|
A Thought Experiment
Suppose, as did John Stuart Mill in Essays on Some Unsettled Questions of Political Economy, first published in 1844, that a number of foreigners who derive large annual incomes from assets in their country of origin arrive in a new country. Assume for the sake of simplicity that the foreigners liquidate none of their assets, that they spend all of their incomes in Queensland and that residents of Queensland own all of the wealth within the state. Will the foreigners’ expenditure of their income augment the wealth of the state’s residents?
Part II and Part III set out premises, and Part IV sets out our conclusion: if the foreigners save some portion of their income and invest these savings productively in Queensland, then they will indeed generate wealth that benefits themselves and local residents; and the greater the rate of saving and the more prolific the investment, the greater the fructification of wealth. But if the foreigners spend all their income “unproductively,” i.e., on final rather than intermediate consumption, then no wealth is created and their presence will impart no general benefit upon the state’s residents. More generally and all else equal, in other words, an increase of consumption per se does nothing to make a society richer.
If a foreigner’s income were remitted to him in the form of bread and beef, shirts and shoes, housing and transport and all the other articles he sought to consume, and assuming that at any given moment the supply of commodities is fixed and that the foreigner were unable to influence the prices of the commodities that he wishes to consume, then few would contend that his eating, drinking, wearing and living on our shores rather than his own confers any particular advantage to any particular resident. The point is no different if his income is remitted in the form of money. Whatever the foreigner’s form of income, the satisfaction of his desire for Quantity X of bread, beef and other commodities implies either that other residents must reduce their consumption of bread and beef by Quantity X or that X must be withdrawn from an inventory of unconsumed bread and beef.
But surely, it might be contended, the foreigner’s consumption employs capital (in this case, inventories of bread and beef) that would otherwise remain unemployed and thus yield no profit to their owners? Surely, then, the added increment of consumption caused by the foreigners benefits the owners of hitherto unused capital? Note, however, that the capital that any person has chosen to produce and accumulate always tends to find present or future employment. The very fact that producers of bread and beef chose to accumulate and inventory some portion of their production, for example, implies the existence of some anticipated unsatisfied (perhaps future) desire to consume bread and beef; and the value imputed to the inventory will reflect the extent of this presently unsatisfied but to-be-satisfied-in-the-future desire (see H.B. Acton, The Morals of Markets and Related Essays, ed. D. Gordon and J. Shearmur, The Liberty Fund, Inc., 1993, ISBN: 0865971072).
We can make the same point in another way: it avails an individual producer nothing to enter his own shop and buy his own goods. To do so does not employ otherwise unemployed capital: at any given point in time there tends to exist no more capital than can find ready and remunerative employment. Further, if one person does not buy his goods then another is likely to do so (and if nobody does then this signals overproduction in that business and indicates to the producer that it may be wise to remove capital from this business and deploy it elsewhere). We conclude provisionally that under these restrictive assumptions an increment of consumption per se does nothing to enrich a producer – nor, by extension, a nation.
A Confrontation with Common Sense
Yet common sense tells us that a producer’s wealth and prosperity generally does depend greatly upon the number of his customers and their demand for what he has produced. More specifically, common sense tells us that, other things equal, an increase in customers’ desire to consume what he produces increase his profits. It is imperative, then, to analyse the nature and extent of the advantage that a producer derives from additional consumption of his output.
Our preliminary conclusion holds only when producers are able instantly to sell everything that they produce. To such a producer, an additional purchaser cannot be accommodated. If a producer can instantly sell everything that he produces, and if customers A, B and C are each willing to buy his entire output, then (assuming that each customer is a price-taker) the producer is indifferent to whom he sells and can accommodate no more than one customer.
Clearly, however, it is questionable whether these conditions describe more than a few producers; and to the great majority they do not apply at all. To most producers, an additional customer (i.e., an incremental increase in the desire to consume what he produces) is equivalent to an increase in the productivity of his capital. An incremental increase of consumption enables producers to convert a portion of their capital which otherwise lies idle and which could not have become productive until a customer was found into wages and instruments of production; and if we suppose that the additional quantity of a commodity, unless purchased by the additional customer, would not have found a purchaser for (say) a year thereafter, then all that that capital enables men to produce during the year is clear gain. It benefits the producer, the laborers whom he will employ and thus – assuming that nobody sustains any corresponding loss of demand for his commodities or labour – to the nation as a whole. The aggregate produce of the country for the succeeding year is thereby increased – not by the exchange between the customer and producer, but by calling into activity a portion of capital which, had it not been for the exchange, would have languished and its productivity and value dissipated.
It is reasonable to suppose that at all times there are a great number and wide variety of producers whose capital lies partly idle. If these producers could locate one another then, through a process of arbitrage, they could relieve one other of this partial idleness. Consider two shopkeepers. Each is hitherto unknown to the other; each owns goods that cannot be readily sold to existing customers and whose value would otherwise dissipate; and each possesses goods that the other wishes to purchase. If the one agreed to buy from the other (on the condition that he would purchase commodities whose quality was equal to that available elsewhere and at as low a price) then they would render each other and the country as a whole a service. By this compact, each would gain an additional customer and would put his capital to fuller employment.
The Benefit to an Individual Producer
We can now describe the benefit that a producer derives from an additional customer. First, if any part of his capital took the form of unproductive inventories, unsold goods, etc., whose value would otherwise dissipate over time, then an additional customer calls a portion of this unused and hence unproductive capital into activity. Under these conditions an additional customer increases the overall productivity of a producer’s capital.
Second, if the additional demand exerted by an additional customer exceeds what Producer A can supply by utilising all of his capital, if A previously invested additional resources in the business of Producer B (who produces the same commodities as A) and if the customer turns to B in order to meet the demand that A cannot fill, then A obtains from his investment in B not mere interest but also that difference between the rate of profit and the rate of interest (which John Stuart Mill dubbed a “wage of superintendence.”)
Third, if the producer is able to utilise all of his capital then the new but unmet demand generated by an additional customer affords him additional encouragement to save. Additional demand enables his savings to yield him not merely interest, but profit; and if he does not choose to save (or until he is able to save) it enables him to undertake the additional business with borrowed capital – and so gain the difference between interest and profit, (i.e., to receive “wages of superintendence”) on a larger amount of capital.
...continued in Part III
 
Designed & maintained by
Artist Web Design
©1999-2008 All Rights Reserved |
