152 SECTIONAL ADDRESSES 



into play. With its aid we are able to say something about the demand 

 equations. We say that they will have this in common, that the quantity 

 of a commodity demanded will be less the higher its price. ^ We are still 

 unable to formulate the demand equations precisely, but we have this very 

 general piece of knowledge about their structure. Having regard to it 

 and also assuming that the other equations relating to supply and produc- 

 tive methods are not of a very odd structure, ^° limited powers of prediction 

 with regard to the direction, though not the quantitative value of changes 

 consequent upon a change in fundamental data, are rendered possible. 



How do we come by this law of demand ? Here we are certainly at 

 the very centre of traditional economic theory. I do not believe this to 

 be based on an observation of markets in the ordinary sense. There the 

 confusing influence of many forces is operative, and though scatter 

 diagrams may give a faint suggestion of the law, we hold it with much more 

 feeling of assurance than they would vouchsafe. 



Consider the Law of Diminishing Utility. Is this based on some 

 psycho-physiological principle, the diminishing reaction to stimuli ? 

 Is the main constructive part of our theory based on a generalisation 

 borrowed from elsewhere, the verification of which depends on the 

 observations of others .? I do not think so. I believe the matter to be 

 simpler. 



It appears to me that we have here an a priori axiom, albeit based in an 

 indirect way on observation. In markets we are concerned with com- 

 modities divisible into parts. The parts are homogeneous in one respect, 

 namely in all their sensible properties, so as to be perfectly substitutable 

 one for another, but heterogeneous in another respect, namely the use 

 to which they may be put. The parts may be used separately. Each 

 occasion of their use has its own importance. Not each occasion is likely 

 to have precisely the same importance, save in an exceptional case. This 

 is all that is required for the law of diminishing utility. If supply is 

 restricted, use will be confined to the most important occasions. This 

 appears more general than, and independent of, the law of diminishing 

 reaction to stimuli. The axiom arises directly out of homogeneity in 

 one respect and heterogeneity in another. That homogeneity and 

 heterogeneity thus reside together in exchangeable objects is of course 

 known by observation, ultimately by introspection and the assumption 

 that other selves exist and have similar states of consciousness to our 

 own. The existence of the law explains how it is possible to make pre- 

 diction on the basis of equations, which themselves seem and claim to be 

 independent of detailed economic investigation. 



With the aid of the general law of demand we are able to predict some 

 immediate consequences of changes in fundamental data. But we cannot 



* Even to this there may be exceptions. Cf. Marshall, Principles of Economics 

 (8th ed.), p. 132. 



1" It is possible that the crucial point in the argument by which Mr. Keynes 

 throws doubt on the consequences usually supposed to flow from certain changes, 

 on the basis of the theory of value, is his demonstration that the real supply 

 schedules of the prime factors are, owng to actual offer terms being expressed 

 in money, precisely of the odd structure required to invahdate the reasoning. 



