122

THE  PROBLEM  OF  THE  UNEMPLOYED

furnish  no  explanation  of  the  congested  state  of  industry
implied  by  the  fact  of  general  over-supply.
§  8.  The  Notion  that  Reduced  Cost  of  Production
cannot  Reduce  all  Prices,  Disproved.
One  other  deep-rooted  fallacy  underlies  the  currency
explanation  of  the  fall  of  prices,  the  a  priori  denial  that
a  lowering  of  “cost  of  production”  of  all  commodities
can  be  a  true  cause  of  a  fall  of  prices.  Mill  gave  distinct
utterance  to  this  doctrine  by  arguing  that,  since  all  trade
is  exchange  of  commodities  for  commodities,  any  increase
of  supply  must  involve  a  corresponding  increase  of  demand,
so  that  each  unit  of  the  increased  supply  must  exchange
on  the  same  terms  as  before,  even  if  the  increased  supply
was  due  to  reduced  labour-cost  of  producing  a  unit  of
supply.  But  this  argument  rests  on  the  assumption  that
everything  which  can  be  “  demanded”  will  be  “demanded,”
i.e.,  that  all  producing-power  is  necessarily  utilised  in
demand.
This  doctrine  has  been  lately  reaffirmed  by  Dr.  Smart
in  terms  which  seem  to  clearly  expose  the  error  which  it
contains.  A  general  fall  in  cost  of  production  would  not,
he  maintains,  in  itself  tend  to  a  general  fall  of  prices,  fot  “  if  a
particular  trade  were  to  take  full  advantage  of  the  reduction ­
  of  machinery  by  laying  down  proportionally  more  plant
and  extending  production,  the  total  cost  would  not  diminish
although  the  cost  per  item  would.  In  such  circumstances,
however,  this  trade  could  maintain  the  exchange  value  of
its  commodities  per  item  only  if  demand  increased  pari
passu  with  the  increase  of  supply.  And  demand  would
increase—assuming  equal  elasticity—if  the  production  of  all
the  other  goods  increased  in  the  same  ratio.”  *  Now  the
*  «Studies  in  Economics’’,  p.  175,