Each factor of supply, demand, or price is a composite of these four types of fluctuations. The types of fluctuations appear in all items, but not in uniform degrees. The four types of change are common characteristics of all articles of supply, of all classes of demand, of all price indexes, but the extent to which the types manifest themselves varies widely from one commodity to another. 1913 1914 1915 1916 1917 1918 1919 1920 1921 1922 1923 1924 By utilizing these main types of change, it is possible to advance our understanding of values much beyond the point where we vaguely refer to long-run and short-run movements. These types of change afford opportunity for statistical measurement along definitely standardized lines.R Normal Equilibrium and Abnormal Disturbance. The traditional cconomics stressed normal equilibrium, the static state, and the point at which competition tended to bring all things into a condition of balance and rest. The constant turmoil and disturbance were viewed as abnormal. Gradually all the waves of commotion would tend to subside and the surface of the economic sea would be in perfect calm. The more recent emphasis is upon the disturbing factors themselves. 6 These four types have previously been illustrated in chapters dealing with production and consumption. See pp. 49-51, 87-88. They are further illustrated in later chapters dealing with business cycles. In other words, in the money economy disequilibrium is constantly with us. The most normal condition surrounding us is repeated change, not static rest. Consequently, we may advantageously study the fluctuations, variations, and movements of all factors in the market. Our center of attention is dynamic change, not perfect equilibrium. We must know something of the nature of the changes always encircling us, how to interpret them, how to predict them, perhaps how to control them, at least how to adjust our business activities to them as effectively as possible. Working with such a subject matter, we do not seek to lay down deductive principles which can be taken as arbitrary laws of value. On the contrary, we seek to discover the ways in which changes take place. We use lags, correlations, trends, probabilities, and frequencies as our instruments for analyzing change. In place of absolute statements or abstract concepts of value, we deal with concrete studies of the variations of actual data. We use averages, variations, tendencies. Changing Price and Volume of Sales.-The popular understanding of the principles of supply and demand is to the effect that a high price will cause a decline in sales, but that a low price will bring forth an increase of sales. Much of the abstract reasoning of economics has implied the same cause and effect relationship. The higher the price, the less the sales; the lower the price, the more the sales. Such is the general statement of price theory, and where other things remain equal, the statement is substantially true. But in the actual world of affairs, the fact that other things do not remain equal limits the significance of the laws of price as stated. The things which do not remain equal are the things of most crucial importance to business. Other things not remaining equal, we may inquire what effect higher or lower prices will have upon sales and demand. Sales may increase in spite phase of the business cycle, contrary, rising prices are While boom and optimism prices. The same reaction Clothing prices are highest The answer brings us back to the conception of typical time movements. If a product appeals strongly to the public taste, and an intense want for the product appears, then the normal rate of growth may be steadily upward even though prices are raised. That is, if the secular trend of public want for a good is more and more intense, then rising prices may not cause a falling off in sales. of rising price. Likewise, in the prosperity rising prices do not diminish sales. On the accompanied by a marked increase in sales. prevail, people buy regardless of increased appears in the case of seasonal movements. at the peak of the season, but sales are also highest simultaneously. Left overs are disposed of at cut prices during the off-peak months. Seasonal sales are greatest when prices are highest. Residual forces may cause a similar situation. For instance, prices rose very rapidly during the war, but sales nevertheless increased by leaps and bounds. It is obvious, therefore, that demand variations of a secular, cyclical, seasonal, or residual nature, may reverse the ordinary understanding of the effect of high prices, and may result in larger sales in spite of high prices. The same observation may be passed with regard to the effect of low prices on sales. When a product is not in public favor, low prices will not stimulate sales. For instance, when the automobile displaced bicycles and horses, low prices for the latter could not stimulate sales. A falling secular trend of demand more than offsets a cut in price. During the depression stage of the business cycle, low prices do not bring forth sales. Everybody waits for prices to fall still lower. Seasonal and residual factors may likewise nullify the tendency of low prices to stimulate sales. A recent business phenomenon supplies another illustration of the inadequacy of prices to govern sales in any arbitrary way. The phenomenon of installment credits permeates a large part of modern selling. The effect of such credits is twofold, to raise prices and to increase sales. Installment prices are from 10 to 25 per cent above cash prices, but the installment prices move the goods when the cash prices cannot. Many of the devices of advertising and salesmanship are calculated to bring about the same result. That is, they aim to create a market for the goods at high prices. Many examples are on record of goods which could not find a market at low prices, because cheapness was associated with inferiority. But when the same goods were wrapped in decorated packages, given an aristocratic trade name, and offered to customers of exclusive tastes, they found an ample market. All such occurrences force us to modify our theories of price and demand to fit the facts of modern business. A Reverse Statement of Supply and Demand. To emphasize the significance of the money economy, it is useful to reverse the ordinary statement of the law of supply and demand. Ordinarily, supply refers to goods in the producers' hands and demand refers to the effective desire for goods on the part of consumers. The concepts refer to goods. But to understand the money economy, we may reverse the concepts and make them refer to money. Demand becomes then the desire of producers to secure the dollars which are in the hands of consumers. Demand may be viewed as a business demand for consumer dollars. Supply becomes the quantity of money in the hands of buyers. Supply may be viewed as a pecuniary quantity of dollars in the hands of purchasers. This version of supply and demand conforms with the actual outlook' of modern business. The business man sits in his office contemplating one major problem, namely, how to collect dollars from potential buyers. In the outside world he visualizes a scattered mass of dollars. Pay envelopes, salary checks, net incomes, rise up before his imagination. This vast supply of dollars he must somehow cause to flow into his business. He demands his share of this pecuniary supply of purchasing. power. He can make his demand effective by many devices. One device is to tempt the individual to part with his money by offering him goods at certain prices. The goods are the business man's way of making effective demand for the real objects of desire,-dollars. Dollars are supply, goods are demand. The setting of prices by business men is governed chiefly by their desire to part the possible buyer from his money. When price is high, it is because business expects to be able to get the buyer's dollar by offering few goods. When price is low, it is because business believes it impossible to get the buyer's dollar without offering many goods. All effort concentrates on getting the buyer's dollar. Prices are high or low according as it is necessary to give few or many goods in order to get the buyer's dollar. The supply of buyers' dollars on the one hand and methods of getting those dollars into the possession of business on the other hand, explain the prices set in the markets. This way of viewing supply and demand squares with the way in which initiative is assumed in business. The consumer is a more or less passive and quiescent object. His indifference and lethargy are prime characteristics. But not so with business. Business is on the alert to go after the money of the consumer. If the passive indifference of the consumer acts as a resistance to sales appeal, then it is the function of the "go-getter" to go get the consumer's money by intensive sales effort. The salesman is the epitome of business demand, for his demand is a demand for the buyer's money. The initiative rests with business. The aggressive is taken by business. The victory is won by business. We have previously described consumption as the satisfaction of wants. We then took the viewpoint of the consumer wanting goods, such as food or clothing. But we may now reverse the viewpoint, and consider the business man wanting the dollars of the buyer. The satisfaction of pecuniary wants is the transfer of money from consumers to business men. The thing wanted is the buyer's dollar. Business wants are wants for money. Nothing else satisfies. The supply of and demand for buyers' dollars shapes the whole strategy of pricing. Business men make their campaigns with as much meticulous care as would a general planning a crucial battle. The tactics of the pecuniary campaign are aimed at one primary purpose, to make money by profitable contracts of purchase and sale. The outcome cannot be successful unless they devise effective methods for acquiring the money of buyers. Acquisition of dollars is indispensable, and guides and directs the price making activities of business. The Money Economy.-The foregoing considerations are sufficient to illustrate the importance of supplementing and amending traditional laws of value for the purpose of obtaining a more complete guide to the behavior of value in the business world. The money economy accentuates many factors which were but mildly active in the economic life of former generations. To cope with the events of the money economy, it is necessary to supplement traditional value theory with pecuniary theory related to the exigencies of the money economy. BIBLIOGRAPHY BERRIDGE, W. A., Cycles of Unemployment in the United States. CASSEL, GUSTAV, A Theory of Social Economy. COOLEY, C. H., Social Process, Chapters XXVI-XXVIII. FEDERAL RESERVE BOARD, Monthly Bulletin. FETTER, F. A., "Price Economics versus Welfare Economics," American Economic Review, Volume X, pp. 467-87, 719-37. MITCHELL, W. C., Business Cycles. "Rôle of Money in Economic Theory," American Economic Review, Supplement, Volume VI, pp. 140-61. - in The Trend of Economics, edited by R. G. Tugwell. MOULTON, H. G., The Financial Organization of Society, Chapters I-V, XXIXXXX. PERSONS, WARREN M., The Indices of General Business Conditions. SMITH, ADAM, Wealth of Nations, Book II, Chapter II. TUGWELL, R. G., AND OTHERS, The Trend of Economics. UNITED STATES BUREAU OF LABOR STATISTICS, Monthly Labor Review. UNITED STATES DEPARTMENT OF COMMERCE, Survey of Current Business (monthly). VEBLEN, THORSTEIN, "Pecuniary versus Industrial Employments," in The Place of Science in Modern Civilization. The Vested Interests. |