which consumers' demand is expected to become effective. ”

“ The cost of management, amount of stock carried, advertising, cost of selling the product, may all be smaller per unit of product. A large aggregation can control credit better and escape loss from bad debts. By regulating and equalizing the output in the different localities, it can run more nearly full time. Being acquainted with the entire situation, it can reduce the friction. A strong combination has advantages in shipment. It can have a clearing-house for orders and ship from the nearest source of supply. The least efficient factories can be first closed when demand falls off. ”

“ The relative plenty or scarcity of the different groups or agents of production is a constant and important force in the distribution of the product of industry. From the perception of its significance, spring many of the loose statements of the action of "supply and demand," which are ventured as complete explanations of the wage situation. It is not possible to give a simple explanation of the part which relative plenty or scarcity does play in the determination of wages. For other forces which affect distribution act simultaneously with it, and all intermingle their results. ”

“ But this can only be accomplished by a proper proportion of the supply to the demand, that is, by an accumulation so proportioned to the actual consumption of produce by those who can make an effectual demand for it, as to occasion the greatest permanent annual increase in the value of the materials of capital. ”

“ The conditions of accumulation we have enumerated are no more than those without which there can be no accumulation. There may even be a desire to accumulate in both departments, yet the desire to accumulate plus the technical prerequisites of accumulation is not enough in a capitalist economy of commodity production. A further condition is required to ensure that accumulation can in fact proceed and production expand: the effective demand for commodities must also increase. ”

“ Although the community would willingly double its aggregate consumption, it may already have as much as it desires of some commodities, and it may prefer to do more than double its consumption of others, or to exercise its increased purchasing power on some new thing. If so, the supply will adapt itself accordingly, and the values of things will continue to conform to their cost of production. At any rate, it is a sheer absurdity that all things should fall in value, and that all producers should, in consequence, be insufficiently remunerated. ”

“ Or, on the contrary, the competition may cease before the value has risen in even the proportion of the deficiency. A rise, short of one-third, may place the article beyond the means, or beyond the inclinations, of purchasers to the full amount. At what point, then, will the rise be arrested? At the point, whatever it be, which equalizes the demand and the supply: at the price which cuts off the extra third from the demand, or brings forward additional sellers sufficient to supply it. ”

“ We shall do well to cultivate a lively sense of this symmetry, for it will frequently save us from ignoring factors which have a vital bearing on the problems we are considering. We should never leave an important feature of demand without turning to see whether it has a counterpart on the supply side, though indeed we may not always find one. In the last chapter we examined the relation between utility and price, and found that the true relation was between the price and what we termed the marginal utility. Corresponding to utility on the demand side is cost of production on the supply side. ”

“ It is the cost of production which must ultimately regulate the price of commodities, and not, as has been often said, the proportion between the supply and demand: the proportion between supply and demand may, indeed, for a time affect the market value of a commodity, until it is supplied in greater or less abundance, according as the demand may have increased or diminished ”

“ Moreover, it is observable that advance in organization, as well as advance in growth, is conducive to a better equilibrium of industrial functions. While the diffusion of mercantile information is slow, and the means of transport deficient, the adjustment of supply to demand is extremely imperfect: great over-production of each commodity followed by great under-production, constitute a rhythm having extremes that depart very widely from the mean state in which demand and supply are equilibrated. ”

“ Inferior lands, or lands at a greater distance from the market, of course yield an inferior return, and an increasing demand can not be supplied from them unless at an augmentation of cost, and therefore of price. If the additional demand could continue to be supplied from the superior lands, by applying additional labor and capital, at no greater proportional cost than that at which they yield the quantity first demanded of them, the owners or farmers of those lands could undersell all others, and engross the whole market. ”

“ They reveal that the equilibrium is established and maintained by the agency of changes in price, and they enable us to lay it down as perhaps the most important thing that can be said about the price of anything that it will tend to be such as will equate demand and supply. ”

“ It is true that this equilibrium is a rough, imperfect one; and it may happen that what is called a "glut" of wool may co-exist for a short period with what is called a scarcity of mutton. But qualifications of this nature are in the strictest sense of the phrase, the exceptions which prove the rule. For the departures from equilibrium which gluts and scarcities represent are always transient and are usually confined within narrow limits. A strong prevailing trend towards an adjustment of demand and supply is unmistakably manifest amid all the vagaries of changing circumstance. ”

“ When the demand arises, the agencies of supply, namely production and distribution, usually respond. One of the great tasks of economic organization, therefore, is to estimate the probable demand and so influence production and distribution that the supply will neither be excessive nor fall short. If there is an over-supply of any commodity, prices normally will fall. That means that goods may bring less than it costs to produce and to distribute them. One reason for the organization of industry on a large scale under great corporations is that supply can thus be kept closer to demand. ”