Front Page Titles (by Subject) Illustrations of the Theory of Exchange. - The Theory of Political Economy
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Illustrations of the Theory of Exchange. - William Stanley Jevons, The Theory of Political Economy 
The Theory of Political Economy (London: Macmillan, 1888) 3rd ed.
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Illustrations of the Theory of Exchange.
As stated above, the Theory of Exchange may seem to be of a somewhat abstract and perplexing character; but it is not difficult to find practical illustrations which will show how it is verified in the actual working of a great market. The ordinary laws of supply and demand, when properly stated, are the practical manifestation of the theory. Considerable discussion has taken place concerning these laws, in consequence of Mr. W. T. Thornton's writings upon the subject in the Fortnightly Review, and in his work on the Claims of Labour. Mill, although he had previously declared the Theory of Value to be complete and perfect (see p. 76), was led by Mr. Thornton's arguments to allow that modification was required.
For my own part, I think that most of Mr. Thornton's arguments are beside the question. He suggests that there are no regular laws of supply and demand, because he adduces certain cases in which no regular variation can take place. Those cases might be indefinitely multiplied, and yet the laws in question would not be touched. Of course, laws which assume a continuity of variation are inapplicable where continuous variation is impossible. Economists can never be free from difficulties unless they will distinguish between a theory and the application of a theory. Because, in retail trade, in English or Dutch auction, or other particular modes of traffic, we cannot at once observe the operation of the laws of supply and demand, it is not in the least to be supposed that those laws are false. In fact, Mr. Thornton seems to allow that, if prospective demand and supply are taken into account, they become substantially true. But, in the actual working of any market, the influence of future events should never be neglected, neither by a merchant nor an economist.
Though Mr. Thornton's objections are mostly beside the question, his remarks have served to show that the action of the laws of supply and demand was inadequately explained by previous economists. What constitutes the demand and the supply was not carefully enough investigated. As Mr. Thornton points out, there may be a number of persons willing to buy; but if their highest offer is ever so little short of the lowest price which the seller is willing to take, their influence is nil. If in an auction there are ten people willing to buy a horse at £20, but not higher, their demand instantly ceases when any one person offers £21. I am inclined not only to accept such a view, but to carry it further. Any change in the price of an article will be determined not with regard to the large numbers who might or might not buy it at other prices, but by the few who will or will not buy it according as a change is made close to the existing price.
The theory consists in carrying out this view to the point of asserting that it is only comparatively insignificant quantities of supply and demand which are at any moment operative on the ratio of exchange. This is practically verified by what takes place in any very large market—say that of the Consolidated Three Per Cent Annuities. As the whole amount of the English funds is nearly eight hundred millions sterling, the quantity bought or sold by any ordinary purchaser is inconsiderably small in comparison. Even £1000 worth of stock may be taken as an infinitesimally small increment, because it does not appreciably affect the total existing supply. Now the theory consists in asserting that the market price of the funds is affected from hour to hour not by the enormous amounts which might be bought or sold at extreme prices, but by the comparatively insignificant amounts which are being sold or bought at the existing prices. A change of price is always occasioned by the overbalancing of the inclinations of those who will or will not sell just about the point at which prices stand. When Consols are at 93½, and business is in a tranquil state, it matters not how many buyers there are at 93, or sellers at 94. They are really off the market. Those only are operative who may be made to buy or sell by a rise or fall of an eighth. The question is, whether the price shall remain at 93½, or rise to , or fall to . This is determined by the sale or purchase of comparatively very small amounts. It is the purchasers who find a little stock more profitable to them than the corresponding sum of money who make the price rise by . When the price of the funds is very steady and the market quiescent, it means that the stocks are distributed among holders in such a way that the exchange of more or less at the prevailing price is a matter of indifference.
In practice, no market ever long fulfils the theoretical conditions of equilibrium, because, from the various accidents of life and business, there are sure to be people every day compelled to sell, or having sudden inducements to buy. There is nearly always, again, the influence of prospective supply or demand, depending upon the political intelligence of the moment. Speculation complicates the action of the laws of supply and demand in a high degree, but does not in the least degree arrest their action or alter their nature. We shall never have a Science of Economics unless we learn to discern the operation of law even among the most perplexing complications and apparent interruptions.