There is one sense, in which this proposition of Mr. Thornton would be assented to by all economists; they none of them consider supply and demand to be the ultimate regulators of value. (3)(3. "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 ...... Demand and supply govern the value of all things which cannot 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 cannot 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 towards 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." J. S. Mill, Print. of Pol. Econ ., book iii. ch. iii. §2.) That character, they hold, belongs to cost of production; always supposing the commodity to be a product of labour, and natural or artificial monopoly to be out of the question. Subject to these conditions, all commodities, in the long run and on the average, tend to exchange for one another (and, though this point is a little more intricate, tend also to exchange for money) in the ratio of what it costs, in labour and abstinence, to produce the articles and to bring them to the place of sale. But though the average price of everything, the price to which the producer looks forward for his remuneration, must approximately conform to the cost of production, it is not so with the price at any given moment. That is always held to depend on the demand and supply at the moment. And the influence even of cost of production depends on supply; for the only thing which compels price, on the average, to conform to cost of production, is that if the price is either above or below that standard, it is brought back to it either by an increase or by a diminution of the supply; though, after this has been effected, the supply adjusts itself to the demand which exists for the commodity at the remunerating price. These are the limits within which political economists consider supply and demand as the arbiters of price. But even within these limits Mr. Thornton denies the doctrine.
Like all fair controversialists, Mr. Thornton directs his attack against the strongest form of the opinion he assails. He does not much concern himself with the infantine form of the theory, in which demand is defined as a desire for the commodity, or as the desire combined with the power of purchase; or in which price is supposed to depend on the ratio between demand and supply. It is to be hoped that few are now dwelling in this limbus infantum . Demand, to be capable of comparison with supply, must be taken to mean, not a wish, nor a power, but a quantity. Neither is it at any time a fixed quantity, but varies with the price. Nor does the price depend on any ratio. The demand and supply theory, when rightly understood--indeed when capable of being understood at all--signifies, that the ratio which exists between demand and supply, when the price has adjusted itself, is always one of equality. If at the market price the demand exceeds the supply, the competition of buyers will drive up the price to the point at which there will only be purchasers for as much as is offered for sale. If, on the contrary, the supply, being in excess of the demand, cannot be all disposed of at the existing price, either a part will be withdrawn to wait for a better market, or a sale will be forced by offering it at such a reduction of price as win bring forward new buyers, or tempt the old ones to increase their purchases. The law, therefore, of values, as affected by demand and supply, is that they adjust themselves so as always to bring about an equation between demand and supply, by the increase of the one or the diminution of the other; the movement of price being only arrested when the quantity asked for at the current price, and the quantity offered at the current price, are equal. This point of exact equilibrium may be as momentary, but is nevertheless as real, as the level of the sea.
It is this doctrine which Mr. Thornton contests: and his mode of cornbating it is by adducing case after case in which he thinks he can show that the proposition is false; most of the cases being, on the face of them, altogether exceptional; but among them they cover, in his opinion, nearly the whole field of possible cases.
The first case, which is presented as the type of a class, rather than for its intrinsic importance, is that of what is called a Dutch auction.
