66 interferes with the free movement of labor or of | equalization of demand and supply, we may say capital, the free exchange of money or of com- that it is governed by the conditions of the market. modities exerts an influence upon prices, pre- "Originally," says Mr. Jevons, "a market was a venting them from reaching their normal level. public place in a town where provisions and other The price of a commodity is determined by the objects were exposed for sale; but the word has relation between demand and supply. It must be been generalized, so as to mean any body of perobvious that the price of a commodity may vary sons who are in intimate business relations and widely, not only in different markets, but even in carry on extensive transactions in any commodity. the same market. In order to simplify matters, A great city may contain as many markets as there we will suppose that there is but one market, and are important branches of trade, and these marin that market the competition among buyers, kets may or may not be localized. The central and also among sellers, is so free that there can point of a market is the public exchange, mart or be but one price for the same commodity at a auction rooms, where the traders agree to meet given time. The price is determined by the and transact business. In London the stock marstruggle of interests between buyers and sell-ket, the corn market, the coal market, the sugar ers, and is subject to constant variation, but always tending to such a rate as will equalize the supply to the demand. For example, a certain quantity of a given commodity is in the market, and at a given price a number of buyers sufficient to consume all of this quantity will be found. Should the quantity offered, or the supply, be increased, without any increase in the number of buyers, there will be a certain quantity remaining unsold, and, in their eagerness to dispose of their stocks, the holders will lower their prices, bidding for custom against one another. This reduction in price is usually (some exceptions will be noted | hereafter) followed by an increase in the number of buyers, as the commodity is now placed within the reach of a larger circle of customers; so that at the reduced price the demand may be equal to the supply, and as in the former case the whole of the stock may be disposed of. Or another contingency may arise. There may be a greater demand for a given commodity than the market is able to meet. In their eagerness to satisfy their wants, the buyers will bid against one another, and prices will rise. But with every rise in price, there will be some among the buyers who will be unwilling to pay the increased price, so that prices will rise until there is only such a number of buyers as will take the quantity of the commodity offered. Again are the supply and demand equalized, and this is the general law of prices. But this supposes a market which has no existence in fact, an ideal market; and a somewhat cursory examination will show that there are an almost infinite number of circumstances acting and reacting among themselves to influence prices; that the commodities in a market do not possess an equal utility to man, some being necessary to his existence, others being consumed at pleasure, and therefore readily dispensed with; that a commodity may possess at one time a very different value from that which it has at another, and yet the conditions attending its production may have remained unchanged. For the present we will suppose that the value of money remains the same (which is by no means the case), and that any alteration in prices arises from some change in the commodity itself. Again, some variations in prices may be of a permanent and others of a temporary character. Instead of saying that price depends upon the market, and many others, are distinctly localized; in Manchester the cotton market, the cotton waste market, and others. But this distinction of locality is not necessary. The traders may be spread over a whole town, or region of country, and yet make a market, if they are, by means of fairs, meetings, published price lists, the postoffice, or otherwise, in close communication with each other." In the United States these markets are known as exchanges. (See EXCHANGES.) - These markets, standing between the producer, and the consumer, and composed almost wholly of those whose sole occupation is to trade, tend to equalize prices. The market price of many things is settled from day to day by the action of dealers rather than by that of producers. Many kinds of raw produce can only be produced at certain times of the year; and the immediate effect of a rise in the price of such things is not to increase the production of them, but simply to induce dealers to bring forward larger quantities for sale, and perhaps to import fresh supplies from distant places. If we go into any corn or wool or cotton market, we shall see dealers selling readily on one day, and holding back on another. The amount which cach of them offers for sale at any price is governed by his calculations of the present and future conditions of the markets with which he is connected. There are some offers which no dealer would accept; some which no one would refuse. There is some price which will be accepted by those whose expectations of the future conditions of the market are least sanguine; but not by others. The higher the price that is bid, the larger will be the sales." The main purpose attained by these markets is to afford, as nearly as possible, a complete understanding of the relation between demand and supply at any given time; and prices are governed accordingly. In attempting, however, to anticipate a large demand or an increased supply, these traders are liable to error, and must suffer. They also may combine to buy up all the supply of a commodity, and then force prices up far above their normal level; but these attempts have no lasting effects, and although an abuse, are not sufficient to condemn these exchanges. These traders, however, are merely middlemen, and act upon prices only; they can not increase directly the supply, nor govern the demand. They * deceased artist, may be enormous, but they are determined by what Adam Smith calls the hig gling of the market, and are as legitimate as is the price paid for a bushel of wheat. That is to say, by the competition of the buyers they have been raised to such a point that the demand is limited to the supply. Mr. Fawcett, in such cases, divides the value of the article into two elements, absolute utility and difficulty of attainment, and both of these elements must be present whenever an article has an exchange value. "For an article, however difficult to obtain, can have no value unless it is capable either of supplying some want, or gratifying some desire; on the other hand, no article can possess exchange value, if it can be obtained without difficulty, although the article may be of prime necessity. * Utility is, in fact, almost invariably only partially operative; this is the general rule, for the case may be regarded as a very rare exception when utility, as well as difficulty of attainment, both exert their full influence upon the price of an article. When such a case does occur, the purchaser of a commodity is guided in the price which he offers for it, solely and entirely by the consideration of the use he expects to derive from the article. This can only happen when the supply of a commodity is absolutely limited." (Book iii., chap. ii.) The same principle has been expressed by Marshall (“ Economics of Industry") in what he calls the "law of demand": "The price of a commodity measures its final utility to each purchaser; that is, the value in use to him of that portion of it which is only just worth his while to buy."-2. In commodities of the second class an increased demand can only be supplied at an increased cost. As representative of this group may be instanced agricultural products. In an old country where the land is limited in quantity, a new demand for wheat (as an example) can be met only by a resort to uncultivated lands, or by increasing the yield of those already under cultivation. It must be obvious, that at a given time all lands that are fitted to grow wheat and return the average profit to the cultivator, will be turned to that use. So that in resorting to new land, it must bring under cultivation land of an inferior quality, or situated remote from the markets, that will yield a less average product to the tiller. The cost of producing the wheat that is grown on these poor lands will determine the price of all wheat. That is to say, while wheat may have as many different costs of production as there are qualities of land, its price is determined by the cost of pro are like a paper machine, which takes in at one end the pulp, and turns out at the other the paper. The machine can not increase the supply of pulp, nor can it make a greater amount of paper from the pulp; it can only work upon what is given to it. So that while exchanges exert an important influence upon prices, their action is rather determined by a set of outside conditions, which might exist were there no such localized markets. -As extreme examples may be mentioned the sudden fluctuations in prices caused by a demand that could not be foreseen. The price of all black cloths may in a public mourning reach a sum far above what they usually bring, and yet it would not increase production, as the demand would be * merely of a temporary character, and not likely to happen soon again. During an eclipse bits of colored glass may be in demand and command high prices. But that is an accidental circumstance. On the other hand, by a change in fashion the demand for a certain class of goods may almost entirely cease, and prices fall to a ruinous rate. Such an event has recently happened to Irish poplin. While ordinary variations in prices may be explained by the altered relations of supply and demand, yet in the long run the price of a commodity is determined by its cost of production. Below this cost the price may fall, but it at once sets in motion a series of events which tend to raise it. As there would be an excess of supply in such a case, when the price fell the producers would take steps to curtail their production, as they could not afford to produce at a loss for any length of time, until this excess had been disposed of, and the competition of buyers had again sent the price up sufficiently high to cover the cost of production. An artificial scarcity is, as it were, made to clear the market. Nor is the result any different when there is a deficiency in the supply. The increased prices offer high profits to producers, who increase as far as possible their own output, and capitalists are tempted to invest their funds in the manufacturer by the hope of reaping the high profit, so that in time the supply is again equal to the demand, and the price has fallen to its former rate. In this discussion it has thus far been supposed that the supply is capable of vary ing indefinitely with the demand, which is not the case in fact. A new limitation must now be made. Commodities may roughly be classed, according to the manner of production, into three groups. The first will include all such as are strictly limited in quantity. In the second will be found those that are capable of being increased in number or in quantity, but at a continually inducing it under the least advantageous circumcreasing cost. The third group will include those that may be indefinitely produced at the same cost. Each of these classes or groups will require some notice. 1. Where the supply of a commodity is strictly limited, and is not capable of being increased under any circumstances, it may be said that its value and price are determined by the demand. For example, the prices obtained for rare coins and curiosities, pr the works of a stances. To secure the fertility of a given piece of land already under cultivation, additional labor and capital must be expended upon it. But after a certain period the returns obtained are not commensurate with the additional expense incurred; after a certain amount of capital has been applied to land every increase in produce is secured by a more than proportionate increase of capital. Such an investment of capital must follow, just as a resort to an inferior quality of lands precedes and enforces a rise in the price of the product. The general tendency, therefore, of the prices of agricultural produce, is in the long run to increase. This same principle applies also to mining operations, as mineral deposits are limited. Of course the opening up of vast extents of unoccupied and fertile soil, or the discovery of new and productive mines, may not only counteract this tendency of prices to rise, but may even produce a fall, by offering very much greater advantages than existed before. The application of improved processes to agriculture, both such as enable the land to yield a greater absolute produce, without an equivalent increase of labor, and such as diminish the amount of labor and expense of obtaining a given produce, may prevent a rise in the price of the produce. Mining operations are more susceptible of mechanical improvement than agricultural, and therefore the antagonizing agency against a permanent rise in the prices of mineral products is more active than in agriculture. The law of diminishing returns, that natural agents that are limited in quantity are also limited in their productive power, but that long before that power is stretched to the utmost they yield to any additional demands on progressively harder terms, holds true, as it is only suspended, not annulled, by improvements in the arts of production. (Mill.)—Agriculture has been able to profit least by the important advances made in recent times, and consequently there are not such active forces to counteract the tendency for the prices of agricultural products to increase, as there exist in purely industrial operations. The principle of a division of employments can be applied only to a limited extent in the cultivation of land, and the introduction of machinery is not followed by that wonderful increase which accompanies its use in manufactures. The land possesses a certain fertility, which becomes exhausted as successive crops are taken from it, unless it is renewed. At the beginning of the eighteenth century it was a common usage to grow successive crops of white corn until the land was utterly exhausted, when it was left to recruit itself by resting in a state of nature, while other portions were undergoing the same process. The practice of fallowing annually a portion of the arable land, and of interposing a crop of peas between cereal crops, was even then becoming common, and at a later period green crops, such as turnips, clover and rye grass, were alternated with grain crops. This rotation of crops increased the capacity of the soil, and the improvements in the breeding of live stock, the preparation of artificial manures, and the application of better methods to the cultivation of the land, were reflected in the increased productiveness of the soil. These steps have required a great outlay of capital, and if the laws prohibiting or restricting the importation of agricultural produce had not been repealed, England could not have obtained sufficient food for her population from her own soil, and what wheat she did grow | would have sold at famine prices. In spite of these many advances in practical agriculture, the average yield per acre in England has steadily diminished. While it was 29.3 bushels during the decade 1849-58, in the following ten years it was 29.1 bushels, between 1869-78 only 25.6 bushels, and in 1879 it had fallen to but 16 bushels. Mr. Laird then wrote that, "In the United Kingdom we appear to have approached a point in agricultural production beyond which capital can be otherwise more profitably laid out than in further attempting to force our poorer classes of soils." It had become cheaper to take the surplus production of Russia, India and the United States, and the tendency of the price of wheat to rise was thus checked. It is said that rent does not enter into the expenses of production, because the price of a commodity is regulated by the expenses of producing that portion which is raised under the most unfavorable existing circumstances. For example, the price of wheat is governed by the cost of growing a bushel upon the poorest quality of land cultivated, so poor that it can not and does not pay rent. So that if rent, which is but the surplus produced by the better lands over this margin of cultivation, as fixed by the poorest lands, were abolished, the price of grain would remain unchanged. This was Ricardo's theory, and, if properly understood, is true. That is to say, rent does not make price, but price, rent. If a demand for grain arises, and the increased price will enable lands hitherto not capable of growing wheat and returning the expenses of production to be cultivated, the rent of all other more productive lands will rise. The increased price of grain has extended the margin of cultivation, and rents have been increased. The same principle applies also to manufactures. But in estimating the cost of producing or manufacturing, or even selling, any product, rent must be included as a factor. When water power was chiefly used in manufactures, the sites where water power was to be obtained, were sought and commanded high rents. The most available business sites in a city are soon occupied, and may command almost fabulous prices. The farmer who pays rent for a certain piece of soil can not compete successfully with another who owns, or hires at a lower rent, land of a like degree of fertility; and for this reason, the wheat growers of England, who have to pay high rents for their land, can not contend against wheat grown in America by farmers who obtain rich lands for a mere trifle. - But as land is limited in quantity, while population and the demand for land are continually increasing, the price of land and also the rent of land rise. An examination into the price of land in France showed that the average price per hectare had been quadrupled since 1789, tripled since 1815, and doubled since the first years of the rule of Louis Philippe. As regards rents, little that is definite can be said. In France it is estimated that in rural districts the rents of agricultural lands are about 3 per cent. of their value, follows from the increased productiveness that may be caused by conducting manufacturing operations on a large scale, as it allows a more complete division of employments, thereby caus being governed almost entirely by the returns the land will make to the tenants. In large towns and cities they may be as high as 20 per cent. of the value of the land, as the most available business sites may command that rent, and yet allowing a greater degree of skill in the labor, a savthe full rate of profit to the tenant. Some agri ing in the material, and an economy in many cultural lands, such as are fitted to produce cer- of the processes and methods. As the extent to tain vines giving a peculiar wine, may also com- which this saving process may be carried depends mand what appear to be exorbitant rents. It may upon the extent of the market, and as the market even happen that the price of land and of rents is, in the case of commodities that are necessary diminish, as, for example, in small villages which or even of voluntary consumption, enlarged by are drained of their population by a neighboring a reduction in the price, which brings them withlarge city. Such cases are, however, not so fre- in the reach of a wider circle of buyers, there quent as to affect the general tendency of prices is practically no limit to which the price may with respect to land. Of commodities in the not attain. Through improvements in machinery third group, that is, such as may be increased to and processes of manufacture the price of the an almost unlimited extent without an increase in product may fall as the enlarging of the market their cost, manufactures may be said to form a offers new opportunities for applying such imlarge part. As most manufactures, however, con- provements. Should, however, a marked rise in sume articles that are the produce of the soil, it wages occur, the cost of production is increased might be supposed that they would follow the and the price of the manufacture generally follaws governing the value of those articles. This lows, but this is neither a usual nor a lasting is in a measure true, but only to a limited extent. result. — General prices have their periods of ebb The value of an agricultural or mineral product and flow, rising at one time and falling at another, lies almost wholly in the value of the raw material, according to the general conditions of trade and the labor expended being merely one of appro- industry. These general movements have a cerpriation. Any increase in the difficulty of obtain- | tain periodicity, rising until checked by a financial ing the raw material is added, to its full extent, or commercial crisis, and then falling until again to its cost. It is not so with a manufacture. Here | raised by a new demand. Thus, the years 1837, there are three elements, or factors, which enter into the price of the finished product: 1, the cost of the raw material; 2, the plant necessary to carry on the process of manufacture; and 3, the labor employed. Of these three factors the cost of the raw material plays the least important part, and a fluctuation in its price must be a great one to be felt in the product. For example, a rise of 20 per cent. in the price of flax would not cause the price of linen cloth to rise as much as 5 per cent. An increased demand for a manufacture, as a rule, affects only the price of the raw material. There may be, and generally is, an increase in the price of the finished product when the demand is greater than the supply. But this increase is only temporary, and is corrected by the increased production which follows the extension of works by the introduction of new capital. There need not necessarily, therefore, result any permanent increase in the cost of production, and consequently in price, save as respects that which follows the rise in price of the raw material used in the manufacture, and this is generally so small as to be inappreciable. In this group of commodities the price more nearly approximates to the actual cost of production than in the first and second groups, as the competition among manufacturers is more active. It may even happen that in the face of a greatly increased demand the prices of manufactured products may fall. In our former position we assumed that no increase in the cost of the necessary plant or of the labor employed was occasioned by such an alteration in the demand. The cost of production may be lessened. This 1847, 1857, 1866 and 1873 were marked by extremely high prices, but they were succeeded by years of falling prices. "When trade is good, a state of things is created in which a downward movement of prices is sooner or later inevitable. A great stimulus has been given to production in certain favorite industries; capital has been employed in creating new establishments, or in extending fixed works and plant; laborers have flocked into the trade, attracted by high wages; at a point the demand is found to be below the supply, the prices of the manufactured article become unremunerative, and in time the raw material and labor employed in the trade are at a discount. The fall is precipitated, moreover, by the inability of speculative holders of stocks to hold on in the face of falling markets. At each new stage of the decline new sales become necestary, till there is apparently no limit to the fall, just as before there seemed to be no limit to the rise. By sympathy almost all markets come to be affected, the low prices in one market attracting capital to it, and so weakening other markets, while speculators who are hit in one department of trade seek to cover their losses by sales of some commodity or stock which has not depreciated." (Giffen.) This course of events may be illustrated by an example. The year 1873 marked the culmination of an era of great speculation and inflated prices. During the following six years, or until 1879, the depression of trade and industry became more and more aggravated, and was accompanied by a gradual fall in prices. This will be shown by the following table: It will be noted that the fall in the price of food ties that are necessary to support life, or to those which may be dispensed with. For example, food is essential to existence, and any deficiency will produce an alteration in price out of all proportion to the amount of the deficiency. Men must have food, and a certain quantity of it; it has been noted that the consumption of food of men in easy circumstances does not differ widely in times of abundance and of dearth. If the price of food rises, they curtail their expenditures in other directions, so that a scarcity of food is very apt to be accompanied by a general prostration of industry, and the only trade that thrives is that which deals in food products. The fluctuations that occur in the price of food have a very wide range, and are great even when there is no famine or real dearth. At the conclusion of the seventeenth century, Gregory King estimated that a deficiency in the harvest would raise the price of corn in the following proportions: A deficit of one-tenth would raise the price above the common rate threetenths; a deficit of two-tenths would raise it eight-tenths; of three-tenths, one and six-tenths; of four-tenths, two and eight-tenths; and of fivetenths, four and five-tenths. (Quoted in Davenant's Works, vol. ii., p. 224.) In a famine there is no limit to prices of food save the ability of the consumers to buy. Whatever affects the supply of grain (taking this as a representative article of general and necessary consumption) will be reflected in prices, and prices will vary in a ratio very different from the variation in quantity. Mr. Tooke observes that the price of corn in England has repeatedly risen from 100 to 200 per cent. and upward, when the utmost computed deficiency of the crops has not been more than between one-sixth and one-third of an average. The cause of this is not difficult to determine. At the time he wrote, there were laws which prohibited, except under certain conditions, the importation of corn into England, and the home crop was chiefly depended upon. Agriculture is, however, most uncertain, and until the harvest is actually secured, it is as likely to be deficient or to fail utterly through meteorological influences which it is beyond the power of man to control. A deficiency, whether it really exists or is only apprehended, becomes under such circumstances a serious matter, and, being exaggerated, forces the price beyond what is justified by the facts. "The more the mere forces of nature preponderate in production, the less can the supply be increased or decreased at pleasure; the more frequently, as a consequence, do we find monopoly prices. Thus, the production of wheat is invariably connected with the order of the seasons. Between seed-time and harvest, there are a number of months which neither capital nor skill can shorten to any extent. The cultivation of land, to be very much greater and more lasting, supposes so many conditions precedent, increase of live stock, buildings, etc., that it can be attained only after a series of years. Hence it happens that wheat, much more than manufactured prod |