Equilibrium of Production and Consumption
Articles of naturally individual consumption can be produced directly—by the same persons who need them, or indirectly—as when an individual produces one article in order to exchange it for another of which he is in need. The law of the Economy of Power is daily tending to make the latter process more and more general. One or more industries specialise in the production of every article of consumption, and as each field of industry is shared by several rivals their products or services compete in the markets. The consumer, needing these products, purchases them with products or services of undertakings in which his own capital or labour co-operates; or he obtains them with a sum of money, an equivalent which is exchangeable for almost every product or service.
Every advance that substitutes indirect for direct production diminishes the sum of the effort and time necessary to produce a given product, and therefore enables mankind to satisfy a greater number of needs in a more complete manner. No sooner has man satisfied the primary needs, common to all animal creation than he begins to minister to those desires which distinguish him from the lower animals. But, although the final basis of civilisation, indirect production sets up a twofold problem upon the solution of which depends the well-being, even the existence, of mankind. Production must balance consumption, and the product must be shared among all those who take part in its production—the producers.
Although direct production also encounters the first part of this problem, it solves it with little difficulty. Man produces because production satisfies many needs—the need of clothing, of food and lodgment, of his moral and intellectual aspirations. These needs compete for satisfaction, and—as in every other kind of competition—the strongest conquer, those which procure the highest degree of pleasure, or obviate the greater pain. Not until these are satisfied does the individual devote his remaining powers and time to the fulfilment of others, chosen in the order of their intensity, the degree and vigour of their several demands. The intelligent and provident, however, refuse to follow blind desire; they calculate, and yield to each such satisfaction as seems fit, regulate consumption, and adapt production to its demands. Such calculations may go astray. Too great obedience to the promptings of the moment, and lack of forethought, may expose a man to future sufferings no less acute than his present joys. It is also easy to miscalculate the amounts of production, or the quantity of products obtainable in exchange for a given expenditure of effort and time. A return which exceeds, or is less than, that expected causes an equivalent error in the relation of the product to the need which it is intended to fill. Overproduction reduces the capacity for satisfaction in proportion to the decreasing intensity of the desire and its final extinction; underproduction increases the intensity of desire in proportion to the insufficiency of the product to satisfy it. This diminution, or increase, in the power of satisfaction, or—stated economically—in the utility of the product, is not simply proportionate to the relation between supply and demand. Its effects are progressive, increased supply reducing demand, and conversely. In the one case it determines a restriction of supply, in the other of demand, until an equilibrium is restored between the supply of the product and the demand of the need.
Under the system of direct production each individual knows his own needs, and the quantities which he estimates sufficient for their satisfaction. He, therefore, experiences no difficulty in regulating his production, but such regulation appears impossible when we first examine the system of indirect production. It does, however, operate with marvellous precision, owing to the regulative power of competition when free to act without hindrance from natural or artificial obstructions. No individual, under this system, undertakes the complete satisfaction of all his needs, but devotes himself—alone or conjointly with others—to the production of some article that supplies a particular need. Those who need this article compete for its possession, offering another product in exchange, or else an equivalent amount of that which is exchangeable for most other products—money.
Every producer, therefore, carries his wares to market where he meets those who desire them, and are prepared to give something in exchange—in the usual case, money. Their desire to purchase constitutes the demand for his wares, and, since his object is to obtain the greatest possible sum of money in return for a given quantity of goods, the seller's object is to restrict supply below the level of demand, never quite to satisfy demand. But since the exchange value of products varies according to the relative proportions of supply and demand, the seller now obtains a sum of money which is more than the actual equivalent of his costs of production—a profit, that is to say, on a constantly ascending scale.
But competition steps in at this moment, and reduces profits to the exact point necessary to determine production of the article in question. An industry no sooner begins to yield higher returns than the cost of production plus a profit—and such a profit is generally held to be included in the costs of production—a surplus dividend, as we may say, than competition causes an irresistible influx of capital and labour, production is forced up, and the exchange value of the product, as expressed in terms of price, falls forthwith. It does not fall solely because of the increased quantities on offer, but also on account of the lower power, now possessed by the product, of satisfying the needs which determined its creation. Price cannot, however, fall below the cost of production, unless in a temporary and accidental manner, for, as soon as the product ceases to command this necessary minimum, the productive forces engaged in an industry seek other and more remunerative fields. Here, failing complete reestablishment, they perish, production is curtailed, and prices begin to rise. When, on the contrary, price rises above the costs of production, competition immediately induces the reverse movement. This action of competition constitutes an economic law of gravity, which is continually bringing price back to the central point of the cost of production, and the further price wanders in either direction the more active is this law.
The first result of this action of the competitive principle is that consumers reap the benefit of every improvement in production. Nor is this more than justice, since progress does not result from the efforts of the moment as applied to any one industry, but is developed from generation to generation and throughout the entire field of industry. Next, when indirect production succeeds direct production, competition continues to assert its power as a regulator. The individual producer, working for himself, regulates production according to the measure of his needs; and—if he governs these in place of submitting to their dictation—in proportion to the demand that he considers useful. If he finds that his production exceeds, or is less than, his need, he corrects the discrepancy for the purpose of equalising the sum of his enjoyment, or of the suffering avoided, with the sum of the efforts, or pain, entailed by the act of production. Competition maintains the like useful order in the realm of indirect production, approximating supply and demand to a point of equilibrium which follows the aggregate efforts and suffering entailed by the act of production.
But competition cannot fulfil this duty if hampered by obstacles, natural or artificial, nor yet in an unenlightened society. The economic history of any civilised people clearly shows that the action of competition develops according to the measure of the emancipation of labour, and the removal of such limitations as curtail an open market. At a time when the worker was the property of an association of strong men, interested, as owners, in assuring him that security which he was unable to obtain for himself, his products belonged to the lord or master of his person. But, when the master or lord discovered that it was advantageous to free himself from the obligation of supporting his slaves or serfs by giving them the right to work for themselves and to exchange their several products, always reserving a claim upon some portion of their produce, this concession resulted in the erection of monopolies. Men who were granted the right to produce a certain article and to exchange it, proceeded to claim the absolute control of their specific industry. Corporations were formed within each lordship, primarily to secure the producer against exactions by lords claiming increased royalties on the fruits of their production, or bartering new concessions against a payment of money; secondarily to defend their monopoly of the markets within a lordship from external competition; and, finally, to regulate production, and so fix the prices of their products as to secure the highest possible rates of profit. Then custom or law intervened to protect the consumer, and a limit was laid down above which it was not lawful to raise prices, a maximum price. We have already shown how custom and law were able to effect this result in those trades and industries the nature of which made it possible to regulate production, but was elsewhere ineffectual.
Industry and, in a certain degree, commerce, have now obtained liberty. Most industries and professions are open to all possessors of the necessary aptitudes and resources, without any limitation on the number of those who engage in them. With the exception of restrictions and prohibitions designed to handicap the foreign producer, markets are equally free to all comers. Market prices are regulated by free competition, or—as we should rather say—by competition freed from the trammels once imposed by restriction on the number of competitors, the rules of monopolist corporations, or laws and customs ordaining a maximum price.
This sketch depicts the present position, but many causes conspire to curtail the full power of competition, and to limit that regulative action which is its peculiar sphere. For despite the extended markets opened to most products by better security and improved communications, the barriers of the custom-house still divide the vast world-market. Competition, acting on a field thus parcelled and divided, loses part of its power as a stimulant to progress, while its exactitude and efficiency as an agent regulating production are even more impaired. Thanks to protective tariffs, syndicates, continuing the ancient system of corporations, limit production at will and maintain prices on a higher scale than would be possible under a system of free competition. Nor are these tariffs stable, but their continual and irregular changes create perpetual disturbance. A sudden rise in rates curtails supply by eliminating foreign offers; prices follow, and the protected home-producer reaps inflated returns, until inevitable transfers of labour and capital reinforce (the home) supply, generally in an excessive degree. At other times tariff reductions flood the markets with imported goods, prices fall suddenly, and the lower price forthwith causes a restriction in supply. Competition is continually bringing price back to, or near, the level of the cost of production, but its regulative action is, in this way, as continually hampered.
Nor are these the only obstacles to its success. Man has not succeeded in regulating the productiveness of all industries. Agriculture is affected by every variation in the weather and all sorts of epidemic blights, but perfection of that branch of commerce which is called speculation might doubtless palliate this variability of the harvests. If the surplus of one season were withheld from the markets, there would neither be an immediate glut and consequent collapse of prices, nor would the failure of future seasons entail enhanced prices and insufficient supply. But, with imperfect means of storage and preservation, the insufficiency of, and too high rates on, capital—subject as this is to the continual drain of unproductive governmental expenditure—with the great existing antipathy to speculation, the regulative action of competition upon agricultural products is hindered by time, as it is harassed by the custom-house in the case of other industries.
Finally, and over and above these natural and artificial obstacles, we must remember our insufficient knowledge of the world's markets. When markets were limited to the territory of a lordship, a county, or a province, demand was practically stable, easily estimated, and production as readily adjustable. But such knowledge has become increasingly difficult with every enlargement of areas. The need for it no doubt creates and multiplies channels of information; harvest figures and estimates, statements of the visible stocks of corn, cotton, wool, sugar, &c., are flashed from one corner of the world to every other. But even if this system embraced every known article of production, and was perfected to the last conceivable degree, the controllers of production would still be insufficiently instructed as to every local shortage or surplus. That information can only be obtained by absolute knowledge of the average profit in every branch of production, and such information is unobtainable until impersonal organisations monopolise the entire production of the world. The very nature of such institutions would compel them to issue regular statements of the results in every branch of their undertakings.
We have now outlined a whole series of imperfections in the existing systems of production and distribution. Each of these imperfections has its remedy, but until all those remedies have become accomplished fact, the action of competition as a regulative principle must remain uncertain. We shall see that this uncertainty entails disturbances hurtful, as a general rule, to the majority of society, and affecting the production, the distribution, even the consumption, of wealth. But, under a system of untrammelled liberty, these causes of disturbance will gradually cease hindering industry and commerce, production and consumption will achieve a final equilibrium, and the point of that equilibrium will be the average cost of production plus the cost of bringing the product to those who desire to consume it.