Supply and Demand | Page 8

I shall not discuss it here. Nothing
that I have said so far has any real bearing on it whatsoever; to suppose
that it has, is indeed to miss the whole point of this chapter.
The order, which I have sought to reveal, pervading and moving the
most diverse phenomena of the economic world, would be a far less
noteworthy and impressive thing were it merely the peculiar product of
capitalism. Merchant adventurers, companies, and trusts; Guilds,
Governments and Soviets may come and go. But under them all, and, if
need be, in spite of them all, the profound adjustments of supply and
demand will work themselves out and work themselves out again for so
long as the lot of man is darkened by the curse of Adam.

CHAPTER II
THE GENERAL LAWS OF SUPPLY AND DEMAND
§1. Preliminary Statement of Three Laws. The recognition of order in
any branch of natural phenomena is but the prelude to the formulation
of a set of laws, the simpler as the order is more universal, which
describe, and as we say, explain it. Thus the perception of the even,
elliptical courses of the heavenly bodies led to the statement of the law
of gravitation and the laws of motion.
In economics, similar laws have long since been enunciated, and have
proved themselves such valuable instruments for the understanding of
the daily problems of the workaday world, that they have been woven
into the texture of our ordinary speech and thought. I have already
touched upon them in the preceding chapter. But it is now desirable to
set them out in order, in the most concise and formal manner possible.

LAW I. When, at the price ruling, demand exceeds supply, the price
tends to rise. Conversely when supply exceeds demand the price tends
to fall.
LAW II. A rise in price tends, sooner or later, to decrease demand and
to increase supply. Conversely a fall in price tends, sooner or later, to
increase demand and to decrease supply.
LAW III. Price tends to the level at which demand is equal to supply.
These three laws are the cornerstone of economic theory. They are the
framework into which all analysis of special, detailed problems must be
fitted. Their scope is very wide. I have purposely refrained from
introducing into my statement of them any reference to commodities;
for they extend far beyond commodities. Subject to an important
qualification, they apply to capital, the price paid for the use of capital
being what we call the rate of interest. They apply hardly less to
"services," to the remuneration of labor of every kind and grade. People
sometimes protest warmly against the idea of treating labor "like a
commodity." If this indignation expresses no more than a belief that in
matters concerning conditions of work, and relations between
employees and the management, the sensibilities of human nature
should be taken into due account, it is based on elementary decency and
commonsense. But if, as sometimes appears, it is directed against the
fact that the remuneration of labor is controlled by the laws of supply
and demand, it is a mere baying at the moon, with singularly little
provocation. For these laws are in no way peculiar to commodities, and
it is no one's fault that they include commodities too within their scope.
But let us go back to the laws themselves, and probe them and dissect
them, and turn them this way and that, so that we may perceive their
full content, and grasp it firmly in our minds. The third law implies a
prevailing tendency for demand to be equal to supply. This tendency,
as was suggested in Chapter I, can be verified by anyone from his
experience and observation (provided he is a reasonable person, and not
the tiresome kind who would dispute the law of gravitation because he
sees that a feather falls to the ground more slowly than a stone). But it
can also be deduced as a corollary from the two preceding laws; and to

regard it in this way will help us to appreciate its significance. Start, for
instance, by supposing that demand is in excess of supply. Then the
price will tend to rise. After the price has risen, the supply will become
larger, while the demand will fall away. The excess of demand with
which we started will thus clearly be diminished. But if there remains
any portion of this excess, the same reactions will continue; the price
will rise further, and for the same reason; demand will be further
checked and supply further stimulated. In other words, these forces
must persist until the entire excess of demand over supply is eliminated.
If we start by supposing supply to exceed demand, the converse chain
of sequences will operate. Now