REDUCED COST CANNOT REDUCE ALL PRICES I 23
assumption that demand would increase is without warrant.
Dr. Smart is only justified in assuming that demand might
increase. All increase of supply might be demanded and
consumed as fast as it grew. If that actually occurred
there would be no alteration in the quantitative relation
of supply and demand (quantity demanded) at the different
stages of industry. Moreover, there could then be no fall of
prices. Dr. Smart thinks that scarcity of money causes the
general fall of prices which others have attributed to reduced
cost of production. But if every increase of supply was
taken off in increased demand, no scarcity of money
(assuming there were such a thing) could affect prices.
This may be tested by a closer attention to any class of
prices. Suppose a general increase of supply in all retail
shops and a corresponding increase of demand as a necessary
counterpart, retailers would not lower prices but would
sell the increased quantity of goods at the same prices as
before. If scarcity of money is to be operative in reducing
prices, it can only be by preventing demand from keeping
pace with increased supply, i.e., by defeating the operation
of what has just been assumed as a necessary law, the
effective demand of the whole of supply.
It is of course true that with every increase of supply
an increase of “ purchasing power ” or possible demand is
created. If this power is exercised, nothing that happens
to the supply of money can prevent prices from standing
firm. If scarcity of money does operate on prices it can
only be by preventing some of the possible demand from
becoming effective. If prices do fall it means that those
who have the power to demand all the increased supply,
do not exercise it, but withhold it.
