Principles of Political Economy · John Stuart Mill
Chapter I. Of Value.
There is no need that there should be any actual alteration of supply; and when there is, the alteration, if permanent, is not the cause but the consequence of the alteration in value. If, indeed, the supply _could_ not be increased, no diminution in the cost of production would lower the value; but there is by no means any necessity that it _should_. The mere possibility often suffices; the dealers are aware of what would happen, and their mutual competition makes them anticipate the result by lowering the price. Before the electric light was yet known as a feasible means of lighting (in 1878), the mere rumor of Edison’s invention, before it was made public, and long before it became practicable, caused a serious fall in the price of gas stocks. It is, therefore, strictly correct to say that the value of things which can be increased in quantity at pleasure does not depend (except accidentally, and during the time necessary for production to adjust itself) upon demand and supply; on the contrary, demand and supply depend upon it. There is a demand for a certain quantity of the commodity at its natural or cost value, and to that the supply in the long run endeavors to conform. Mr. Cairnes(213) fitly says: “The supply of a commodity always tends to adapt itself to the demand at the normal price. I may here say briefly that by the normal price of a commodity I mean that price which suffices, and no more than suffices, to yield to the producers what is considered to be the average and usual remuneration on such sacrifices as they undergo.”
When at any time it fails of so conforming, it is either from miscalculation, or from a change in some of the elements of the problem; either in the natural value, that is, in the cost of production, or in the demand, from an alteration in public taste, or in the number or wealth of the consumers. If a value different from the natural value be necessary to make the demand equal to the supply, the market value will deviate from the natural value; but only for a time, for the permanent tendency of supply is to conform itself to the demand which is found by experience to exist for the commodity when selling at its natural value. If the supply is either more or less than this, it is so accidentally, and affords either more or less than the ordinary rate of profit, which, under free and active competition, can not long continue to be the case. To recapitulate: demand and supply govern the value of all things which can not be indefinitely increased; except that even for them, when produced by industry, there is a minimum value, determined by the cost of production. But in all things which admit of indefinite multiplication, demand and supply only determine the perturbations of value during a period which can not exceed the length of time necessary for altering the supply. While thus ruling the oscillations of value, they themselves obey a superior force, which makes value gravitate toward Cost of Production, and which would settle it and keep it there, if fresh disturbing influences were not continually arising to make it again deviate.
Ideas discussed in this chapter
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