The general effect of these studies among earlier economists was to break up the unity of industry: firstly, by suggesting that bargains for the use of land, of capital, and of labour-power were subject to radically different laws; secondly, by failure to relate these laws of the value or the price of the factors of production to the laws which were found to determine the price of the commodities which they contributed to produce. More recent economic writers have made considerable advances towards the integration or unification of a theory of distribution, by relating the theories of determining the price of the several factors through an extension of the law of differential rents, and by a scientific formulation of a theory of value which is applicable to the determination of all prices, alike of uses of factors and of commodities.

But the completion of this work of unifying the theory of distribution has been delayed by a refusal of economists to investigate sufficiently the nature of the bargain per se, so as to find what is common to its different species. So far as England is concerned, this refusal is due to a visible reluctance among students to engage upon purely deductive or speculative problems, except within a certain narrow field of mathematical analysis.

The dominance of the historical spirit on the one hand, and the rapid advance of specialization in economic study on the other, have unduly drawn attention away from the rootproblems of deductive economics, which are too often assumed either to have been solved or not to be worth the trouble of solution. To these influences I chiefly attribute the small amount of intellectual energy devoted to the investigation of the process of bargaining which lies at the base of the theory of distribution.

Such study requires the moderate use of a method which is peculiarly disfavoured by English economists of the present day, and is stigmatized as "Crusoe Economics." The recent revolt against speculations, which were barren or illusive because they commonly proceeded from false premisses, has gone too far. Such speculative analysis, with all its dangers, is indispensable

in the social sciences. The conditions of inductive reasoning from experiments which exist in many branches of physical science are here notoriously lacking, and to supply this defect a process of fictitious experiment is substituted, supposititious cases being framed where unessential circumstances are eliminated so as to enable us to see more clearly the working of certain simple forces.

To study problems of price or value by plunging into the full intricacy of actual business is not really a practical but a most unpractical method. To go back to a thoroughly uneconomic condition is usually unprofitable; but first to take cases true to the essential facts of life, though contained in a simpler setting of circumstances than that in which they are actually found, and afterwards gradually to introduce the excluded circumstances in order to see what difference is wrought—such substitute for the experimental method of the physical sciences is both defensible and highly profitable, as a mode of gradual approach towards a real issue. This method I propose to adopt in opening up the nature of a bargain.

Bargains are found commonly in clusters at a market price, being acts of sale or exchange at this common rate. It is, therefore, first essential to understand how this common pricepoint is determined.

If A. wishes to sell a horse, and B. is the only buyer, it is evident that, if the highest price B. is willing to give does not reach the lowest point A. is willing to take, there can be no price and no sale.

A. asks £20 and fixes his reserve at £15.

B. offers £8 and fixes his reserve at £12.

A.'s offers 20 19 18 17 16 15.
B.'s offers

Next, suppose A. willing to take £15.

12 11 10 9 8.

If a sale take place the price will obviously lie on the common ground between £18 and £15. But at what point, and how is the point reached? Hadley assumes1 that a point will

› Economics, p. 73.

be reached, and thinks it is determined by "relative skill in bargaining."

A. 20 19 18 17 16 15

B.

18 17 16 15 14 13 12 11 10 98

But this attainment of a price by "skill of bargaining" implies ignorance of each other's mind in the case of A. and B. or either. If A. knows or thinks that B. will go to £18, and B. does not know that A. will sell at £15, A. will stand firm at £18 and get that price. If, per contra, B. knows that A. will sell at £15, and A. does not know that B. will go to £18, B. gets his horse at £15. If neither knows, but each suspects the other will go further, "bluff" is the determinant; the bidding proceeds until either A. or B. believes that any further demand will outstep the limit set by the other in his mind and will lose him the bargain. The determinant here is superior cunning, or, as Hadley says, "skill in bargaining." Or it may be that, while A. is willing to sell at £15, he may know or suspect that it is more important for B. to obtain the horse than for him to sell, in which case he is in the position to extort £18.

So far we have no element of competition; the process by which a price is reached, if it is reached, is one of bargaining from beginning to end.

Now introduce the competitive element upon one side of the transaction. A., the happy owner of the horse, which he will sell for £15, or as much more as he can get, is faced by B. and C., who both want the horse, and are furnished with effective demand in the shape of cash. Now, B. and C. either fix the same limit-price upon A.'s horse, or they fix a different limit-price. If it is equally important to both to get the horse, and they are possessed of equal pecuniary resources, they may conceivably be both willing to bid up to £18 for the horse. In such a case, it is a matter of absolute indifference to A. whether, after making B. and C. bid against each other up to £18, he sells to B. or to C. Indeed the sophist might argue that, since he could not sell to both, and there was no more reason why he should sell to one rather than to the other, he could not sell at all, but would stand like the ass of the fable, who starved to death as he stood at an

of

equal distance from two equally attractive bundles of hay. But elbowing aside our sophist, and allowing A. to effect a sale at £18 to either B. or C., guided by some personal preference or the prospects of future business with the respective parties, it is plain that the competition between B. and C. has simply placed A. in the same position of bargaining superiority as he would occupy in dealing with B. alone, on the assumption that he knew the limit-price B. had set himself, and B. did not know his limit-price. The actual price reached would assign to A. the whole gain of the bargain, less the minimum required to compensate B. or C. for the trouble of bargaining.

But the chance of B. and C. fixing the same price-limit and adhering to it with exactly equal persistency, is infinitely small. In the actual business world we may take it that the two competitors fix a different price-limit.

B.'s limit is £19, and C. will not go beyond £18. Here it will be evident that competition does not fix the price-point, but only a lower limit of price. The price actually reached cannot be less than £18, because B. and C. will bid against each other up to that point. It may be anywhere between £18 and £19, and the actual point will be determined, not by competition, but by those same forces of skill and force in bargaining which operated in the earlier case.

Now comes the question, Is the method of determining a price essentially different when we place upon both sides of the transaction a number of genuine competitors-in other words, when we institute a free market ?

What is the determination of a market price? It is curious to observe how the text-books of English economists have almost without exception shirked or slighted this practical question, hurrying the reader to the more abstract consideration of a normal price, and contented, as was Mill, to explain any particular divergence of market price from normal price by vague reference

to temporary fluctuations in supply and demand, which kept market prices oscillating round a normal price, giving the advantage now to sellers, now to buyers.1

It has generally been considered a satisfactory account to say that the competition between owners of supply on the one hand, and exercisers of demand on the other hand, will equalize supply and demand at some point of price.

This is Mill's contribution towards the theory of a market price, and it may be said to be generally received in English economic text-books as a sufficient description of a market price. Professor Marshall, in discussing the price of the cornmarket, finds it to be such as would "exactly equate supply and demand." Professor Hadley, in his recent book, is content to say that "the market price of an article under the modern commercial system is the price at which the demand is equal to the supply."

Now, such a statement is doubly unsatisfactory. It neither defines a market price, nor explains how a market price is actually reached. It furnishes no real answer to the celebrated question of the Oxford professor who was reputed to stop his friends in the street to ask them why a silk hat cost 20s. The text-book answer to this question is to show that the price of a silk hat cannot be 21s., because in that case supply would be in excess of demand; there would be too many hats and too few people to buy them, and the competition of sellers would reduce prices. Conversely, the price could not be 198., therefore 208. is presented as a point of convergence between two opposing forces which reached at that point a temporary equilibrium. The supply of hats was equal to the demand at 208.

This statement, that a market price is one that equalizes supply and demand, explains nothing. What we want to know is, why this equilibration occurs at 20s. English economists have commonly shirked the direct significance of this question, which requires an investigation of the actual process of Cf. Essay on Thornton.

1 Principles, p. 273.

Principles (2nd edit.), p. 392.