THE BUSINESS OF SUPPLY

THE BUSINESS OF SUPPLY

It is now time to analyse in more detail the factors that influence
the supply of goods and services to market. How are resources
organised in production and what are the economic constraints
involved? How do costs and revenues impact on prices and outputs,
and how does the state of business competition affect a firm’s
decision-making? First of all, however, consider the very foundation
stone of a market society.
PRIVATE PROPERTY
Private property rights represent a fundamental building block of
modern, developed economies. Being able to define what is mine
and what is yours enables us to trade, agree prices and thereby
organise the allocation of society’s resources. Property rights are
thus an essential starting point – if we cannot agree ownership
today, we cannot bring together diverse resources, invest in production
and distribute future rewards according to some arranged
formula.
Peruvian economist Hernando de Soto has argued that what holds
back people in poor countries is lack of legal title to the assets – land
they live on and buildings they have constructed – they informally
possess. Because their possessions are not legally recognised, people
are not willing to pool capital and start a business. The risk is too
great: they may lose what little they have and then have no legal
© 2004 Tony Cleaver
In modern capitalist states, however, one of the most important
socio-economic inventions that underpinned the Industrial
Revolution and drove subsequent economic growth was the
creation of the JOINT STOCK COMPANY. Large numbers of owners of
relatively small amounts of capital could together pool their assets,
pledge this stockpile as security to raise even more in the form of
bank loans and thereby equip a large factory, a ship or some other
productive enterprise capable of securing future profits.
Not that production needs always to be on a large scale. But
whether large or small, business cannot be conducted without rules,
without contracts enforceable in law. A promise to deliver a given
supply at some time in the future must be kept if economic organisation
is to be successful. If people do not trust one another to
complete a deal then no progress can be made. Everyone would
have to provide everything for him or herself since no one else
would be relied upon to fulfil their part of the bargain. What standard
of living could you then aspire to if you had to provide for all
your own shelter, clothing, food and transport – let alone other, less
urgent needs? Yet, this is precisely the reality faced by many in
societies that fail to codify private capital.
Property rights protect owners and facilitate trade. Specialisation
becomes possible. Market values can be estimated and this allows
for subdivision and exchange through time. You can buy or sell a
share of some existing or future asset and have the confidence you
can retain this long term, so that when you die this property will be
passed on to your heirs. Such confidence in the future promotes
investment and thus growth.
Poor peasants, meanwhile, who may have farmed communal
lands for ages may have no recognised assets, no means to raise
capital, no pathway to increasing incomes. Quite the opposite, they
risk eviction if they have no formal title to the lands they work on
and they may lose any crops or livestock they may possess if they

cannot physically defend them.