The Scope and Method of Political Economy
by Philip H. Wicksteed
Economic Journal, volume 24 (1914) pp. 1-23.
Presidential Address to Section F of British Association,
Birmingham, 1913.


    I address myself primarily to those who already accept the
marginal theory of Value and Distribution, inviting their
attention to the modifications it is already introducing into
current conceptions of Political Economy and of its relation to
other studies, and urging the necessity of accepting the change
more frankly and pressing it further. But at the same time I
think we shall find that the best approach to our proper subject
is through a summary exposition, if not a defence, of the theory
itself.
    Let us begin by attempting to determine the characteristic of
the economic field of investigation. Naturally there is no sharp
line that marks off the economic life, and we must not expect to
arrive at any rigid definition of it; but I take it that if I am
doing a thing because I want it done for its own sake (not
necessarily my own sake, in any restricted sense, for it may
primarily concern some one else in whom I am interested out of
pure goodwill), or am making a thing that I require for the
supply of my own desires or the accomplishment of my own
purposes; if, in fact, I am engaged in the direct pursuit of my
own purposes, or expression of my own impulses, my action is not
economic. But if I am making or doing anything not because I have
any direct interest in it, but because some one else wants it,
and that other person will either do what I want done or put me
in command of it, then I am furthering his purposes as a means of
furthering my own. I am indirectly forwarding my purposes by
directly forwarding his. This is the nature of the economic
relation, and the mechanism or articulation of the whole complex
of such economic relations is the proper subject of economic
investigation. Thus, if a peasant adorns his ox-yoke with carving
because he likes doing it and likes it when done, or if he carves
a stool for his fiend because he loves him and likes doing it for
him and believes he will like it when done, the action is not
economic; but if he gets a reputation for carving and other
peasants want his work, he may become a professional carver and
may carve a yoke or a stool because other people want them and he
finds that supplying their wants is the easiest way for him to
get food and clothes and leisure for his own art, and all things
else that he desires. His artistic work now puts him into an
economic relation with his fellows; but this example serves to
remind us that there may be an indefinite area of coincidence
between the economic and non-economic aspects of a man's
occupations and relations. That man is happy indeed who finds
that in expressing some part of his nature he is providing for
all his natural wants; or that in rendering services to fiends in
which he delights he is putting himself in command of all the
services he himself needs for the accomplishment of his own
purposes. A perfect coincidence of this nature is the dream of
modern Utopias; but my present subject is only the economic side
of the shield.
    The economic organism, then, of an industrial society
represents the instrumentality whereby every man, by doing what
he can for some of his fellows, gets what he wants from others.
It is true, of course, that those for whom he makes or does
something may be the same as those from whom he gets the
particular things he wants. But this is not usual. In such a
society as ours the persons whom a man serves are usually
incapable of serving him in the way he desires, but they can put
him in command of the services he requires, though they cannot
render them. This is accomplished by the instrumentality of
money, which is a generalised command of the services and
commodities in the circle of exchange; "money" being at once a
standard in which all market prices are expressed, and a
universal commodity which every one who wishes to exchange what
he has for what he.wants will accept as a medium, or middle term,
by which to effect the transformation. Thus in most commercial
transactions one party furthers a specific purpose of the other,
and receives in exchange a command, defined in amount but not in
kind, of services and commodities in general; the scale of
equivalence being a publicly recognised thing announced in
current market prices. Every member of the community who stands
in economic relations with others alternately generalises his
special resources and then specialises his general resources,
first directly furthering some one else's purposes and then
picking out the persons who can directly further his. Thus each
of us puts in what he has at one point of the circle of exchange
and takes out what he wants at another. Being out of work is
being unable to find any one who values our special service
enough to relinquish in our favour such a command of services in
general as we are prepared to accept in return.
    Our economic relations, therefore, are built up on a
recognised scale of equivalences amongst the various commodities
and services in the circle of exchange'. or, in other words, upon
market values. And our first step must be to formulate the
"marginal" theory of exchange, or market, values. It is capable
of very easy and precise formulation in mathematical language;
for it simply regards value in exchange as the first derived or
"differential" function of value in use; which is as much as to
say, in ordinary language, that what a man will give for anything
sooner than go without it is determined by a comparison of the
difference which he conceives its possession will make to him,
compared with the difference that anything he gives for it or
could have had instead of it will or would make; and, further,
that we are generally considering in our private budgets, and
almost always in our general speculations, not the significance
of a total supply of any commodity-coals, bread, or clothes, for
instance-but the significance of the difference between, say, a
good and a very good wheat harvest to the public, or the
difference between ten and eleven loaves of bread per week to our
own family, or perhaps between ten days and a fortnight spent at
the seaside. In short, when we are considering whether we will
contract or enlarge our expenditure upon this or that object, we
are normally engaged in considering the difference to our
satisfaction which differences of adjustment in our several
supplies will make. We are normally engaged, then, not in the
consideration of totals, either of supplies or of satisfactions,
but of differences of satisfaction dependent upon differences of
supplies.
    According to this theory, then, what I am willing to give for
an increase in my supply of anything is determined by the
difference it will make to my satisfaction, but what I shall have
to give for it is determined by the difference it would make to
the satisfaction of certain other people; for if there is any one
to whom it will make more difference than it will to me, he will
be ready to give more for it, and he will get it, while I go
without. But again, since the more he has the less difference
will a still further increase make to him, and the less I have
the more difference will a still further decrease make to me, we
shall ultimately arrive at an equilibrium; what I am willing to
give and what I am compelled to give will coincide, and the
difference that a little more or a little less of any commodity
which I habitually consume makes to my estimated satisfaction
will be identical with a similar estimated difference to any
other habitual consumer.
    Or we may attack the problem from the point of view of the
individual. We have pointed out that to any individual the
differential significance of a unit of supply of any commodity or
service declines as the supply increases. In our own expenditure,
we find that current prices (our individual reaction on the
market being insensible) fix the terms on which the various
alternatives offered by the whole range of commodities and
services in the circle of exchange are open to us. Obviously, so
long as the differential satisfaction anticipated from one
purchase exceeds that which the same money would procure from
another, we shall take the preferable alternative (thereby
reducing its differential superiority) until we have so regulated
our expanding or contracting supplies that the differential
satisfactions gained or lost from a given small increase or
decrease of expenditure upon any one of our different objects of
interest is identical. Into the practical difficulties that
prevent our ever actually reaching this ideal equilibrium of
expenditure I will not here enter; but I must call attention to
the identity in principle of this analysis of the internal
economy of our own choice between alternatives, tending to a
subjective equilibrium between the differential significances of
different supplies to the same person, and the corresponding
analysis, just given, of the process by which an objective
equilibrium is approached between the differential significances
of the same supplies to different persons.
    And this observation introduces another of extreme
importance. In our private administration of resources we are
concerned both with things that are and with things that are not
in the circle of exchange, and the principle of distribution of
resources is identical in both cases. The independent student who
is apportioning his time and energy between pursuing his own line
of research and keeping abreast of the literature of his subject
is forming estimates of differential significances and is
equating them to each other just as directly as the housewife who
is hesitating between two stalls in the market. And when we are
considering whether we will live in the country or the town, we
may find, on examination, that we are carefully equating
increments and decrements of such apparently heterogeneous
indulgences as those associated with fresh eggs and friendship.
Or, more generally, the inner core of our life problems and the
gratification of all our ultimate desires (which are indeed
inextricably interlaced with our command of exchangeable things,
but are the ends to which the others are but means) obey the same
all-permeating law. Virtue, wisdom, sagacity, prudence, success,
imply different schemes of values, but they all submit to the law
formulated by Aristotle with reference to virtue, and analysed by
modern writers with reference to business, for they all consist
in combining factors, in the right proportion, as fixed by that
distribution of resources which establishes the equilibrium of
their differential significances in securing the object
contemplated, whether that object be tranquillity of mind, the
indulgence of an overmastering passion or affection, the command
of things and services in the circle of exchange, or a
combination of all these, or of any other conceivable factors of
life.
    Now this dominating and universal principle of the
distribution of resources, as we have seen, tends, by the
instrumentality of the market, to secure an identity in the
relative positions of increments of all exchangeable things upon
the scales of all the members of the community amongst whom they
are distributed. For if, amongst the things he possesses, A finds
one, a given decrement in which would make less difference to
him, as measured in increments of other exchangeable things, than
the corresponding increment would make to B (who is assumed to
have a certain command of exchangeable things in general),
obviously there is a mutual gain in B giving for the increment in
question what is less than worth it to him but more than worth it
to A. There is equilibrium therefore only when a decrement in any
man's stock of any exchangeable thing would make more difference
to him, as measured in other exchangeable things, than the
corresponding increment (measured in the same terms) would make
to any one else. Hence all those who possess anything must, in
equilibrium, value it more, differentially or incrementally, than
any one who does not possess it, provided that this latter does
possess something, and provided that "value" is measured in
exchangeable things.
    But this last qualification is all-important. The market
tends to establish an identity of the place of the differential
value of any commodity amongst all exchangeable things on
everybody's scale of preferences, and further to secure that it
is higher on the scale of every one that has it than on the scale
of any one who has it not; so that to that extent, and in that
sense, things must always tend to go and to stay where they are
most significant. But then exchangeable thing are never really
the ultimately significant things at all. They are means. The
ends, which are always subjective experiences of some kind,
whether of the senses or the will or the emotions, are not in any
direct way exchangeable; and there is no machinery to secure that
increments and decrements of exchangeable things shall in
industrial equilibrium take the same place and have the same
differential significance on the scales of any two men when
measured not in terms of other means, but in terms of ends. If
two men habitually spend a portion of their resources on food and
on books, there is a presumption that to both of them the
differential significance of a shilling's -- worth of food and of
a volume of Everyman's or the Home University Library is
equivalent. But there is no presumption whatever that the vital
significance of either one or the other is identical to the two
men as measured, not each in terms of the other, but each in the
degree to which it ministers to the ultimate purposes of its
possessor or consumer; in the pain that its absence or the
pleasure that its presence would give him; or in its ultimate
significance upon his life. Granted that x makes just as much
difference, both to you and to me, as y does, it does not follow
that either x or y makes the same difference to you that it does
to me.
    The ground is now clear for a step forward along the main
line of our advance. The differential theory of exchange values
carries with it a corresponding theory of distribution, whether
we use this term in its technical sense of the division of a
product amongst the factors that combine for its production, or
whether we employ it as equivalent to "administration," and are
thinking of the administration of our personal resources; that is
to say, their distribution amongst the various objects that
appeal to us; or again, the distribution, under economic
pressures, of the sum of the industrial resources of a society
amongst the objects that appeal to its members.
    Land, manifold apparatus, various specialised faculties of
hand, eye, and brain, are essential, let us say, to the
production of some commodity valued by some one (it does not
matter whom), for some purpose (it does not matter what). None of
these heterogeneous factors can be dispensed with, and therefore
the product in its totality is dependent upon the co-operation of
each one severally. But there is room for wide variety in the
proportions in which they are combined, and whatever the existing
proportion may be each factor has a differential significance,
and all these differential significances can be expressed in a
common unit; that is to say, all can be expressed in terms of
each other, by noting the increment or decrement of any one that
would be the equivalent of a given decrement or increment of any
other; equivalence being measured by the neutralising of the
effect upon the product, or rather, not upon the material product
itself, but the command of generalised resources in the circle of
exchange for the sake of which it is produced. The manager of a
business is constantly engaged in considering, for instance, how
much labour such-and-such a machine would save; how much raw
material a man of such-and-such character would save; what
equivalent an expansion or reconstruction of his premises would
yield in ease and smoothness in the conduct of business; how much
economy in the shop would be effected by a given addition to the
staff in the office, and so on. This is considering differential
significances and their equivalences as they affect his business.
And all the time he is also considering the prices at which he
can obtain these several factors, dependent upon their
differential significances to other people in other businesses.
His skill consists, like that of the housewife in the market, in
expanding and contracting his expenditure on the several factors
of production so as to bring their differential significances to
himself into coincidence with their market prices. And note that
the same principle can be applied without any difficulty to such
immaterial factors of efficiency as "goodwill" or notoriety; but
it would delay us too long to work this out or to anticipate
possible objections. A hint must suffice.
    Here, then, we have a firm theoretical basis for the study of
distribution, independent of the particular form of organisation
of a business. Whether those in command of the several factors of
production meet and discuss the principles upon which the actual
proceeds of the business shall be divided, when they are
realised; or whether some one person takes the risks (on his own
behalf or on behalf of a group of others), and discounts the
estimated significance of the several factors, buying up their
several interests in the product, by paying wages and salaries,
interest, and rent, and by purchasing machinery and raw material,
and so forth; or whatever other mechanism may be adopted, the
underlying principle is the same. The differential equivalence of
the factors of production reduces them to a common measure, and
when they are all expressed in the same unit the problem of the
division of the product amongst them is solved in principle.
    Now I conceive that the application of this differential
method to economics must tend to enlarge and to harmonise our
conception of the scope of the study, and to keep it in constant
touch with the wider ethical, social, and sociological problems
and aspirations from which it must always draw its inspiration
and derive its interest; for if we really understand and accept
the principle of differential significances we shall realise, as
already pointed out, that Aristotle's system of ethics and our
reconstructed system of economics are twin applications of one
identical principle or law, and that our conduct in business is
but a phase or part of our conduct in life, both being determined
by our sense, such as it is, of differential significances and
their changing weight as the integrals of which they are the
differences expand or contract. Caesar, "that day he overcame the
Nervii," being surprised by the enemy, contracted his exhortation
to the troop, but did not omit it. In his distribution of the
time at his disposal the differential significance of prompt
movement was higher than usual in relation to the differential
significance of stirring words from their beloved and trusted
commander addressed to the soldiers as they entered upon action.
An ardent lover may decline a business interview in order to keep
an appointment with his lady-love, but there will be a point at
which its estimated bearing upon his prospects of an early
settlement will make him break his appointment with the lady in
favour of the business interview. A man of leisure with a taste
for literature and a taste for gardening will have to apportion
time, money, and attention between them, and consciously or
unconsciously will balance against each other the differential
significances involved. All these, therefore, are making
selections and choosing between alternatives on precisely the
same principle and under precisely the same law as those which
dominate the transactions of the housewife in the market, or the
management of a great factory or ironworks, or the business of a
bill-broker.
    A full realisation of this will produce two effects. In the
first place, it will put an end to all attempts to find "laws"
proper to our conduct in economic relations. There are none.
Hitherto economists for the most part have been vaguely conscious
that the ultimate laws of economic conduct must be psychological,
and, feeling the necessity of determining some defining
boundaries of their study, have sought to make a selection of the
motives and aims that are to be recognised by it. Hence the
simplified psychology of the "economic man," now generally
abandoned -- but abandoned grudgingly, by piecemeal, under pressure,
and with constant attempt to patch up what ought to be cast away.
There is no occasion to define the economic motive, or the
psychology of the economic man, for economics study a type of
relation, not a type of motive, and the psychological law that
dominates economics dominates life. We may either ignore all
motives or admit all to our consideration, as occasion demands,
but there is no rhyme or reason in selecting certain motives that
shall and certain others that shall not be recognised by the
economist.
    In the second place, when taken off the wrong track we shall
be able to find the right one, and shall understand that the
proper field of economic study is, in the first instance, the
type of relationship into which men spontaneously enter, when
they find that they can best further their own purposes by
approaching them indirectly. There is seldom a direct line by
which a man can make his faculties and his specialised
possessions minister continuously to all his purposes, or even to
the greater part or the most importunate part of them. He must
find some one else to whose purposes he can directly devote his
powers or lend his resources in order that he may generalise his
specific capacity or possession, and then again specialise this
generalised command in the direction his tastes or needs dictate.
The industrial world is a spontaneous organisation for
transmuting what every man has into what he desires, wholly
irrespective of what his desires may be.
    And, in the third place, this truer conception of the
economic field of investigation, coupled with the sense of the
unity of fundamental law and fundamental motive that sways our
economic and our non-economic action, will throw a constantly
increasing emphasis upon the fact that our economic life is not
and cannot be isolated, but is at every point combined with the
direct expression of character and indulgence of taste, while the
human relations into which it brings us are constantly waking in
us a direct interest (whether of attraction or repulsion) in
those purposes of others which we are directly furthering as an
indirect means of furthering our own, purposes which we have
indeed adopted, hut beyond which we look whenever we reflect.
There is no reason why means should not, to an undefined extent,
be rom the beginning, or become, in course of time, ends in
themselves, while still continuing to be means; nor, alas, is
there any guarantee that they will not be, or will not become,
negative and repellent as ends, either through physical weariness
or moral repulsion. Perhaps most men's "occupations" combine both
characteristics.
    Again, the realisation of the exact nature of the economic
organisation as a machinery for combining in mutual helpfulness
persons whose ends are diverse, will drive it home to our
consciousness that one man's want is another man's opportunity,
and that it may serve a man's turn to create a want or a passion
in another in order that he may find his opportunity in it. All
along the line, from a certain type of ingenious advertiser to
the financier (if he really exists) who engineers a war in order
that he may arrange a war loan, we may study the creation of
wants and passions, destructive of general welfare, for the sake
of securing wealth to individuals. And we may realise the deeply
significant truth that to any individual the full discharge of
his industrial function -- that is to say, the complete
satisfaction or disappearance, by whatever means, of the want
which he is there to satisfy -- must be, if he contemplates it, a
nightmare; for it would mean that he would be "out of work," that
because no one wants what he can give no one wants him, and
neither will any one give him what he wants.
    Yet again, in our industrial relations the thing we are doing
is indeed an end, but it is some one else's end, not ours; and as
far as the relation is really economic, the significance to us of
what we are doing is measured not by its importance to the man
for whom it is done, but by the degree to which it furthers our
own ends. There can, therefore, be no presumption of any
coincidence between the social significance of our work and the
return we receive for it. We cannot say, "What men most care for
they will pay most for, therefore what is most highly paid is
most cared for," for (sometimes to our positive knowledge, and
generally "for all we know") it is different men who express
their eagerness for the different things we are comparing, by
offering such-and-such prices, and those who offer little money
for a thing may do so not because what they demand signifies so
little, but because what they would have to give, or to forgo,
for it signifies so much. They may offer little for a thing not
because its possession matters so little but because their
possession of anything, including this particular thing, matters
so much.
    These and other such considerations will not directly affect
our exposition of the mechanism of the market, the central
phenomenon of the industrial world, but they will profoundly
affect the spirit in which we approach, and in which we conduct,
our investigation of it. For we shall not only know but shall
always feel that the economic machine is constructed and moved by
individuals for individual ends, and that its social effect is
incidental. It is a means and its whole value consists in the
nature of the ends it subserves and its efficacy in subserving
them. The collective wealth of a community ceases to be a matter
of much direct significance to us, for if one man has a million
pounds, and a hundred others have ten pounds each, the collective
wealth is the same as if the hundred and one men had a thousand
each. What are we to expect from a survey made from a point of
view from which these two thing are indistinguishable? The market
does not tell us in any fruitful sense What are the "national",
"social," or "collective" wants, or means of satisfaction, of a
community, for it can only give us sums, and the significance of
a sum varies indefinitely according to its distribution.
    If we reflect on these things-and the study of differential
significances forces us to reflect upon them -- we shall never
for a moment, in our economic investigations, be able to escape
from the pressure of the consciousness that they derive their
whole significance from their social and vital bearings, and that
the categories under which we usually discuss them conceal rather
than reveal their meaning. We shall understand that this ultimate
significance is determined by ethical considerations; that the
sanity of men's desires matters more than the abundance of their
means of accomplishing them; that the chief dangers of poverty
and wealth alike are to be found in degeneracy of desire, and
that the final goal of education and of legislation alike must be
to thwart corrupt and degrading ends, to stimulate worthy
desires, to infect the mind with a wholesome scheme of values,
and to direct means into the channels where they are likeliest to
conduce to worthy ends.
    To sum up this branch of our examination, the differential
theory of economics will never allow us to forget that organised
"production," which is the proper economic field, is a means
only, and derives its whole significance from its relation to
"consumption" or "fruition," which is the vital field, and covers
all the ends to which production is a means; and, moreover, the
economic laws must not be sought and cannot be found on the
properly economic field. It is on the vital field, then, that the
laws of economics must be discovered and studied, and the data of
economics interpreted. To recognise this will be to humanise
economics.
    The merit of our present organisation of industry is to be
found in the extent to which it is spontaneous, and lays every
man, whatever his ends, under the necessity of seeking some other
man whom he can serve, in order to accomplish them. So far it is
social, for it compels the individual to relate himself to
others. But the more we analyse the life of society the less can
we rest upon the "economic harmonies"; and the better we
understand the true function of the "market," in its widest
sense, the more fully shall we realise that it never has been
left to itself, and the more deeply shall we feel that it never
must be. Economics must be the handmaid of sociology.

        II

    Let me now proceed to the consideration of a few points in
which I think the traditional methods of technical exposition
need reconsideration in the light of the differential theory.
    At the root of all lies a profound modification of our
conception of the nature and function of the "market" itself. The
differential theory when applied to exchangeable things tells us
that there is equilibrium only when an exchangeable commodity is
so distributed that every one who possesses it assigns the same
place to its differential value, amongst those of other
commodities of which he has a supply; and that this place is a
higher one than it occupies on the relative scale of any one who
does not possess it. What this place is -- that is to say, the
differential equivalence of the commodity in terms of other
commodities, when equilibrium is established -- is fixed
absolutely by two determinants. These are: -- (1) The tastes,
desires, and resources of the individuals constituting the
society. When objectively measured and expressed, these
individual desires for any one commodity can be represented by
curves capable of being summed; and the resultant curve,
objectively homogeneous but covering undefined differences of
vital or subjective significance, is usually called, so far as it
is understood and realised, the "curve of demand." This is one of
the determinants we are examining, and it represents a series of
hypothetically coexisting relations between given hypothetical
supplies and corresponding differential significances. It is a
curve representing a function. (2) The amount of the actual
supply existing in the community. This is not a curve at all, but
an actual quantity. It is not a series of co-existing relations,
but one single fact, and it determines which of the series of
hypothetical or potential relations represented by the curve
shall be actually realised.
    But what about the "supply curve" that usually figures as a
determinant of price, co-ordinate with the demand curve? I say it
boldly and baldly: There is no such thing. When we are speaking
of a marketable commodity, what is usually called the supply
curve is in reality the demand curve of those who possess the
commodity; for it shows the exact place which every successive
unit of the commodity holds in their relative scale of estimates.
The so-called supply curve, therefore, is simply a part of the
total demand curve which we have already described as factor (1).
The separating out of this portion of the demand curve and
reversing it in the diagram is a process which has its meaning
and its legitimate function, as we shall see in a moment, but is
wholly irrelevant to the determination of the price.
    The intercourse of the market enables all the parties
concerned to find their places with respect to each other on the
general demand curve. Each individual, whether or not he
possesses a stock of the commodity, brings his own individual
curve of demand into the market, and there relates it to all the
other individual curves of demand, thus constituting the
collective curve, which (together with the amount of the
commodity available) determines the price, i.e. the (objective)
height of the lowest demand for a unit of the commodity which the
available amount will suffice to reach.
Figure I
    The ordinary method of presenting the demand curve in two
sections tells us the extent to which the present distribution of
the commodity departs from that of equilibrium, and therefore the
extent of the transactions that will be required to reach
equilibrium. But it is the single combined curve alone that tells
us what the equilibrium price will be. The customary
representation of cross curves confounds the process by which the
price is discovered with the ultimate facts that determine it.
    Diagrams of intersecting curves (and corresponding tables) of
demand prices and supply prices are therefore profoundly
misleading. They co-ordinate as two determinants what are really
only two separated portions of one; and they conceal altogether
the existence and operation of what is really the second
determinant. For it will be found on a careful analysis that the
construction of a diagram of intersecting demand and "supply"
curves always involves, but never reveals, a definite assumption
as to the amount of the total supply possessed by the supposed
buyers and the supposed sellers taken together as a single
homogeneous body, and that if this total is changed the emerging
price changes too; whereas a change in its initial distribution
(if the collective curve is unaffected, while the component or
intersecting curves change) will have no effect on the market, or
equilibrating price itself, which will come out exactly the same.
Naturally, for neither the one curve nor the one quantity which
determine the price has been changed.
Figure II
    The accompanying diagrams may suggest to the reader a method
of testing the validity of the argument in the text.
    Ox in both figures represents the amount of the commodity,
and the curve in Fig. 1 represents the total demand curve. The
resultant price is px.
    None of these data are altered in Fig. II, but the demand
curves of the possessors (collectively) and the non-possessors
(collectively) are separated out from each other, as representing
the conditions under which the market opens. Two different
hypotheses as to this initial distribution of the stock are
represented by the dotted and the continuous lines. But in each
case, of course, the condition of preserving the data of Fig. I
intact determines that at any price OA, the line AB (Fig. I)
shall be equal to the sum Ab + ab' or AB + aB' (Fig. II). If this
condition is observed, the intersection must be at the height xp,
when AB or its equivalent sum in Fig. II equals Ox.
    The dotted lines represent a market that opens with
conditions nearer to equilibrium than those represented by the
continuous lines; and in the one case only O x' will change
hands, whereas in the other O x" will do so. But this has nothing
to do with the price.(1*)
    The curve of supply prices, then, is a mere alias of a
portion of the demand curve. But so far we have only dealt with
the market in the narrower sense. Our investigations throw
sufficient light on the distribution of the hay harvest, for
instance, or on the "catch" of a fishing fleet. But where the
production is continuous, as in mining or in ironworks, will the
same theory still suffice to guide us? Here again we encounter
the attempt to establish two co-ordinate principles,
diagammatically represented by two intersecting curves; for
though the "cost of production" theory of value is generally
repudiated, we are still too often taught to look for the forces
that determine the stream of supply along two lines, the value of
the product, regulated by the law of the market, and the cost of
production. But what is cost of production? In the market of
commodities I am ready to give as much as the article is worth to
me, and I cannot get it unless I give as much as it is worth to
others. In the same way, if I employ land or labour or tools to
produce something, I shall be ready to give as much as they are
worth to me, and I shall have to give as much as they are worth
to others - always, of course, differentially. Their worth to me
is determined by their differential effect upon my product, their
worth to others by the like effect upon their products (or direct
fruitions, if they do not apply them industrially) ' Again we
have an alias merely. Cost of production is merely the form in
which the desiredness a thing possesses for some one else
presents itself to me.(2*) When we take the collective curve of
demand for any factor of production we see again that it is
entirely composed of demands, and my adjustment of my own demands
to the conditions imposed by the demands of others is of exactly
the same nature whether I am buying cabbages or factors for the
production of steel plates. I have to adjust my desire for a
thing to the desires of others for the same thing, not to find
some principle other than that of desiredness, co-ordinate with
it as a second determinant of market price. The second
determinant, here as everywhere, is the supply. It is not until
we have perfectly gasped the truth that costs of production of
one thing are nothing whatever but an alias of efficiencies in
production of other things that we shall be finally emancipated
from the ancient fallacy we have so often thrust out at the door,
while always leaving the window open for its return.
    I now turn to some of the most obvious consequences of the
differential theory of distribution. They are all included in the
one statement that when fully gasped this theory must destroy the
very conception of separate laws of distribution such as the law
of rent, the law of interest, or the law of wages. It is by
determining the differential equivalence of all the factors of
production, however heterogeneous, that we reduce them to a
common measure and establish the theory of distribution; just as
it is by determining the differential equivalence of all our
pursuits and possessions that we attempt to place a shilling or
an hour or an effort of the mind where it will tell best, and so
distribute our money or time or mental energy well. There can no
more be a law of rent than there can be a law of the price of
shoes distinct from the general law of the market. The way in
which the several factors render their service to production
differs, but the differential service they render is in every
case identical, and it is on this identity or equivalence of
service that the possibility of co-ordinate distribution rests.
    So the economist, though he may begin by giving precision to
the student's idea of how "waiting," for example, or tools, or
mere command of "extension" in space, or manual skill, or
experience, or honesty, may affect the value of the product, must
end by showing him that their distributive share of the product
depends not upon the way in which they affect the product
(wherein they are all heterogeneous), but on the differential
amount of their effect (wherein they are all alike). The law of
distribution, then, is one, and is governed not by the
differences of nature in the factors, but by the identity of
their differential effect. With this searchlight we must
scrutinise the body of current economic teaching, and must cast
out the mischievous survivals that deform it.
    On the present occasion severe selection and limitation is,
of course, necessary, and I think we cannot do better than take
up a few of the current phrases, or conceptions and diagrammatic
illustrations connected with the phenomenon of rent. Antecedently
we must expect that as there is no theoretical difference between
the part played by land and that played by other factors of
production (or more direct ministrants to enjoyment), so there
can be no general assertion about rent and land which is at once
true and distinctive; for, if true, it must be based on that
aspect of land which expresses its function in a unit common,
say, to capital, and which brings its differential significance,
upon which all depends, under the same law; and therefore it
cannot be distinctive of land.
    Let us test the truth of these anticipations. Ricardo's
celebrated law of rent really asserts nothing except that the
superior article fetches the superior price, in proportion to its
superiority; and it is obvious that all "superiorities" in land,
whether arising from "inalienable" properties or from expenditure
of capital, tell in exactly the same way upon the rent. Again, a
diagram may easily be constructed in which different qualities of
land are represented along the axis of X and their supposed
relative fertilities to a fixed application of labour and capital
along the axis of Y. The "marginal" land will occupy the extreme
place to the right. This is not a functional curve; for the
height of y does not depend upon the length of x, the units being
expressly so placed on OX as to produce a declining y. It is
applicable to land or to anything else of which typical units can
be arranged in ascending or descending order of efficiency.
    But the same figure has been used as a functional curve in
connection with the theory of rent. Take a given fixed area of
land of a certain quality and consider what would be its yield if
it were "dosed" with a certain quantity of labour and capital
represented by a unit on the axis of X. Increase the doses till a
further increment of labour and capital would not produce as
large an increment in the yield of this land as it would if
applied to some other piece of land of the same or different
quality, or if turned to some non-agricultural business. The last
increment actually applied is the "marginal" increment, and it
measures the distributive share of a unit "dose" in the product.
The figure and the details of the argument are too familiar to
need elaboration; nor can I stay to show that such a curve ought
really to pass through the origin, for important as the point is,
it does not affect our present investigation; but it is essential
to point out that the descriptive and the functional curves just
described both present the same appearance, both represent "rent"
by a curvilinear surface, both use the term "margin," though in
entirely different senses, as determining rent, and are both just
as applicable to anything else as to land, and (specifically)
ignore the difference between "economic" and "commercial" rent,
being just as applicable to one as to the other.
    The ambiguous use of "marginal" has naturally caused some
confusion (a point to which I shall soon revert), but at present
the descriptive curve and "margin" have only been introduced to
be dismissed. In the discussion of the functional curve, which we
must now continue, I have used the term "marginal" in the sense
of "differential" as applied throughout our whole investigation.
It is not any peculiarity of the "marginal" increment that makes
it yield less than the others. It does not. They all have exactly
the same differential effect on the yield, as to which none is
after or afore the other. The height of this differential or
marginal yield is dependent not upon the nature of each several
dose, but upon their aggregate number. What we have here, then,
is not a law or theory of rent at all, but the tacit assumption
that the differential theory of distribution is true of every
factor of production except land, and that rent is what is left
after everything that is not rent is taken away. For, observe,
land-and-labour is treated as a homogeneous quantity, so that the
reduction of heterogeneous factors to a common unit is assumed,
and how is this to be done except by comparing their several
efficiencies on the product, and so combining them as to keep
those efficiencies in differential equivalence to their market
prices, i.e. their efficiencies on other land or in other
industries? And thus the principle of marginal or differential
efficiency as determining distributive shares in the product has
long been quite definitely, though naively and unconsciously,
asserted in saying that the "marginal" efficiency of this
compound factor of production will find the same level in the
specified industry and out of it, and will determine its
remuneration.
    This so-called statement of the law of rent, then, assumes
our differential laws of exchange value and distribution, with
all their implications, as ruling everywhere except in land and
rent. Rent is merely what is left when everything except rent is
taken away. This can hardly be called a "law," but, such as it
is, it is again common to all factors of production. Wages are
all that is left when everything that is not wages is taken out.
And this is actually the statement of Walker's "law of wages."
And so with the rest.
    But this is not all. In the treatment of rent that we are
examining the differential theory of distribution is avowed with
respect to every factor except land; but it is implied with
respect to land also. This can be rigidly proved mathematically,
as is now beginning to be acknowledged; and even the
non-mathematical student can easily perceive that the forms of
the figures representing the shares of "land" and
"labour-and-capital" respectively are determined not by any
peculiarity of land, but by the fact that land is supposed to
remain constant, while labour-and-capital vary. But three pounds
sterling applied to one acre is the same thing as a third of an
acre coming under one pound's worth of culture, and five pounds
per acre is a fifth of an acre per pound. Instead of taking an
acre, therefore, and considering the difference of yield, as two,
three, four, five pounds are expended upon it, let us take one
pound and consider the differences of yield, as one-fifth,
one-fourth, one-third, one-half of an acre come under it, or in
other words, as it spreads itself over these different areas. You
will then find that you have a figure in which the same identical
data are presented and the same identical results obtained, but
the return to land is represented as a rectangle cut off by a
line parallel to OX, and the return to labour-and-capital by a
curvilinear "surplus" or residuum. So that the supposed law of
rent again turns out, in so far as it is true of land, to be true
of all the other factors of production. But the unhappy confusion
between the geometric properties of an arbitrarily selected
constant factor in a diagram and the economic properties of land
has brought dire confusion into economic thought and economic
terminology. The Augean stables must be cleansed. We must
understand that when the differential distribution is effected
there is no surplus or residuum at all; and that any diagram of
distribution that represents the shares of the different factors
under different geometrical forms is sure to be misleading, and
is likely to be particularly mischievous in its misdirection of
social imagination and aspiration.
    And note, finally, that even in practical problems the
supposed peculiar conditions introduced by the rigidly determined
quantity of land in existence are non-existent. Any individual
can have as much land as he likes if he will pay the price, and
he is conscious of no difference in principle whether he is
bidding for a certain quality and site of land, or a certain
grade of labour or kind of ability, unless it be that in the
latter case he is more conscious of the limits of supply that no
offer of remuneration can stretch.
    In conclusion, I will revert to the point, incidentally
raised in connection with rent, of the difficulties and
confusions connected with terminology. I have throughout spoken
of differential) rather than marginal significances; for there is
a fatal ambiguity in the use of the word "marginal." And yet,
after all, I have felt like the man who "did flee from a lion and
a bear met him; or went into the house and leaned his hand on the
wall, and a serpent bit him," for by a singular perversity of
fate or fashion a closely similar ambiguity besets the word
"differential" itself, and yet another and equally appropriate
term "incremental." All these words have been preoccupied; and
curiously enough it is speculations on the nature of rent or
projects concerning land that have done the mischief in every
case. "increment," instead of suggesting a small homogeneous
addition to any magnitude whatever, at once suggests to the
reader of economic literature the "unearned increment of land,"
so that the "incremental value," "efficacy," or "significance" of
anything cannot conveniently carry its proper meaning of the
value attached to a small increment or decrement of anything,
varying with the expansion or contraction of the supply. This is
the conception I have indicated by the term "differential." But
here again we are forestalled. "Differential payment," for
instance, would generally be understood by readers of economic
literature to mean payment made for some articles in excess of
that made for others, in consideration of their superiority.
Thus, if I were to say that "rent is a differential charge," I
should be supposed to mean that what you pay for a certain piece
of land as rent represents the superiority of that piece of land
to another that you can get for nothing. In this use of the word
everything depends upon the different quality of the things
compared. But what we want is a word which shall always carry the
underlying assumption that we are considering the expansion and
contraction of a homogeneous supply, the "differential" value of
that supply being a function of its breadth or magnitude.
    Again, the same theory of rent which regards it as a
differential charge, in the sense of a charge due to an inherent
difference of quality in the things charged for, assumes that
there is some land which bears no rent at all. This is the land
on the "margin" of cultivation. Hence "marginal" has come to be
used in economic literature to signify the lowest grade or
quality of any commodity, or service, or the least favourable set
of conditions, that just hold their footing in any industry. Thus
the marginal land would mean the worst land under cultivation,
the marginal workman the least efficient man in actual
employment, the marginal conditions of an industry the least
advantageous conditions under which it is actually conducted,
and, I suppose, the marginal grade of potatoes or wheat the worst
quality actually in the market; or to the hungry individual the
marginal mouthful of beef would be the one just not rejected and
left on the plate because too largely composed of "veins" to be
eaten, even if no more of any kind were to be had.
    Now attempts have been made to erect a theory of distribution
upon the consideration of "margins" in this sense. The "marginal"
man, working on the "marginal" land, under the "marginal"
conditions, and with the "marginal" appliances, is taken as the
ultimate basis of the pile, and wages, rent and interest are
explained as "differential" in their nature., that is to say, as
due to the superiority in quality, position, or point of
application, of such-and-such work, land, or apparatus, over the
"marginal" specimens.
    I do not stay to examine this theory on its merits: but it is
necessary to insist on the almost incredible fact that there is
constant confusion between it and what I have tried to expound as
the "differential" theory of distribution, simply because they
can both be described as "marginal," and the term "differential,"
though in quite divergent senses, may be introduced in the
exposition of either.
    Once again, then, if I speak of the differential or marginal
significance of my supply of bread and milk, and say that it
depends, ceteris Paribus) upon how many loaves of bread and how
many pints of milk I take, I am supposing all the bread and milk
to be of the same quality. And if I speak of the differential or
marginal significance of labour in a particular industry, I am
either speaking of a uniform grade of labour or of different
grades reduced to some common measure and expressed in one and
the same unit, and I mean the significance which such a unit has
when it is one out of so many others like itself. Thus, in my use
of the word, there is no ear-marked marginal unit, which is such
in virtue of its special quality. Any one of 100 units has
exactly the same marginal value; but as soon as one unit is
withdrawn, all the remaining 99 have a higher marginal value; and
when one is added, all the 101 a lower.
    The only word I can think of free from misleading
associations would be "quotal"; for quotus means (amongst other
things) "one out of how many" and so quotal significance might
mean the significance which a unit has when associated with
such-and-such a number of others homogeneous with itself.
    Here I must close these almost random indications of some of
the directions in which I think that convinced apostles of the
differential economics should revise the methods of economic
exposition. For myself I cannot but believe that if this were
accomplished, all serious opposition to the doctrine would cease,
that there would once again be a body of accepted economic
doctrine, and that Jevons's dream would be accomplished and
economic science re-established "on a sensible basis." It is
impossible to exaggerate the importance of such a consummation.
Social reformers and legislators will never be economists, and
they will always work on economic theory of one kind or another.
They will quote and apply such dicta as they can assimilate, and
such acknowledged principles as seem to serve their turn.
    Let us suppose there were a recognised body of economic
doctrine the truth and relevancy of which perpetually revealed
itself to all who looked below the surface, which taught men what
to expect and how to analyse their experience; which insisted at
every turn on the illuminating relation between our conduct in
life and our conduct in business; which drove the analysis of our
daily administration of our individual resources deeper, and
thereby dissipated the mist that hangs about our economic
relations, and concentrated attention upon the uniting and
all-penetrating principles of our study. Economics might even
then be no more than a feeble barrier against passion, and might
afford but a feeble light to guide honest enthusiasm, but it
would exert a steady and a cumulative pressure, making for the
truth. While the experts worked on severer methods than ever,
popularisers would be found to drive homely illustrations and
analogies into the general consciousness; and the roughly
understood dicta bandied about in the name of Political Economy
would at any rate stand in some relation to truth and to
experience, instead of being, as they too often are at present, a
mere armoury of consecrated paradoxes that cannot be understood
because they are not true, that every one uses as weapons while
no one grasps them as principles.


NOTES:

1. For further details and the treatment of possible objections,
see my Common Sense of Political Economy, Book II, Chap. IV.

2. I do not deny that, as we recede from the market and  deal
with long periods and the ulitmate conditions on which nature
yields her stores, cases may arise in which something like a
"supply curve" seems legitimate. The terms on which nature yields
increasing supplies of some raw material, for instance, cannot
legitimately be regarded as the reserve prices in which she
expresses her own demand! But even here in the last analysis, and
when we consider the enormous range of the principle of
"substitution" and the pressures that determine the directions
taken by inventive genius, I believe we shall be thrown back in
all important cases upon modifications in the demands upon human
energy and expressions of human vitality and their distribution
amongst all the utilities and fruitions that appeal to them.