The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword to Economists and Teachers
• Economic Principles
• Part I: Elements of Value and Price
• Chapter 1: Purpose and Nature of Economics
• Chapter 2: Choice and Value
• Chapter 3: Goods and Psychic Income
• Chapter 4: Principles of Evaluation
• Chapter 5: Trade By Barter
• Chapter 6: Money and Markets
• Chapter 7: Principles of Price
• Chapter 8: Competition and Monopoly
• Part II: Usance and Rent
• Chapter 9: Agents For Changing Stuff and Form
• Chapter 10: Agents For Effecting Changes of Place and Time
• Chapter 11: Consumption and Duration
• Chapter 12: The Principle of Proportionality
• Chapter 13: The Concept of Usance-value
• Chapter 14: The Renting Contract
• Chapter 15: Principles of Rent
• Part III: Valuable Human Services, and Wages
• Chapter 16: Human Beings and Their Economic Services
• Chapter 17: Conditions For Efficient Labor
• Chapter 18: The Value of Labor and the Choice of Occupations
• Chapter 19: Principles of Wages
• Part IV: Time-value and Interest
• Chapter 20: Time-preference
• Chapter 21: Rate of Time-preference
• Chapter 22: Money and Capitalization
• Chapter 23: Capitalization of Monetary Incomes
• Chapter 24: Saving and Borrowing
• Chapter 25: Capitalization and Interest
• Part V: Enterprise and Profit
• Chapter 26: Enterprise
• Chapter 27: Management
• Chapter 28: Profits and Costs
• Chapter 29: Various Shades of Profits
• Chapter 30: Costs and Competitive Prices
• Chapter 31: Monopoly-prices; Large Production
• Part VI: Dynamic Changes In Economic Society
• Chapter 32: The Problem of Population
• Chapter 33: Volitional Doctrine of Population
• Chapter 34: Decreasing and Increasing Returns
• Chapter 35: Basic Material Resources: Their Use, Consumption, and Conservation
• Chapter 36: Machinery and Wages
• Chapter 37: Waste and Luxury
• Chapter 38: Abstinence and Production
• Chapter 39: Value Theory and Social Welfare

PART I

ELEMENTS OF VALUE AND PRICE

CHAPTER 1

PURPOSE AND NATURE OF ECONOMICS

§ 1. Definition of economics. Economics may be defined, briefly, as the study of men earning a living; or, more fully, as the study of the material world and of the activities and mutual relations of men so far as all these are the objective conditions to the gratification and to the welfare of men. The ideas of most persons on this subject are vague, yet it would be very desirable if the student could approach this study with an exact understanding of the nature of the questions with which it deals. Until a subject has been studied, however, a definition in mere words but slightly aids in marking it off clearly in our thought. The student must first try to see the general field of facts and of human interests that economics covers.

§ 2. Economics contrasted with the natural sciences. Economics may be contrasted with the natural sciences, which deal with material things and their mutual relations. A definition that suggests clear and familiar thoughts to the student seems at first much more difficult to get in economics than in the natural sciences. These deal with concrete, material things which we are accustomed to see, handle, and measure. If a child is told that botany is a study in which he may learn about flowers, trees, and plants, the answer is fairly satisfying, for he at once thinks of many things of that kind. When, in like manner, zoölogy is defined as the study of animals, or geology as the study of rocks and the earth, the words call up memories of many familiar objects. Even so difficult and foreign-looking a word as ichthyology seems to be made clear by the statement that it is the name of the study in which one learns about fish. It is true that there may be some misunderstanding as to the way in which these subjects are studied, for botany is not in the main to teach how to cultivate plants in the garden, nor ichthyology how to catch fish or to propagate them in a pond. But the main purpose of these studies is easily made clear at the outset; it is to know about the natural objects themselves. It is true that as each science is pursued, and knowledge widens to take in the manifold and various forms of life, the boundaries of the special sciences become not more but less sharp and definite.

In contrast with these, economics is one of the social sciences which deal with the inner nature of men and with men’s relations in society. These are less tangible facts—we are tempted to say that they are less familiar—than are the materials with which the natural sciences deal. But the truth may be that social acts and relations are more familiar to our thought than is the subject matter of the physical sciences. Every hour in the streets and stores one may witness thousands of acts, such as bargains, labor, and payments, that are the data of economic science. Their very familiarity causes us to overlook their deeper meaning.

§ 3. Science as abstraction. A science by its very nature as science is concerned primarily with abstractions rather than with concrete objects. To think scientifically is to think abstractly. Abstraction is a certain way of looking at things; it is looking at their qualities. It is more difficult to think abstractly than it is to think of concrete things. It implies an analysis, a taking-apart of things to get at their components, and a grouping of these parts into some general idea—not an easy task for most minds. Economics singles out for study those aspects of the world which have to do with man’s desire for the things about him and the use that he makes of them.

Economics “as the study of the material world” also has to do with all of those things which are the subject-matter of the natural sciences; but only in a secondary way. It studies them only as they are related to man’s welfare, or as they affect his valuation of things; only in so far as they are related to the central subject of economic interest, the earning of a living.

§ 4. Science and art. Like every other field of study, economics has two aspects, one of science, the other of art; the one of knowledge, the other of action; the one of principles, the other of their application. Each science seeks to study and to understand the world in some aspect, to reduce the multitude of facts to order, and to understand their relations. Thus, astronomy has succeeded in counting a large number of heavenly bodies, classifying them as stars, planets, comets, etc., has come to understand their relations in space, distances, direction, and speed of movement, etc. On this science is based such practical arts as navigation, regulation of the calendar, determination of the exact time, prediction of eclipses, etc. Thus, likewise, physics, chemistry, the various branches of biology, psychology, etc., are concerned first, and merely as science, with the truth regardless of its application. Then, however, whatever truth is discovered may be found to be capable of some uses or applications, either in the hands of the scientists themselves or in the hands of another body of men, variously named practical workers, technicians, and inventors, who develop the art side of the subject. The history of civilization abounds with evidence showing that the work of the group of scientific workers continually pursuing truth for its own sake (work little esteemed by the world in general), is indispensable for the continued progress in the practical arts. Just outside the circle of attained scientific knowledge is a fringe of possible practical applications. But unless other and still other discoveries were made, practical progress in the arts would lose its source of inspiration.

§ 5. Place of economics among the sciences. Economics seeks the reason, connection, and relations in the great multitude of acts arising out of the dependence of men on the world of things and of other men. Economics has to study men in two sets of relations, as is indicated in the definition: the relation on the one hand of man to material (non-human) things about him, and on the other hand to other men with whom he has “economic” dealings. In so far as economics is concerned with the former, the relation of man to his material environment, economics borders on some phases of each of the engineering sciences, and of the natural sciences, as geology, botany, zoölogy, and (in considering how these things affect man) physiology and psychology.

In so far as economics is concerned with the mutual relations of men in business, it becomes one of the group of social sciences. The word “social” comes from the Latin socius, meaning a fellow, comrade, companion, associate. The social sciences deal with men and their relations with each other. As men living together have to do with each other in a great many different ways, and enter into a great many different relations, there arise many different social problems, and the several social sciences of politics, law, ethics, and economics. Each of these attempts to study social relations in some one important aspect, that is, to view them from some one standpoint. Politics treats of the form and working of government, and is mainly concerned with the question of power or control of the individual’s actions and liberty. Law treats of the rules of the sovereign state controlling the actions of men (criminal jurisprudence), and of the principles guiding the interpreting of the contracts into which men see fit to enter in their economic affairs (civil jurisprudence). Ethics treats the question of right and wrong, and the moral aspects of men’s acts and relations with each other. As compared with these, economics is a much less purely social science; it has to do almost constantly with the material environment as well as with the social environment in which men live.

The attempt to distinguish between the fields occupied by the various social sciences discloses at once a fundamental unity existing among them. The acts of men are closely related in their lives, but they may be looked at from different sides. The central thought in economics in its social aspect is the business relation, the relation of men in working together, or in exchanging their services and material goods. In pursuing economic inquiries we come into contact with political, legal, and ethical considerations, all of which must be recognized before a final, practical answer can be given to any question. Nevertheless, the province of economics is limited. It is because of the feebleness of our mental power that we divide and subdivide these complex questions and try to answer certain parts before we seek to answer the whole. Whoever attempts this final and more difficult task should rise to the standpoint of the social philosopher.

§ 6. Subdivisions of economics. Economics in its most general sense includes various subdivisions. First is domestic economics (household economics), the modern equivalent of oiko-nomos, first used by Xenophon as the name for a set of rules to help the housekeeper or steward of an estate. The typical Greek household, however, was a large estate with slaves, almost a little state in itself, carrying on nearly all the arts and crafts. The term political economy (as économie politique) was first used in France in the eighteenth century to express the set of rules or principles to guide the king and his counselors in the control of his country, which was thought of much as if it were the king’s private estate. Of late the term “economics,” as expressing better a broadening conception of the subject, and at the same time as less likely to be confused with politics, has been gradually displacing the term political economy. It is used with various adjectives indicating the field covered; for example, domestic economics, household economics, corporation economics, national economics, political economy, world-economy, etc.

§ 7. Economy in the sense of the subject studied. We have chosen for our purpose to define economics as a “study,” a body of knowledge, a science. But as in the case of various other sciences, its name is used also to indicate the body of facts and group of persons which are studied. One person (like Robinson Crusoe, on his desert island) constitutes an individual economy. There are, in such a case, no personal relations to study, but only the relations of man to his environment. A group of persons thought of together with all their material environment and in their relations with each other, forming something of an economic unity, constitute a social economy. The economic affairs of a family constitute a family or domestic economy, and those of a nation a political, or a national, economy.

§ 8. Economy not parsimony. It should hardly be necessary to warn against giving to the word “economy” the meaning of (the act or the quality of) parsimony. Economy implies good management, making the best of whatever means one has, and this is not stinginess, tho the thriftless and the self-seeking are always prone to impute it as such to others. Economy as a mode of action is parallel to economics as the science that seeks to arrive at such general rules and principles as will lead to the best results in the use of the resources and services of individuals, families, and nations.

It is true that there are different standards by which to judge what is “best”; sometimes a merely pecuniary standard of business profit to the individual is taken, and this may come close to mere avarice. Again, a standard of true welfare for the nation or for the race may be taken. These two views may be, and often are, in conflict, and it is a part of the task in this study to keep before the mind as clearly as possible the difference between these standards. The one standard is that of individual—pecuniary, acquisitive economics; the other that of public—industrial, productive economics.1

§ 9. Social aims of economics. Economics is often defined as the science of wealth. Partly because of this, and partly because of the unfortunate confusion of the individual and of the social points of view, it has been characterized as a “gospel of Mammon.” But, in the main, economics must be understood as a social study for social ends, not a selfish study for individual advantage. The individual interest must be recognized, but treated as within, and subordinate to, the larger social interests. Certainly some of the lessons of economics may be of practical value to men in active business, and training in economics is increasingly deemed a helpful preparation for many special callings. Many economic “principles” are but the general statement of those ideas that have been approved by the experience of business men, of statesmen, and of the masses of men. Economics is not dreamed out by the closest philosopher, but more and more it is the attempt to describe and comprehend the interests and the action of the practical world in which men must live. Many men are working together to develop this study—those who collect statistics and facts bearing on all kinds of practical affairs, and those who search through the records of the past for illustrations of experiments and experiences that may help us in our life to-day.

§ 10. Economics in a democracy. With the growth of the modern state, with the increasing importance of business, and of industrial and commercial interests, as compared with changes of dynasty or the personal rivalries of rulers, economic questions have grown in relative importance. In our own country, particularly since the subjects of slavery and of states’ rights ceased to absorb the attention of our people, economic questions have pushed rapidly into the foreground. Indeed, it has of late been more clearly seen that many of the older political questions, such as the American Revolution and slavery, formerly discussed almost entirely in their political and constitutional aspects, were at bottom largely questions of economic rivalry and of economic welfare. The remarkable increase in the attention given to this study in colleges and universities since the beginning of the last quarter of the nineteenth century is but the index of the greatly increased interest and attention given to it by citizens generally.

The conception of political economy as the term was first used, has been modified wherever unlimited monarchy has given way to the rule of the people. In a democracy there is need for a general diffusion of knowledge, if the economic policy and legislation of the State is to be intelligent. The power now rests not with the king and a few counselors, but in the last resort with the people, and therefore the people must be acquainted with the experiences of the past, must so far as possible have economic knowledge to enlighten them in their choice of men and of measures.

Note

Economic laws and other terms. In the science of economics some general ideas and statements are attained, and are called variously laws, principles, theories, hypotheses, and doctrines. These terms are used somewhat loosely, and we may note the general meaning that we are to attach to them.

Law originally meant (1) the binding custom or practice of a community; then came to mean (2) a rule laid down and enforced by some authority, as the State (acting through the political law-making body), or as divine will; (3) a statement of an order or relation of phenomena which appears to hold under the given conditions. Economic laws have this last meaning; they are not made and enforced by man, but are discovered as the true order inherent in things. Often in the physical sciences law in this sense suggests a pretty definite arithmetic statement (i.e., Newton’s law of gravitation, Kepler’s law, etc.), but it is used generally of an orderly recurrence. In economics the term is frequently applied, as in the phrases, law of diminishing returns, Gresham’s law of money, etc.

Principle meant (1) beginning; then (2) source, or origin; (3) a fundamental truth; (4) an elementary proposition. Law and principle are used almost interchangeably, tho it would seem better to speak of principle when a more elementary statement is meant, and a law when the statement is more complex. Throughout this book the preference is generally given to the word principle rather than law in cases where there is good usage favorable to both.

Theory meant (1) contemplation; then (2) the general explanation of a body of facts, or group of phenomena; in other words, a plan or scheme of thought constructed to fit the facts so far as they are known. The popular use of the term theory to mean some plan of action, especially a poorly thought out plan sure to fail, should have no place in our discussion. It is an error to contrast theory and practice as the impracticable versus the practical. They should be contrasted only as idea, or explanation, versus action, or execution. Good theory then, usually goes with good practice and bad theory with poor practice. Usually when it is said that a thing is true in theory but false in practice, what is meant is that the theory is untrue, based on purely imaginary conditions and hence will not work. Science has to do with theory; art has to do with practice.

Hypothesis, often used interchangeably with theory, may be distinguished from it; it is a provisional conjecture regarding the relations of certain phenomena, whereas a theory is a hypothesis which has undergone a large measure of verification.

Doctrine meant originally (1) that which is taught, usually by a group of thinkers; hence (2 a body of principles. In such expressions as the law of rent, the theory of rent, and the doctrine of rent, the terms are well nigh synonymous, and the preference for the use of “doctrine” in certain cases rather than theory or principle, resulted more or less from the historical accident that a theory became connected in thought with a group of thinkers (that is, was taught by them, as Malthusian doctrine, the Ricardian rent doctrine, the free-trade doctrine of the Manchester School, etc.).

CHAPTER 2

CHOICE AND VALUE

§ 1. Choice; its origin. The world of industry, as we look out upon it, appears to be alive with motion, like a beehive. In the crowded harbor, the busy railroad yard, the noisy steel mill, the bustling department store, we see a ceaseless and bewildering activity. In all this movement and apparent confusion, there is, however, a large degree of order and a pretty regular succession of events which reflects a succession of choices that men are making.

These choices are not always and entirely the result of deliberate and conscious calculation. They are determined in a very great degree by habit or by instinct. Every living creature has a nervous organization of some sort—plants as well as the lowest forms of animals. This nervous organization has a pretty definite “set” or habit of response toward its environment; that is, the nerves react in certain ways to external stimuli. The seed in moist soil germinates; it sends rootlets into the earth in search of water and of the particular soil-elements which it by nature “chooses”; it sends stock and leaf upward into the light and air, it spreads or climbs or twines according to its nature. The chick picks its way out of the shell, and then instinctively (by its inborn nature) picks at any particle it sees. It finds some objects “good” and it eats them; it finds others “bad” and it rejects them. It thus adds to its instinctive choice the choice resulting from experience.

§ 2. Development of conscious choice. Every human being starts on his life of choice in just this way, with a fund of natural impulses, a capacity for certain instinctive reactions. The new-born child cries when hungry or uncomfortable, and it does not know in advance (the first time) what it is crying for. It is moved by mere impulse, tho we say loosely that it “knows” well enough when it gets the right thing. Some food it rejects, other food it takes; and its mere impulse has now become a vague aversion or a vague desire. Very quickly it learns to associate the presence of some object with this or with that choice, and reaches for it, cries for it, giving now a very definite direction to the impulse which it feels. Feeling directed in this way upon some particular object or action is called desire. If we speak of this as a “conscious desire,” we mean not that the person is reflecting on the nature of the desire, but simply that he is conscious of the presence of the thing, and that he desires it. As the child grows older, choice becomes vastly more complex, but all human choice is the development of the first simple impulsive acts. The difference in this matter between man and the animals lies in the degree to which the original fund of impulses is strengthened or weakened by experience and training, and is modified by the greater growth of forethought, imagination, and reason. As the man attains his maturity, deliberate calculation enters more and more into the making of choice. Yet the instinctive and habitual elements of choice continue to be very potent.

Tastes change with age, are trained, are influenced by custom, by example, and by suggestions of many kinds, and are given a wider range by wealth, travel, and opportunity. But choice is ruled fundamentally by instinct; one likes what he likes; de gustibus non disputandum est.

Choice develops in this way as it is directed upon each of the great classes of things with which man is surrounded; clothing, houses, furniture, horses, automobiles, books, etc. It operates also upon the actions of the man himself. He reaches out or withdraws his hand; he seeks or he shuns; he labors to make or to destroy, to possess or to get rid of. Thus the choice among one’s own acts is intertwined with one’s choice of things.1

§ 3. The idea of scarcity. Now we are not likely to feel a very keen desire for a particular thing unless the supply of it at our disposal is relatively limited. The air which we breathe is essential to life. But the air is all around us, and ordinarily in boundless abundance. Moreover, we breathe by reflex or automatic action of the muscles without conscious attention. The result is that we do not ordinarily feel a desire for air. But in a crowded room where there is a real scarcity of fresh air relative to our need for it, our desire for a breath of fresh air may become very keen indeed. Under such circumstances the air takes on a very different importance as an object of choice. Our impulsive actions and our thought are directed toward getting it. The diver in his diving suit must make this his first and most constant interest; the drowning man tragically feels this need.

The scarcity which we are now discussing is such a limitation in the number or quantity of objects that not all desires can be met then and there by the amount of goods available. In the numberless cases where some desires are not met or are only partially met, we are under the necessity of making a choice as to which desires shall be met. This involves a choice—and therefore a comparison—among things.2

§ 4. Valuation. If we choose one thing rather than another it is plain that for us the first thing has the greater importance. For one cause or another (instinct, training, experience, imagination, judgment) it weighs more in the scale of our choice than the thing which is rejected. Now in our daily life we are constantly making comparisons of this sort between things. Few of us—if any—are able to secure all the things which we desire. We are under the necessity of choosing among the various possibilities. We are, therefore, under the recurring necessity of comparing one thing with another, and in so doing, we assess or estimate one thing in terms of the quantity of the other thing. Such an expression of the importance of one object of choice in terms of another we may call a valuation.

A comparison of this sort between things may take the form of a mere vague preference without any exact quantitative expression of the degree to which the one thing is more important to us than the other. (Fig. 1.) We prefer one object, X, to another object, Y, without attempting to express even to ourselves the exact strength of the preference. On the other hand, our valuations may and usually do take the form of definite mathematical ratios. In the early American fur trade, for example, a beaver skin came by convention to be used as a unit in terms of which the relative importance of other things (e.g., other furs, food supplies, etc.) was expressed. The other things were measured as multiples (or fractions) of the unit.

Suppose, now, that in a similar way, we were to take a number of things, X, Y, M, N, O, P, and Q (taking, of course, a definite amount and grade of each) and were to make an exact estimate of their respective degrees of importance. The accompanying diagram may be used to express in a graphic way the mathematical relations of the importance of any one expressed in terms of any one of the others. As a matter of convenience we may settle upon a particular one, Q, as a common unit for expressing or measuring the importance of each of the others in turn. This, in fact, is exactly what the fur-traders did. And we do the same in our use of a monetary unit as our standard for the expression and comparison of the relative importance of things.

Viewed as the reflection of an act of choice, a valuation of goods appears to be a very simple fact. Yet underlying this simplicity would be found ordinarily a number of complex motives. Each valuation is a focus of many influences, a resultant of many conditions, some in the environment, and some in the nature and in the feeling of man. According as there is more or less of the various things to choose, and according as the person is more or less hungry or tired or cold or elated or downcast, any particular object may appear to be more or less important, may thus have a greater or less valuation.

§ 5. One’s own labor as a valuation unit. A valuation involves more than a comparison between external objects. Often one’s own labor is brought into the comparison. Choice frequently has to be made with reference to the limited strength and time of the subject, his laboring force. Here there is a twofold comparison; a good is compared with the labor required to secure it as well as with another good. When we are face to face with nature, and goods are to be secured only through our own labor applied to various materials, we are likely to estimate things habitually in terms of our own labor. Labor may under these circumstances become a common unit for the valuation of external things.

§ 6. Crusoe’s scale of valuations. The economy of Robinson Crusoe serves to illustrate the problems which the individual has to solve when the relation is between man and nature, and not between man and man.

The unfailing interest which old and young find in the story of Crusoe is largely due to the convincing naturalness of the tale. Each reader feels that he would have done just the same things in just the same order, if he were in the same plight and had been cast ashore as the story relates.

Crusoe knew not at what moment the waves would sweep into the sea whatever was left. He had scant strength and time for the task. His labor was to be so distributed that he might save from the wrecked ship the most valuable contents. Did he choose well? First, to preserve his life he found a tree to sleep in, and a stick to ward off wild beasts. Then at the ship he took food, clothing, weapons and tools, and made a place to store them safe; and finally came gold and pets. We see how he ranks them then and there, and how different is the scale from that he had before. His remark about the gold is whimsically suggestive of the old lingering standards of choice, and of the dim hope that he might return to live among men, and thus resume his old scale of values.

§ 7. Choice before and after valuation. It is usual to speak of the valuation which a person has (or holds or makes) of an object as preceding choice; but evidently this is not so in the case of instinctive choice, and many choices have in a measure this impulsive character. In case of a choice of a thing by a person for his own use the valuation is simply the resultant of choice; it is the arithmetic expression necessarily involved in the action and reveals to the person himself what he has done, how he values the object, rather than determines his action.

In a great many business transactions, however, one is not choosing for his own desires, but is trying to forecast the valuations of others to whom he will sell. There is often, in such cases, a long and careful attempt to express in exact figures the relative importance of different objects before a choice is finally made. In other cases the valuations precede the choice, when a conscious calculation is made of the relative effectiveness of things (heating power, food-value, etc.) and the relative difficulty of getting them (cost in money, distance to carry, etc.). In this sense of a careful estimate of the importance of a thing for business purposes, we speak of an assessor’s valuation of property for purposes of taxation, an appraiser’s valuation of imports, and a merchant’s valuation of his stock-in-trade. This kind of commercial valuation usually precedes choice by merchants.3

§ 8. Value. Now as a choice is made and a valuation is thus expressed, the person choosing feels that there is a certain quality in the thing which evokes or determines his choice. This quality of importance which things have when they are the subjects of man’s choice is value. Broadly understood value may be of many kinds: moral (the quality in actions calling for approval or disapproval), religious (the quality in actions, sentiments, and beliefs reflecting what the persons believe to be the will of the deity), esthetic (the quality in objects that accords with the canons of good taste in color, form, sound, etc.). Economic value is but one species of the larger genus of value. It is the quality in an object in the environment to influence a man’s action in respect to the control and use of the object. We ascribe this quality to the object that motivates our choice. Bread, meat, dress, houses, land, gold, carriages, slaves, the labor of hired servants, each object is said by you to have (economic) value, just because you feel and know that it sways your behavior in relation to itself. Value in this sense is not inherent or intrinsic in anything; it goes and comes, it grows and wanes, according to the intensity of the desire. It may have existence for one economic subject and not for another. It is not to be thought of as something in a thing before man makes it an object of choice. The logical order is: first, choice; secondly, a valuation by necessary implication; third, value—the quality imputed to the object. Yet in real life these are but three phases, absolutely contemporaneous, of the same thing. Value is but the abstract quality which we attach to the thing in our thought, because of the way it makes us behave in its presence. Value is fundamentally a reflection of the individual choice, though many individuals may have a similar choice, and by their interrelations mutually influence each other’s valuations in remarkable ways. Objects have their physical qualities independent of man’s choice; the apple has form, weight, the texture and skin which to the eye look red, and the chemical elements that give a certain flavor and taste. These singly or combined are not value, tho each has its part in determining under varying conditions, whether the apple is to have also the quality of value. There are as many problems of economic value as there are ways of choosing between economic objects. Their study makes up a large part of economics.4

Notes

Aspects of things chosen. Choice itself has a number of aspects and is made in reference to one or another quality of goods and acts (when certain other qualities are for the time equal or may be left out of consideration). The four chief aspects of choice relate to stuff, form, place, and time, as follows: (1) Choice of kinds of things (the simplest case being choice among things present and chosen for their immediate use and enjoyment), as choice between different kinds of objects, such as food and clothing, apples and oranges; or again the things may be of the same general kind but of different qualities, as apples differing in sweetness, smoothness, and in color; or the objects may be of different sizes or be in different quantities. (2) Choice of form, as an apple cut and pared rather than one uncut, or cooked food rather than uncooked food, or a made garment rather than the unmade cloth and materials. (3) Choice of the place, as an apple here rather than on the tree or on a distant farm, a pail of water in the house rather than at the well, home for one’s self rather than the roadside at dusk with home still miles away, etc. (4) Choice of the time at which goods of a certain kind shall come into one’s control, or that acts should be done, as choice of food at once when hungry rather than later, or of rainfall after a drought rather than during a flood, or the choice involved in keeping of food for winter instead of eating it all in the fall, etc.

These choices occur in many combinations and degrees of difficulty and complexity. It is a large part of the task of economics to study in detail the large groups of choices which are thus made.

Various meanings of scarcity. In economics the idea of scarcity is (as is shown above) connected with limitation relative to the desire for the objects. But “scarce” has other meanings. Sometimes it is that of rare, or uncommon (which usually, tho not always, implies desirability), as a scarce plant, a scarce butterfly, or a scarce stamp. Scarcity means also a small amount compared with the average or usual; it is said that wheat is scarce the year of a poor harvest tho there are millions of bushels of it, and conversely that “wheat is not scarce,” when there is a good harvest; yet in relation to choice it is merely less scarce than usual.

Value and valuation. The words value and valuation are frequently used interchangeably without much harm; yet for great precision it would usually be better to distinguish between them. The essential meaning of value as given in § 8 (a quality imputed to an object by a man) is individual, that is, it relates to a particular person. The meaning is somewhat different when value and market value are used for convenience to express a valuation, that is, some one’s estimate (as a statistician’s, an official’s) of the amount of goods in terms of price, such as the value of the imports and of the exports, the total value of the wheat crop of the country, the value of all the outstanding stock of a corporation. This valuation is obtained by multiplying the whole number of units of goods, shares of stock, etc., by the price in a single transaction. This valuation is not to be confused with price; price is an actual amount of money paid, whereas the valuation is an estimate of the total number of dollars for which all the articles could have sold, if they had changed hands at that price. In fact, in many cases, many of them did not change hands at that time.

CHAPTER 3

GOODS AND PSYCHIC INCOME

§ 1. Inherent physical nature of things. Man has to take the physical nature of things as he finds it. He can, to be sure, make certain changes in the relative positions of particles or masses of matter. He can decompose a chemical compound into its elements; he can change iron into steel, and with this construct elaborate machinery; he can make clothing of vegetable fiber; he can cut a canal through an isthmus that united two continents. He can, in short, make many changes in his physical environment and, within limits, he can adjust it to his liking. But the physical and chemical forces of the world, acting in ways which we express as natural laws, are beyond the power of man to change. He may rise above the earth in a balloon, or even travel through the air in a heavier-than-air machine. But the force of gravitation is acting upon him during every moment of his flight. Material things differ in their specific gravity, in their power to reflect rays of light, or to absorb or transmit heat. They differ also in their chemical qualities. Niter, charcoal, and saltpeter, combined in certain proportions, form an explosive. Other proportions give other results. Solids combine to form gases and liquids unite to form solids, and these qualities and reactions of material things are for men ultimate truths of chemistry. Sunshine acts on living bodies, whether plant, animal, or man, in certain ways. Some plants are nourishing food for animals, others are poisonous. If man were not living on the earth, things would, so far as we can conclude, have the same physical and chemical qualities, and mechanical laws would be the same as at present. They are not governed by the will of man. Man can, however—and does—slowly learn the nature of things, and as he does so he makes choices among them, uses them for his purposes, combines, separates, and adapts them so that he may better bring about the results he desires. The fitness of things for accomplishing man’s desires is what makes them objects of choice.

§ 2. Free goods and economic goods. We have already seen that some things, even such as are indispensable to existence, may yet, because of their abundance, fail to be objects of desire and of choice. Such things are called free goods. They have no value in the sense in which the economist uses that term. Free goods are things which exist in superfluity; that is, in quantities sufficient not only to gratify but also to satisfy all the desires which may depend upon them. The air about us is ordinarily a good of this kind. Water, too, tho in certain places and at certain times where it is scarce it takes on a value, is in many places so abundant that it falls in the category of free goods. The same is true at certain times and places of firewood, fruits, and other things, when there chances to be a surplus, relative to the desires of men. In such cases both the portions which are used and the other portions are without value—are free goods.

There is always something puzzling about this as one begins to think about it. It seems unreasonable to say that diamonds, laces, cigarettes, have value, and air and water have not. But the explanation is simple. Tho we must have air to live, and tho every breath we draw is to supply this need, our attention need not ordinarily be given to the matter of the supply of air at all. So long as it is present in abundance, the desire for it has no chance to rise to noticeable intensity, and remains constantly at the zero point. Men do not concern themselves about that which they have in superfluity—unless indeed the excess causes them some discomfort. It is well that they do not, for a wise direction of effort can take place only when men think mainly of the things that are lacking and direct their efforts toward securing them.

Most kinds of enjoyable things are constantly being used up before every use dependent on them can be made. Our stocks of such things become therefore the objects of our choice. We strive to use them with some care and attention. Such goods are called economic goods, being the goods which have value and therefore must be economized. As we have already seen, a certain thing may be a free good at one time because of its abundance and at another time it may be an economic good because of its scarcity.

§ 3. Harmful objects. Beyond the boundary of economic goods and of free goods there lies an anti-economic environment, the harmful: destructive lightning, floods, poisons, vermin, pests of locusts, disease-breeding swamps, wild beasts, human enemies, and many other ills of earth. While some water continues to be “a good,” other water may be “an ill,” flooding one’s cellar, or soaking one’s clothes on a cold day, or breaking through the walls of a mountain reservoir and carrying death and destruction in its path. Pure air may come as a tornado, fire may destroy our dwelling, growing woods may cover the fields needed for tillage, iron may crush the foot or cut the hand. And so, anything may become harmful, while in turn the “harmful” may become useful. Poison helps rid the house of vermin, disease germs may be made to serve as antitoxins, noxious weeds may, by the discovery of some new process, be worked into useful forms, tho they may still continue to be harmful in many a farmer’s field.

§ 4. Value and true welfare. It will be noticed that the things that are valued, the things that we call economic goods, are things that have a relation to the choices or desires of men. It must not be thought, however, that they are of necessity conducive to real welfare, either generally or permanently, as the term “good” might seem to imply. In many cases they may be so, but what shall we say of the pistol which the highwayman points at his victim, or of the poison with which the lunatic kills his friend, or of the opium for which the miserable victim would give his birthright, or of the whisky which is ruining the happiness of the drinker and of his family? For the individual these things, being the objects of choice and desire, have value, and the term “economic goods” has been extended to cover things of this sort. The economist, however, must not overlook the injurious results of such uses, and in his final judgments on economic welfare must endeavor to see a larger good than that of the moment and of the individual desire.

The term utility properly expresses the idea of this fitness (a quality) of things to conduce to real welfare quite apart from the subject’s knowledge at the time or of his choice. This is in accord with usage as well in biology (for example, in discussing the utility of certain organs) as in the moral sciences (for example, in studying the utility of certain institutions). We should beware of the very frequent confusion of the terms value and utility, and throughout we shall connect the idea of value with choice and not with utility. Later, in considering the more lasting effects that wealth has, either upon the individual or upon society, utility has its place.

§ 5. Gratification of desire. We have already seen that there is in our desires for things an impulsive or an instinctive element. But with our growth through childhood into maturity, experience accumulates, and our choices among things and our desires for things come to have in them elements of memory, calculation, imagination, and reason. We desire an article of food partially because we have already tasted it and imagination recalls the sensation which it gave us. We desire a plow because our reasoning powers tell us that the plow will assist us in growing the crop which is to serve as food. So as we develop intellectually it comes about that judgment dominates our desires to a very considerable degree. Now if we have a desire for a thing, and succeed in securing it, a change takes place in our desire. This change we call gratification. (Or if the desire is completely met, we speak of the change as the satisfaction of the desire.) It is the sensation (feeling) which accompanies the getting of the thing desired.1

§ 6. The idea of income. Desire is a mental reaching out for things. The fulfilment of desire involves the securing of the objects of desire, and this brings us to the idea of income. We find the term used in a number of different senses. Income may consist of certain concrete goods which come in to a person during a given period—such as bread, butter, meat, clothing, etc., the quantity of which is expressed in physical units, such as bushels, pounds, yards, etc. A stream of goods of this sort is sometimes called “real” income in contrast with monetary (or pecuniary) income, which is a certain sum of money—or its equivalent in credit—received by a person within the period under consideration. If this terminology seems to imply that monetary income is less “real” than an income consisting of food, clothing, etc., the explanation is that a money income is but a means to an end. It is likely to be used to purchase all sorts of concrete goods—such as food and clothing—which are the real objects of desire. However, in the commercial world, and in ordinary life, we are very much in the habit of expressing income as a sum of money accruing within a period. This is perhaps the sense in which the term is most frequently used.

§ 7. Psychic income. A closer consideration, however, discloses the fact that there are many desirable results which cannot be included either under “real” or under “monetary” income. Many choices made by men are not directed to securing material objects. The term real income can hardly be strained to include the services of the hired laborer, the man’s own direct services to himself, the valued social esteem which leads one to take a lower salary for harder work, etc. It is difficult to estimate such things in monetary terms or in terms of other concrete goods, and often the attempt to do so is not made. For we are dealing here with things which are in the realm of feeling. We may call them psychic income, and we may define the term psychic income as desirable results produced in the realm of feeling by valuable objects or by valuable changes in the environment which accrue to or affect an economic subject within a given period.

We have here reached something fundamental in our analysis. It is not merely that many items of income take this form and this form only—not being embodied in any tangible shape. But concrete, tangible objects (monetary or non-monetary), are regarded as income, as something desirable, just because their ultimate effect is to bring about such changes in the realm of feeling as we are now discussing. The food that we eat banishes the sensation of hunger. Clothing protects us from the cold, gives the feeling of being well-dressed, etc. The musical instrument creates, through our nerves of hearing, the pleasurable feelings of harmony. The beautiful picture, the automobile, the pleasure yacht—all the many kinds of concrete goods which man desires—are objects of desire to him because of their capacity to affect the sensory system, and, through that, his mental life. It is clear, therefore, that any adequate enumeration of the group of things which we call income must take careful account of these psychic elements. The estimate of a man’s income merely in dollars may leave out items which are of the greatest significance to him. A man will work for a certain salary in an occupation that he enjoys who might refuse several times the amount in a less enjoyable or actually disagreeable line of work. A family may choose to live in a small house in a particular neighborhood, rather than in a larger house with greater physical comforts in a less attractive neighborhood. A girl who can live at home may accept what would otherwise be an inadequate wage—an income which would not support her if she lived elsewhere.

§ 8. Motivating force of psychic income. It may be seen that (anticipated) total psychic income is what motivates our economic activity—at least as far as this activity is determined by conscious purpose. There are men holding public office to whom the salary received is an insignificant consideration. They are paid largely in public esteem, or in their own consciousness of duty well performed. And in as far as men work for material rewards—money or goods—their ultimate ends are not material. They are in the realm of the psychic. Except to the miser, money is not an end in itself (if it is even in that case). Nor are stocks and bonds, or real estate, or even clothing and food, ends in themselves. Man’s psychic life is the thing which is of ultimate concern to him, and all these things appeal to him because of their relation to that complex of sensations and feelings of which his psychic life is composed.

§ 9. The personal equation in psychic income. The magnitude of the stream of psychic income depends in large measure on the natural temperament, on acquired habits of life and thought, and on the state of health of the individual. One person gets delight from small things; another is miserable in the midst of luxury. In 1913 the richest man and wife in Switzerland committed suicide together because they felt that they had nothing to live for; whereas the mass of the hardworking Swiss with their scanty material incomes, are as joyous and contented as any people in the world. Nothing can equalize these subjective differences between individuals, but each individual, in his choice, compares things with reference to their psychic income-value to himself; he does not judge them merely by their physical or by their pecuniary measurements. But when in moralizing strain, we say that the source of happiness is within oneself, we speak within limits. For the most joyous and optimistic of persons must have some of “this world’s goods” or life itself becomes impossible.

§ 10. Desire-streams and income-streams. It is not enough, however, that we should have a supply of goods at a given time; we need an “income stream.” Our desires are nearly all recurrent. Hunger, tho fully satisfied, returns again. One circus does not last the boy a lifetime. New clothing quickly becomes old. We weather one storm only to feel an equal need of shelter from the next. To meet this series of desires and wants we require a pretty regular flow of goods and services.

We may liken man’s life to a journey in which the supplies of food and of other goods are got at the daily stations. If any one of these supplies fails, the traveler suffers the pangs of hunger, and if two or three supplies are at one point, they do not serve his needs so well as if distributed along the way. This almost unbroken inflow of certain kinds of goods is a necessity of existence. The savage dimly understands this need. Even the birds and the beasts adjust their lives to it by toil and by travel. The spring and autumn migrations to new feeding grounds are the attempts of the bird to secure this income. The ant, the bee, and the squirrel anticipate, and work to fill their storehouses against the days of need. Man has to take thought to provide the much more complex series of goods upon which his desires are directed.

§ 11. Goods of direct, present use. These goods are of many kinds, but we may give our first attention to the goods of present, direct use to secure psychic income. Such is food to the primitive man, a skin to wear over his shoulders, a club to defend himself against his enemies. Such, to-day, is the cup of coffee on the table, the fire on the hearth, the furniture, the house, the land used for playground, tennis court, park, the clothing we wear, and countless other objects in daily use. Thus in every case that a desire is gratified, whether of child or of man, of poor or of rich, the relationship may be traced between psychic income and goods of direct use. Warmth is to be had by the use of clothing, shelter, and fire; light is given by the candle, the lamp, and the electric light. All around men are things just ready to serve the final use of yielding enjoyment, or just on the point of “ripening” or becoming fitted to serve this end. These goods of present, direct use are the first and almost the only concern of the animal, of the child, or of the savage. To man in developed economic conditions these goods are still the immediate objective conditions to the creation of his psychic income.

§ 12. Directness of use defined. Directness of use is that quality a good has of yielding to its possessor its ultimate economic use (psychic income) without the physical intervention of any other agent (between itself and the user). Examples of goods having direct uses are food ready to eat, fuel to give warmth to the body, the candle to give light, a beautiful picture, a riding horse, clothing, ornaments, furniture, dwelling houses, general services of all kinds, such as the musician’s song, the services of actor, teacher, lecturer, preacher, physician. When these uses and services produce psychic income directly (without the aid of any intervening agent), they are direct uses.2

CHAPTER 4

PRINCIPLES OF EVALUATION

§ 1. Quality, a reflection of desire. Our task now is to explain—in the case of present, directly enjoyable goods—the elementary principles of valuation. We have already seen that things have inherent physical and chemical qualities which are quite beyond the power of man to change. We can go further than this and say that no two objects are exactly alike. Each object is in an extremely literal sense a “unique.” “Alike as two peas” means merely so near to likeness that the eye cannot detect the difference. The differences are minute, and for many practical purposes quite negligible. It is such a degree of likeness for practical purposes which we have in mind when we speak of a “grade” of goods, and (somewhat inconsistently) of “like” goods having different qualities. Thus all apples may be spoken of as being “like” goods. They are alike botanically; they are also alike to a degree in the uses of which they are put. There are, nevertheless, different varieties of apples, and the apples of a given variety may always be “graded”—according to size, or to color, or to degree of perfection—when the grower uses them himself or prepares them for the market. These differences are inherent in the apples themselves. When, however, we speak of apples of “good quality” or “bad quality,” we mean simply that we desire the so-called good ones more than the so-called bad ones. As between two apples, the one which we desire the more is spoken of as of “good” or “superior” quality. But plainly the goodness or the superiority lies in the relation to our desires. So that quality is partly a matter of inherent differences, and partly a reflection of our desires. Thus if (in Fig. 3) 1, 2, 3, and 4 are apples which are practically alike except in one particular—sweetness, for example—and if we have a preference for sweet apples we are likely to rank them as to value according to their sweetness.

§ 2. Substitution of goods. If now we have an abundance of apples of the greatest sweetness or best flavor, those of inferior quality will make little appeal to our desires. The best apples have a high value; the poorest have little or none. Because of their abundance, or the abundance of the better grades, the apples of inferior quality may even be free goods, lacking in value because not in the smallest degree the objects of desire. If, on the other hand, apples of the finest flavor are few in number, those of the next best grade will become objects of desire, and will therefore have a value for us. We come in this way to attach different values to the different grades. This act of resorting to objects of inferior quality because of the scarcity of the better grades, is substitution of goods. It is but the objective aspect of the shifting in our desires. It is a simple matter, but it has its bearing on the general problem of value. The thing that is fundamental in the valuation of different grades of things is the connection between these various grades and the desires of men.

In some years, when the difference in quality between the grades of apples is marked and there is a large crop of the best grade, the small, knotty apples are free goods in the orchards, and are allowed to rot on the ground. In other years, when good apples are scarce, the poorer grades are gathered and are sold at good prices. But if there is an abrupt difference in quality between two grades, the value of the better grade may rise considerably before there is any use made of the poorer. The slighter the difference in quality the more quickly appears the effect of the presence of the lower grades in limiting the increase of value of the higher grades.

§ 3. The principle of substitution. Substitution of goods in the simplest case occurs where an individual is distributing two or more goods or kinds of goods to different uses. His object is to gratify his desires to the maximum, by economizing the more valuable goods and making the less valuable goods serve some of the same purposes. This may be expressed as a general principle of substitution as follows: goods of kinds and of grades the most valuable are applied to the more urgent uses they are capable of meeting, and less valuable goods are brought in to take their place (substituted) up to the point where the value of each use and the value of the good applied to it are equal.

No grade can be said to be the cause of the value of the others. There is an independent reason for the attaching of value to each grade of goods. Each grade would have value if there were none of the other. But they mutually affect each other’s value when they exist side by side. The value of each is lessened by the presence of the other. And thus two or many grades constitute for many purposes a single group of goods which shade gradually into each other by the shifting of choice.

§ 4. Substitution of like and of unlike goods. The cases of substitution most easily called to mind are between goods very nearly alike in physical nature and used for the same general purpose; cotton and wool for clothing; fish and venison, or peaches and pears, for food; candles and petroleum for light; stone, brick, and wood for house building; horses, mules, and oxen for hauling. But cases may be found which range in almost unbroken series in either direction—towards the substitution of practically like goods on the one hand and towards the substitution of most unlike goods on the other. One may go without overshoes to get books, without candy to go to the theater, without adequate food to get an education.

§ 5. Complementary goods. Some goods, however, instead of being substitutes have a complementary relation to each other. Two or more kinds of economic goods are said to be complementary when either one, instead of taking the place of the other, enhances its desirability. The one complements (fills out, completes) the other. Cases occur where the one good is entirely useless without the other, as the two gloves of a pair, a gun without powder, fuel without flame to light it, etc. In another class of cases the one is still of some value, but of less value, without the other, as salt in the food, one of a finely matched pair of horses, etc. In one way or another and at various times, a great many most unlike goods may become linked together in choice by this complementary quality. This gives rise to interesting, sometimes puzzling, problems of valuation. A group of complementary goods is valued as a whole; but if one part is missing the rest may be worth nothing, and a part may for the moment be worth as much as the whole. If a good in one of its possible uses is highly complementary, perhaps indispensable to another good, it will be valued for that use, and a substitute found in other uses. Economics is full of problems of complementary goods. Some of these occur in the use of enjoyable goods, and still more occur in production by means of complementary agents, the consideration of which must be postponed till later in our study.

§ 6. Changes of desires and of valuations. Choice is constantly being affected by changes within men (subjective) as well as by changes in the objective conditions. Desire is constantly shifting; different kinds of goods are at every moment being revalued according to the new conditions. The use of one unit of a good causes the valuation of the remaining portions to drop down the scale for the next moment. When we rise in the morning, we desire breakfast; the breakfast eaten, another breakfast does not appeal to us. Our tasks done, we take a boat ride or go golfing; then, appetite returning, we are tempted to our dinner. And thus from hour to hour desires are gratified, are altered, and are shifted, until, wearied with the day’s labors and pastimes, we go to rest. No impression on the nerves or on the senses is lasting. The “consciousness” is not a state; it is a ceaseless process. Man’s senses were evolved for the purpose of bringing him into relation with the outer world, of enabling him to survive in his struggle with the forces of nature. When a choice occurs, the corresponding desire falls for that particular moment, it may be even to zero. To keep desires satisfied is impossible. Desires recur for the same reason that they first arose. If they did not there would be no motive for action. We can not do next week’s reading or next week’s eating now. The best results in reading or eating come from taking the right amount day by day. In a well-ordered life, in an advanced, economic society, the means for gratifying desires as they arise are provided in advance. The changing series of desires is met by a changing series of goods. Life has been defined as a constant adjustment of inner relations to outer conditions. Economic life is therefore like physical life, a constant adjustment; and this adjustment of goods but reflects the shifting and adjustment of feelings.

§ 7. Effect of repeated stimuli. It is in the very nature of man and his nervous organization that any stimulus to the nerves, however pleasant for a time, becomes painful when long continued or increased unduly. The trumpet too distant at first for the ear to distinguish its notes, may swell to pleasing tones as it approaches, until at length its volume and its din may become absolutely painful. A man coming in from the winter storm and holding out his hands before the fire enjoys the warmth intensely; a few minutes later the same heat becomes unpleasant. In winter we wish for a moderation of the temperature; on the sultry days of summer we think of a cool breeze as the most to be desired of all things. Whether the temperature rises or falls, there is a point beyond which the change no longer adds to our comfort but begins to detract from it. A man, however hungry at first, may be made miserable if forced to eat beyond his capacity. The first sup of cool water is delicious to a thirsty man; a second and third glass, but not more, may still be grateful. Forcing one to take an excessive amount of water is one of the cruelest of tortures (sometimes called the “water cure”). Of every economic object it may be said, “One may have too much of a good thing.” The statement of this relativity of desires and successive gratification, is called the principle of diminishing gratification.1

§ 8. Different quantities and corresponding desires. It has already been made clear that the scarcity or abundance of a good has its effect upon our desire for that good. We can make use of more or less of it, but not of an infinite amount. If a very small quantity is available, we may use that quantity and still feel a fairly intense desire for more. If the quantity available is large, our consumption may be increased, but a desire (less intense) for more may still remain. A limit will be found somewhere, however, to the use that we can make of the good, and if this limit is reached—if the quantity available is so great that absolutely all our desires for it are satisfied—the value of the good will fall to zero for the reason that desire has completely ceased. Clearly the intensity of desire changes—and changes inversely—with the quantity of the goods available. If now we may be allowed the latitude of speaking of these various intensities of desire as different desires, we may say that there is a series of desires capable of being gratified by various quantities of the good in question. A small amount will gratify the greatest or most intense desire, an additional amount of the good will meet the desire which comes next in intensity, and so on until finally we reach the point where, with the whole series of desires already met, an additional amount finds desire completely lacking and value therefore at the zero point.

§ 9. Stock of homogeneous units; principle of indifference. If now we consider a quantity (stock) of the good which is capable of gratifying a part, but not all, of our desires, it is plain that a value will attach to the good. If it is a stock made up of homogeneous or identical units, there is no reason for preferring any particular unit to any other.

True, in advance of using the goods, we say that some of the desires are more intense than the others. But when we begin to use a stock of homogeneous units this difference must disappear. For we will begin by applying the goods first to the more intense desires, and as we have just seen, this reduces their intensity. We then apply goods to the desire formerly ranking next in intensity. And so successively, we apply the goods to the more intense desires remaining, and as they fall in intensity we take in, one after another, the desires which at first were less intense, continuing until the whole stock of goods has been applied. In this way we bring to equality the values of all the units that are actually used (if the goods are divided into very small units). We have come to the limit, or the margin, of the series of desires that this stock of goods is capable of gratifying, and outside of this limit may remain various ungratified desires.

The marginal desire (originally the least intense of the desires now gratified) now marks and expresses the actual value of each of the other units of the stock. This is the marginal valuation. The stock being made up of homogeneous units, equally fitted to gratify any one of the series of desires, no unit can be valued at the moment more than any other unit. The aspect of valuation here presented is called either the marginal principle (thinking of the least intense desire), or the principle of indifference (thinking of the equal fitness of the objective units), and may be expressed as follows: each unit of a stock of homogeneous goods which is actually at hand and equally convenient for use, is of equal value with every other unit, no matter to what use it is there applied. Of course this holds only as to the particular time and set of conditions, and desires may change in the next moment.

§ 10. Diagram of marginal valuation. This principle of valuation may be illustrated by the following diagram in which horizontal distance represents stocks of goods of various amounts, and perpendicular distance represents marginal valuation or value per unit. Let us assume that in the case of a stock of ten units the marginal valuation (value per unit) is 36. The value then ascribed to the whole stock will be 360 (represented on the diagram by the rectangle ab). If instead of a stock of ten we consider a stock of fifteen, then since fifteen units will gratify more desires than ten units, leaving fewer desires still unsatisfied, the marginal valuation will be lower—for example 30 instead of 36. In this case the value of the stock is 450 (rectangle ac). And similarly, for stocks of various amounts, we get marginal and total valuations as shown in the following table:

The first thing of significance in the diagram is that the marginal valuation, or value per unit, is large in the case of a small stock, and small in the case of a large stock. And this means simply that when we have a small supply of a commodity we set a high value (per unit) upon it; when we have a large supply its value per unit to us is small. This, of course, is a familiar fact of daily experience.2

§ 11. The paradox of value. One thing more may be pointed out by way of further study of the diagram. Corresponding with any given stock—for example a stock of ten units—there is a rectangle (Fig. 5, ab) which represents graphically the total value of the stock—that is, the product of the value per unit by the number of units. In the case of a very small stock this rectangle will be very small. On the other hand, in the case of a very large stock, since the value per unit is small and may even reach zero, the rectangle will also be very small, reaching zero, as we have already seen, in the case of free goods. Somewhere in between these two extremes, of course, there will be a maximum rectangle (Fig. 5, af), a stock the total value of which is greater than that of either a larger or a smaller stock. This fact (brought out also in the third column of the table) that after a certain point an increase of the total stock will result in a decrease of the total value, has been called the “paradox of value.” Cases have been known of the partial destruction of a stock of goods by its owners as the result of their calculation that the remainder would actually sell on the market for more than could be secured for the whole original supply.

Note

The Weber-Fechner Law. In part the effects of repeated stimuli are probably explained by a law of psychology. It is that geometric increase of the stimuli acting on any of the senses is required to produce an arithmetic increase of sensation. It holds “approximately and within a certain middle region of the intensive scale for intensities of noise and tone, of pressure, of various kinesthetic complexes (lifted weights, movements of the arms, movements of the eyes), and of smell.” “There is some little evidence that affection on the intensive side obeys Weber’s law.” (Titchener, “A Text book of Psychology,” 1911, pp. 218, 259.)

The points on the curve R₁ to R₄ indicate the total stimuli (measured on the ordinate by scale shown at right) required to produce a given degree of sensation, shown by abscissas measured on line S₀ to S₄. While the stimuli increase in geometric ratio (1, 2, 4, 8) the sensations increase in an arithmetic ratio (1, 2, 3, 4.) The relative quantity of sensation perunit of stimulus is represented by the height of a, b, c, d respectively above the base line. The second R produces sensation equal to the first, the third and fourth R (average) produce ½ as much sensation, the 5th to 8th R (average) produce ¼ as much. The curve a-d corresponds with the observed trend of decreasing valuation in many cases. It is clear, however, that valuation does not always (perhaps not usually) rise and fall in curves exactly parallel with sensation; for example, a first and a second unit of R might (if there were no more) be neither pleasurable nor valuable; a third and fourth might raise the total sensation to a degree where it was desirable and valuable; and not until the fifth or some latter unit would an additional unit of R add a smaller proportional value. The correspondence between decreasing sensation and decreasing valuation is thus found only at certain middle regions of the scale.

CHAPTER 5

TRADE BY BARTER

§ 1. Advantage of trade.1 Whenever two persons having valuable goods meet, there is a chance that their valuations of goods at that time will not be the same. One person may have more food than he needs at the time but be lacking in clothing. If each gives to the other some of the good which to him has smaller value, and receives some of the other good, in an amount which to him is more valuable, each of the two parties will be the gainer. This mutual giving is trade. Trade increases the range of choice open to men. Each good that can be traded takes on a new importance, that of procuring other things in trade. In addition to its own power to gratify a desire, it gains a representative quality and appeals to desires with the power of all the other objects for which it can be traded. It draws its value from two or more sources, one source being its own direct uses, the other sources being the uses of each thing for which it may be traded. This led men to speak of value-in-use and value-in-exchange. But it must not be thought that an object has to any one person two values at once; for as each good had before but one value at a time to any one person tho it had many uses, so when it gets the trading use, it continues to have but one value at a time, as determined at the margin of least urgent desire.2

Readiness to trade shows a man’s desire to redistribute his goods in accordance with the principle of substitution. He virtually says: “Part of what I have I am ready to give for part of what you have.” The relative strength of his desire for the other good is expressed in part by the amount of his offer. When he makes this comparison and this offer, he enters into the social, economic relation of trade with his fellows.

§ 2. Barter. Trade without the use of money or even the form of the money-expression, is rarely seen by the city boy to-day. Yet it has played a great part in economic history. In early societies the differing natural products of different localities were the most usual objects of trade. Salt, so essential to life, is on the whole plentiful, but it is found in comparatively few places, in rare springs, and in the salt seas, and was eagerly brought from great distances. Copper, when it took the place of stone as the material for weapons of defense or of the chase, was sought far and wide. Rare shells, feathers, jewels, and the precious metals appealed in early times to a universal desire for ornament. Products like these were in early times the objects of a rude sort of trade, which took the form of gift-making or of barter, accompanied by much higgling, in the simple efforts to adjust possessions better to desires. In the Middle Ages, outside the cities, which were very small compared with those of to-day, almost universally a “barter economy” prevailed or, as it has been called, a “natural economy” (a term taken from the German “Naturalien,” which means natural products, enjoyable things, as opposed to money). Natural economy, therefore, means that condition of society in which things are exchanged “in kind.” In the Middle Ages land was the chief form of wealth. Even princes were dependent on the products of land for their incomes. The peasants were “paid” (as we think of it) for their work by the grant of the use of land. The income of the landlords was in the form of “Naturalien” (wheat, chickens, eggs, etc., as well as labor), the kind and amount of which were fixed by contract or by immemorial usage. The use of money has greatly changed these conditions in Europe and America, but barter still is used in outlying districts, and in backward countries. It occurs more frequently than one is likely to think, in trade between savages and civilized traders, in rural districts, on the school grounds, between neighbors in horse trades and house trades, in multitudes of trades made by the help of want advertisements, and in many other cases.

The extent of the use of barter to-day does not, however, measure the importance to the economic student of understanding it. The true measure is the fact that without comprehending the process of barter it is impossible to comprehend much beyond the superficial aspects of developed markets and prices. The zoölogist studies the simpler forms of life, unicellular or little organized, as the best way to understand the higher organisms; so we must analyze the simplest forms of trade as a means to the comprehension of the most complex. Barter contains within it the elements from which develop all the forms of commerce.

§ 3. Some trading terms defined.Buyer and seller are the two parties to the transaction, the two traders; the buyer being the one acquiring a good not in his possession, the seller the one giving up the possession of that good in return for something else. Either of the goods may be taken as the point of departure in thought, and either party to the trade may be then looked upon as buyer or as seller.

Price is the good given by a buyer in a trade. In barter either good may be looked upon as the price of the other. At present one of the two goods is most often money of some particular king expressly mentioned, or clearly implied. When money is used in a trade, its quantity is looked upon as the price, and the other good is looked upon as sold for, and bought with money. Price may be per piece of a conventional size, as per quart, bushel, yard, pound, or for the entire group of objects or amount bought, as the price of a farm, of an entire stock of goods, etc., as is likewise usually shown by the context. The other good, that for which a price is paid, may be called the sale-good.

§ 4. The problem of price. Few words are more often on the lips to-day than price. If the price of a thing is high, the thing is dear; if price is low, it is cheap. What makes things cheap or dear? That question puts the price problem. It is a matter of every-day observation that when things are more plentiful than usual they are pretty sure to be cheaper; when they are scarcer than usual they probably will be dearer. Hens lay few eggs in the winter, but many in the spring. Apples are few on the trees and of poor quality one year, and plentiful the next. Rains are late and inadequate, and the crop of cotton in the South, or of corn in the Middle West, or of hay in the Northeast of the United States is small, and as quantity is small prices are high. Every one knows in this general way about prices and the reasons why prices change. Some men of business become astonishingly skilled in following and anticipating the changes in price of the particular goods in which they deal. But the purpose of the student of economics is not to learn the conditions that influence the prices of particular goods except as they may serve as examples, but rather it is to understand the general nature of all price movements and the principles determining all prices. The thoro pursuit of this purpose is a large part of the task of economic study.

§ 5. Demand. The phrase demand and supply is very frequently used as an explanation of economic problems, without any clear conception of the meaning of the words. Let us examine the meaning and the difficulties of the phrase.

Demand conveys the idea partly of the intensity of the desire of a trader for a certain good, partly of his having something (a certain amount) which he is willing to give for it, and partly of the amount of goods which he desires to buy at the price. Thus we may define: demand is desire for a certain quantity of goods at a certain price, united with the power to give the amount of the price in trade for it. Real demand refers to actual trade, for demand is effective desire, desire backed by the price needed to induce the other party to trade. It is convenient, however, to speak of potential demand as the amount which buyers would be ready to take at some specified price.

The hungry boy looking longingly at the sweetmeats in the confectioner’s window, represents mere desire; not until the kind-hearted gentleman gives him a nickel does he represent demand for sweetmeats, and then only in case the sweets are the nickel’s worth that he most desires, and not then unless the confectioner is willing to part with the coveted article for a nickel. Demand is actual, desire for a sale-good is effective, only in reference to a certain price, the quantity of the goods which the seller will take for it. We may speak of the intensity of desire, but should say rather the extent (or amount, the number of units) of demand.

§ 6. Supply. Supply is the correlative of demand in the phrase, demand and supply; it is the amount of sale-goods which sellers are actually ready to trade at a given price. Supply implies the existence of desire as surely as does demand. Indeed, supply may be defined as desire for a certain quantity of price-goods, at a certain ratio of exchange, united with the power to give sale-goods for them. Supply should not be confused with the stock in possession. The two may differ greatly, for at a given price a person may choose to offer for trade little or none at all of a good, even tho he has a considerable stock of it on hand. Demand and supply vary as the price changes, but in opposite directions. Demand varies inversely with price (rises as price falls), and supply varies directly with price (rises as price rises).

§ 7. Limits of advantage in isolated barter. In barter the trade can take place only within certain limits of price permitting each party to gain somewhat by the choice. The number of units of sale-goods compared with those of the price (each in some specific unit, as pound, yard, gallon, etc.), expresses the ratio of trade (or ratio-of-exchange). When two farmers “trade even,” a horse for a cow, either the horse or the cow may be looked upon as the price of the other good, and the ratio of exchange is 1 to 1. But the fact that in trade one thing is equal to the other does not mean that in either trader’s opinion the values of the two things are equal. Indeed the very motive of the trade to each party is that he may get what is to him a more valuable for a less valuable object. To even up a trade something may be given “to boot” and one thing be traded for a group of things, as a gun for a boat and a set of fishing tackle, or on rabbit for a lot of 25 fish.3 It must nearly always be the case that there are several ratios of exchange at which a trader has more or less of a motive to trade.

Where there are only two (or a small number of) traders there is a considerable range for bargaining, or higgling. For example, the owner of the rabbit might be willing to take 20 fish rather than not to trade, and the owner of the fish might rather give 30 fish than go without the rabbit. It is not at all certain that in such a case the trade will be at a ratio arithmetically midway between the extremes. Higgling is illustrated by the old-time American horse trade, in which so much depends on “bluff”; in such cases it is as important to be able to judge character as to judge horses, for the bargain will be concluded at a ratio of price to sale-good which exactly balance the hope of gain and fear of loss by one of the parties. This same margin for higgling appears in most exchanges between two somewhat isolated traders, even in highly developed business.

The effect that duplicate and additional units of a good have on valuation (principle of diminishing gratification) is the most frequent cause of barter. The owner, in accordance with the principle of substitution, seeks to trade some of his stock of a good (those units which correspond to less intense, direct uses) for goods which he lacks entirely or values more highly. A hunter with a large pack will be glad to trade a part of his furs for a part of the farmer’s grain and fruit. He thus gives up the satisfaction of his marginal, less intense desires for furs to gratify his more intense desires for grain and fruit. But (having meat to eat) he would not, at any price, trade for food all the furs he has. Thus, when goods are turned to their trade-uses, new levels of actual valuations for each of the two kinds of goods result in place of those existing before the trade.

It should be clear from this chapter that any true trade must be mutual and voluntary. It thus differs from gift-making, stealing, extortion, taxation, etc. True trade is of mutual advantage to the parties, at least is believed to be so at the moment. It is this which makes trade rational. It is a mode of substituting more desirable for less desirable goods.

A popular idea very difficult to uproot is that if one party to a trade gains the other must lose. This idea was generally held in ancient times and in the Middle Ages, and seems to have been connected with the notion that value is something fixed in a good and unchangeable. This seems to have been one reason for the poor opinion held of merchants, tho the frequency of fraud in trade with strangers strengthened this opinion. But if goods having a small value may be given a higher value by being traded, trade and the work of merchants, peddlers, and carriers of all sorts, may be a value-increasing process.

CHAPTER 6

MONEY AND MARKETS

§ 1. Money and evaluation. In the last chapter it was seen why a process of delicate price fixing can not go on in a state of true barter. The lack of correspondence between the amounts of the two goods, makes very exact estimates of the value of goods in barter difficult and often impossible. Therefore, in the earlier stages of society, no careful estimate of value is made by the individual. Children do not make it. The typical trade of the small boy is a “trade even”; Johnny exchanges his gingerbread for Jimmie’s jack-knife. It marks an epoch in the industrial development of the boy when he begins to keep store with pins, and no longer trades candy for apples, but both for pins, which have become the means of trade in his boy world. He then can express values in much more exact terms. In our society most children begin early to grow familiar with this conception of some thing used as a means of trading other goods; but travelers find some savage tribes still in the earlier childish stage of development, unable to grasp the thought, or understand the use, of money. When through lack of money there is a failure to adjust valuation, there is a loss of the possible advantage in each trade. There is a further waste of time and of effort to find something that will be accepted in barter, and the loss offsets a large part of the gain even when the barter is effected.

§ 2. Origin of money. These difficulties are met by the use of money. Some kind of good in general use comes to be accepted as a medium of trade. Money is simply one kind of wealth which is taken, not for itself, but to pass along. Each person takes it in the belief that it will enable him to distribute his purchasing power in a more effective way. Money was not an invention, as are some mechanical devices, suddenly hit upon, but it was invented in the sense that the use as money of this or that object grew into a social custom as its convenience was tested by practice. Money is used in some degree everywhere except in the most primitive tribes. Historically viewed, the money first used in any community seems in every case to have been an object capable of giving immediate enjoyment to its possessor: salt, furs, rare feathers, bronze for weapons, silver and gold for ornaments, etc. This valuable good then gradually comes to be used as money, adding to its value-in-use this quality of value-in-exchange.

§ 3. The use of money and money-prices. A money-economy is a social organization, or an economic community, where money is generally used as the means of payment, in contrast with a barter-economy where trade is carried on without the use of money. In either case it is a matter of degree, and actually both methods are found in use in any modern community in varying proportions. The numerous problems arising with the use of money in a money-economy make up an important sub-division of economics, which must in the main be reserved for later study. Our present purpose, however, is merely to get in mind a few fundamental ideas regarding the use of money as a standard of current prices.

Goods had value long before such a thing as money was known in the world. All the essential features of the valuation process are possible without reference to money. But the great bulk of the trade of the world is effected through the instrumentality of money (and credit), and prices are nearly always quoted in money terms. So, altho there may be valuation and even a certain amount of trade (and therefore prices) without the use of money, it is natural for us to look for concrete illustrations of trade and of price to the money transactions which are taking place around us all the time—the familiar purchase of a good for money. Moreover, while the explanation of the more complicated problem of market prices without reference to money is quite possible, it is simplified by having these prices expressed in money terms.

§ 4. The standard price unit. In every civilized country to-day, some one valuable metal, either gold or silver, is selected as the standard money material, and a certain number of grains of the metal, of a certain degree of fineness, duly stamped by governmental authority, is the standard coin or monetary unit. This unit in the United States is called a dollar, consisting of 23.22 grains of “fine gold” (or 25.8 grains of “standard gold” nine tenths fine); in Great Britain it is the pound, containing 113.001605 grains of fine gold; in Germany it is the mark, containing 5.5312 grains; and in France it is the franc, containing 4.4803 grains. The coinage of the dollar gold piece was discontinued in the United States in 1890, and gold is coined in multiples of a dollar in quarter and half eagles, eagles ($10.00), and double eagles. Other pieces of metal and paper, properly stamped, are also called dollars, but the value of each of those is always now maintained practically equal to the value of the gold dollar.1 When we discuss market prices to-day in America in terms of money, we may think, therefore, of the price as being a quantity of gold, some multiple of a piece weighing 25.8 grains.

§ 5. Representative quality of money. Buying and selling by means of money is not essentially different from a case of barter in which gold (or other standard money) is one of the two goods in the trade. Except in the rarest cases, the price-good, money, is taken by the seller for its power-in-exchange for other goods, not as metal to be used in the arts. The money is taken for its representative quality (see above, section 2); it represents to the trader the desirability of the things that it can be expected to buy. Money becomes in the thought of the traders something like an algebraic symbol, but it stands for different things and groups of things to different traders, and to each its significance changes from one moment to another, according as he chooses to use it in buying different goods.

When numerous things are bartered, the ratio in one transaction is unrelated with that in another. Tho there might be at the same time and place a hundred acts of barter, as sheep for cloth and wheat for shoes, etc., in large part each act of barter stands by itself in the thoughts of men. There is no common unit of comparison for prices. But if sheep, cloth, wheat, and shoes are each in turn sold and bought with the money unit, money becomes a common unit of expression not only for prices on the market, but for the various individuals’ valuations of goods. The habit of comparing goods in terms of money grows, and for convenience men frame their own valuations in monetary terms, as they approach a trade to bid and ask, and buy and sell.

§ 6. The sale at auction. Let us now approach the price problem as it presents itself when groups of traders come together, and where bids are expressed in some common unit of price. We will consider first the simplest case of price fixing in a group, that of the auction sale. In auctions on the Dutch plan the auctioneer first names a high price and then successively lowers the price until some buyer takes it. Balancing his hopes and fears, some one bids it in, because he fears that when a lower price is named some one else will take it. In auction sales on the English plan the auctioneer asks, “What am I bid?” and after getting “a starter” he stimulates the desire of the bidders by praise of the sale-goods, keeps the crowd good natured and optimistic by artful story telling, arouses the spirit of rivalry in the bidders, and excites their fears by skilful threats of “going, going,” until, shrewdly watching their faces, he feels that the limit is reached. Then he lets fall the hammer, “knocking the article off” to the “lucky buyer.” The auctioneer in all this is himself under some pressure, and the success of the sale as a whole depends much on his skill. He dare not delay long for a higher bid on any one article, for unless the bidders continue to believe that things can be had at low prices (i.e., at less than new goods will ordinarily bring) the interest flags and the crowd melts away.

§ 7. Bids in relation to valuations. Note how the prices paid are related to the valuations of the bidders. Suppose that an ax is to be sold at auction, and each one of the ten prospective buyers as he comes to the market has his outside valuation, as follows:

When B 3 has bid 50 he has reached his limit and only two other bidders remain. B 2 may then hope to be successful at 51, but B 1 “goes one higher” at each bid until the bid of 54, at which point B 2 drops out. The price in an auction sale is the next unit above the next to the highest bidder’s maximum valuation.2 When there are several urgent bidders for a single article, or for a number of articles less numerous than the bidders, the price sometimes goes considerably above what is “normal.” For example, if several farmers in the neighborhood have lost or sold horses and a horse is offered at auction just as the spring plowing needs to be done, they may bid so eagerly as to carry the price above that for which an equally good animal could be bought in the next county, or in a near-by city. The buyer can afford to pay as much more as the cost to himself of a few days’ delay and loss of his time when “time is money.” If the normal price is 60, the actual price, which is the market price at that time and place, might be 70 or 80.3

§ 8. Effect of multiplicate units of supply. Suppose that instead of one ax, there were ten axes, all of about the same quality. At rural auction sales in America, those present look over the articles before the sale begins, and try to find who has come to buy, what they would like to get, and what they are likely to bid. If every prospective bidder judged the situation with entire accuracy, then when there were nine axes the exact price would be 21, just enough to exclude the lowest bidder; if there were eight axes the price would be 26 (and so on up to 54 if there were but one ax).

What would happen if there were ten axes offered to ten bidders and no one else would be tempted to bid at any price, however low (i.e., complete inelasticity of demand at prices below 20)? The first thought may be that the price may be twenty. But we are here coming to the margin of satisfaction of desires where values disappear. If the more eager bidders know the situation and refrain from bidding, each buyer might in turn get an ax for one unit, the smallest possible bid. This is the case when things sell for a “song.” On Saturday nights at the produce markets such goods as strawberries, vegetables, and fish will be sold at any price. In fact, it rarely happens that demand is entirely inelastic, for at an abnormally low price each of the more eager bidders may be tempted to get more of the sale-goods than he had expected, and still others who had no thought of buying will do so if only with the purpose of selling later. The man who bought a cheap coffin at an auction because “it would be handy to have in the house” was a bit of an extremist, yet it is proverbial that anything can be sold if the price is low enough.

§ 9. Successive price levels through uncertainty. It is evident that a mistake in the judgment of traders must alter the price somewhat with any number of sale-goods. There may be a succession of price levels. When there were ten axes, the first five might sell at close to 40, the next three at close to 30, and the last two at 20; the more eager bidders being uncertain of the number of other bidders and afraid to risk waiting for the lower price. This drop in price is a very common incident at auctions, to the chagrin of the earlier buyers; but the opposite is possible, and bidding may become more spirited and the price rise as the last article is put up for sale.

§ 10. Auctions with reserve valuations. An auction is advertised to be “without reserve” when everything is to be sold for the highest bid, no matter how low it is. The seller agrees in advance to have no minimum selling valuation. Price in such a case may be abnormally low, much lower than in a trade where a lower limit is set by the ability and readiness of each would-be seller to keep all or part of the supply if the price is not as high as his valuations. Buyers’ bids alone then determine the price at anything above zero. In most cases of trade, each trader virtually stands ready “to bid in” his own goods at his valuations rather than to sacrifice them; and even in some auctions the right is expressly reserved of withdrawing articles for which the bids remain unduly low. In some cases friends or confederates, “cappers,” make pretended bids, or sometimes bid in the goods if the price is too low.

§ 11. Origin of markets. We have in the auction sale, with its gathering of buyers, something near to the idea of a market. In all parts of the world, civilized or uncivilized, are found places where both buyers and sellers of various kinds of goods come together to trade. These meeting places (or meetings) were called markets because they were first found on the border (mark) between tribes, villages, or clans, as a common ground where strangers met to trade. The notion of trade did not develop within the family and the tribe. There the idea of common ownership seems to have ruled, and the communities seem to have been led to trade by the abundance or the want of certain natural resources in their environment; thus shore tribes had a surplus of salt and fish, forest tribes had meat and skins, tribes living near good mineral deposits had flints and bronze, while each wanted what the other had. Markets developed on neutral ground whither came buyers and sellers, some of whom became regular merchants. Buyers found a better selection of goods, both as to kind and as to quality, and merchants found many would-be purchasers for what they had to sell. Throughout the Middle Ages purchases were made by the more prosperous husbandmen in great quantities once or twice a year at the fairs or markets. As both buyers and sellers came from widely separated places, the feature of combination (or monopoly) was not common and the conditions of a competitive market were present.

In America as towns or villages appeared where some men could give most of their time to producing something besides food, local markets sprang up whither farmers came to exchange with village artisans. Every little country store in America is in some measure a market, where the merchant trades with the farmer, the townpeople with the merchant, and neighbors with each other. The larger cities become the great markets, toward which are sent all the surplus products of farms and of the mills in smaller cities to be distributed to the consumers.

§ 12. Transportation and the extent of markets. Markets are limited by the means of transportation enabling goods to be brought from the place of their origin and delivered to the place of their use. A dense population engaged mainly in commerce and manufactures can be maintained only at points where there are means of bringing in a large supply of food, and of carrying back manufactured goods. The remarkable growth in the means of commerce since the application of steam to water traffic, and the invention of the railroad, have made it possible for goods to be gathered from more distant points.

§ 13. Communication and markets. Buyers and sellers need not be physically present at one place, but they must be in communication, so that there can be a common understanding between them. In earlier times, however, there were no easy means of gathering information such as trade bulletins, newspapers, special commercial agencies, and no rapid means of transmitting intelligence, such as the steamship, the railroad, the postal service, the land telegraph, the ocean cable, and the wireless telegraph. The traders once had to be together at one place in order that each should know what the others were willing to do. All this is now changed and for many purposes men in Paris, in New York, in London, and in Calcutta are separated by only a few moments for trading.

As a result of these changes, the old periodical fairs and markets have almost disappeared, and there has been a widening of the village-market to the markets of the province, of the nation, and finally of the world. While a part of every one’s purchases continues to be made in the neighborhood, a greater and greater portion of the total business is done by traders that are widely separated and that are members of a world-market. Various products produced in the same locality may seek different markets. While the market for fruit and eggs may be in the village near the farmhouse, that for most of the wheat of the same farm may be in Liverpool.

§ 14. One price in a market. If the many buyers and sellers coming together at a market-place were to meet as isolated couples, without knowledge of the others, the trades would be made at a great variety of ratios, possibly no two trades at the same. But the coming together of buyers and sellers into a single trading group has a remarkable effect on the ratio at which the trades take place between individual buyers and sellers. So far as there is truly a meeting of minds, all the trades taking place at any one time are at the same ratio. It is the essential proof of a true market that there is but one price at any moment. A complete or typical market may therefore be defined as a group of closely communicating traders whose valuations, however diverse before they meet, unite for a moment into a single price (as regards the goods actually traded). A typical market exists and a market price results when there is: (a) a group of buyers and sellers; (b) a judgment by each trader of both groups, as to the conditions of the market; (c) free bidding on both sides.

§ 15. Imperfect market conditions. When, however, these conditions are not fulfilled perfectly, different prices may exist at the same moment near each other. Retail and wholesale merchants may be purchasing goods in the same room at the same time at very different prices, but there are here two distinct and well recognized markets. Even within what is ordinarily the same market, differences may for brief times exist. On the occasion of a break in stocks, excited traders within ten feet of each other make bids that differ by thousands of dollars; but the expression used to describe this explains the cause: “the market has all gone to pieces.” The very essence of the idea of market is the meeting of minds in agreement on a price. Within a group of buyers and sellers thus meeting, one price prevails at least for the moment. The more nearly the actual conditions approach to the ideal of a market, the less are prices fixed by individual higgling, and the more impersonal they become, the buyers and sellers being compelled to adjust their bids to the needs of the market, and being unable to vary them greatly one way or the other.

CHAPTER 7

PRINCIPLES OF PRICE

§ 1. Buyers’ composite valuation curve. We have now to examine the process by which market-price is determined where two groups of bidders are present. This fulfils the conditions of a complete market, where there is two-sided, competitive bidding. Each trader comes to the market with valuations already in his mind more or less definitely. It may be that he is disposed to buy one unit if the price is high;1 if it is lower he will buy two units; if still lower, three units, etc. Or he is disposed to sell one unit at a certain price, two units if the price offered is higher, three if it is still higher, etc. The situation from the standpoint of the prospective buyers is represented in Figure 9. One of them (B 1) stands ready to purchase one unit at a price as high as 14 if he can do no better, but he will, of course, buy at a lower figure if possible. B 2 will, if he must, pay as high as 13 for a unit. Other buyers2 are willing to buy (one unit each) at prices respectively lower—12, 11, etc. At the extreme end of the scale there are certain individuals who would be induced to buy only by a price extremely low—4, 3, 1, etc. The diagram, therefore, represents this situation where the individual (prospective) buyers have different mental attitudes (valuations) as regards the good in question, and where in the aggregate the whole body of buyers stand ready to take the various amounts indicated, according as the prevailing price is higher or lower. If it is high they will take a relatively small quantity: if it is low they will take a larger amount. If, for example, the price should prove to be 12, it will be seen that only four units will be taken by the would-be purchasers. They will be secured, of course, by the most urgent buyers, B 1, B 2, B 3, and B 4. There is no one else who stands ready to buy at a price as high as 12. There are others who would buy at a lower figure, but if the ruling market price is as high as 12 they are, by their own attitude of choice, necessarily excluded from the actual market transactions. Similarly for any other price in the scale there will be a definite number of included or actual buyers, and a definite amount of the good which in the aggregate will be taken by those buyers at that price. This amount, the demand, which the buyers will take at any specified price is a composite, the combined result, of course, of the bids of the various individuals concerned.

§ 2. Sellers’ composite valuation curve. We may show in a similar way by Figure 10 the conditions of supply. S 1, the most urgent seller, is willing to sell one unit at a price as low as 4;3 S 7 will part with a unit at a price of 7.5 if he can do no better; S 12 will not be tempted to sell unless he can get 10 for a unit of the good, etc. Here again the diagram simply depicts the fact that at any given price there will be a certain number of actual or included sellers, and the amount offered by those sellers at that price, or the supply, will also be a definite quantity. At a low price this quantity is small; at a high price it is large.

§ 3. Price the resultant of demand and supply. Our question now is what is the market-price which naturally emerges from the demand- and supply-conditions which we have been considering. If one of these curves be superimposed upon the other, they are seen to cross at the point corresponding to ten units of sale-goods, and to the price of nine per unit. All that the diagram means is that under the supposed conditions of demand and supply (i.e., ten units offered by the sellers, and ten asked by the buyers at the same price, 9), the market-price which actually prevails will be the price (9) at which the demand and supply are equal. It is obvious that the number of units bought must be the same as the number sold. At the price 9, there can be and will be ten trades. In each of these ten trades there is some gain for each buyer and for each seller. (It matters not whether the most urgent buyer buys from the most urgent seller.) But not one of the buyers with a valuation less than 9 could trade with any of the sellers with a valuation more than 9. The only way in which any one of these excluded buyers or sellers could get into the trading would be by inducing some one on the other side to act by mistake contrary to his own interest, or from motives of pity or generosity, while at the same time one on the same side fails to act in accord with his own interest.4

It appears then that a logical market-price5 is that price common to all trades made at the time, which permits the maximum number of transfers with some gain to both parties. This may be expressed also as: that price common to all trades at a given moment, at which no less urgent bidder on either side of the market can trade while any more urgent bidder is excluded. Such a price brings the desires underlying demand and supply to an equilibrium; no buyer is willing to bid more and no seller is willing to take less. It may therefore be called an equilibrium price.

§ 4. The market as a two-sided auction. It may be helpful to think of the market as a double auction-sale in which each bidder in either group has in mind a “reserve-price,” a valuation at which he will withdraw from the market. Now suppose it is the duty of the auctioneer to find the correct market-price. He would say, “There are 16 axes here, how many will sell at 7 rather than not sell at all?” At this price there would be six sellers and only six trades possible. The other owners of axes hold them (have reserve-valuations) at more than price 7. “How many will buy?” At this price there are sixteen would-be buyers. Then by successive readjustments the auctioneer might finally fix a price at which the maximum number of trades is possible, that is, the price 9, with ten trades.

§ 5. Supply and demand coördinate in price-determination. It should be emphasized that in the foregoing explanation of price, choice must be understood in relation both to demand and to supply. Choice is not peculiarly connected with demand. Demand, like supply, means a quantity of goods which a person chooses to trade at the actual price. Demand is expressed as the number of sale-goods which a buyer will take at the price; supply as the number of sale-goods with which a seller6 will part. Demand and supply are the same goods viewed in different aspects. A trader can have no demand unless he has a supply of the price-goods to give, and will make no offer unless he has a desire for the other goods. There is no more of the psychological element in demand than in supply, and no less of the objective elements (of material goods).

§ 6. Price in a permanent market. We have been analyzing the process of price-fixing, starting at a moment when no price existed. Prices must have their origin in this way beginning in a given situation of human desires in relation to the existing fund of goods. But in a much greater number of cases in practical life to-day, price seems to exist in advance of, and apart from, any individual’s valuations. Almost every market, like every active business, is a “going concern,” closed only at night, on Sundays, and on holidays. Price seems to be a continuous fact, altho there is, properly speaking, no continuous price; there is merely a succession of separate prices, as shown by the trades from moment to moment. We watch price change as in a moving picture made up of many instantaneous photographs. Yet each new price seems to grow out of the last price. The opening price each day is usually somewhere near the closing price of the day before, but often somewhat, or very, different as a result of rumors, or of information regarding rains, wars, fires, and countless other influences. The individual trader must take the price at any moment as he finds it. His choice, indeed, is such a small element that price seems to be independent of his valuation. He merely decides whether at that price to buy, or to sell, the same amount as before, or more or less, or none at all, or to bid or to ask a lower or a higher sum. In doing any of these things, however, he not only indicates his attitude toward the market-price, but he exercises his influence upon it. An excluded buyer, if he has anything to trade, shows that he values the price more than he does the sale-good. On the other hand, an excluded seller, the owner of a sale-good, retains it because his desire for it is stronger than his desire for the price (and for the other things which by trade the price represents to him). Trade and the succession of prices appearing are the index and the resultant of the continuous changes in the economic conditions, desires, and choices of the members of the community.

§ 7. Effect of the market upon valuations. It is clear that price is the result of the valuations of traders in a market taken collectively; yet as each individual’s valuation is looked at separately it seems to be largely determined by price. It is very important to keep in mind that the valuations which are spoken of and represented graphically as so different from the market-price, are not actual. They are merely what would be if the individual were not in the market. It was shown in discussing the valuation curve (see Chapter 4, sections 8-11), of an isolated person, that the higher valuations of earlier units sink in accordance with the principle of diminishing gratification when more like units are added. The actual valuations of all the like units of a present supply are all alike (principle of indifference). Now in a market the individual is in the presence of large new supplies which he can buy at a price. If he approached the market with a higher valuation of the sale-good (in terms of the price-good) than he finds prevailing, he buys, and continues to buy successive units until his valuation of the sale-good has sunk to the market-price, or until his price-goods (purchasing power) are exhausted. So long as he keeps on buying he is bringing his valuation as nearly into agreement with the market-price as he can (with units of the size offered). As he gets more sale-goods their value (in money) falls (principle of diminishing gratification); as his money decreases the value of the other things he can buy with it relatively increases (principle of increasing gratification). When all his money is gone he has desire, but no demand, his valuation is merely hypothetical—what he thinks he would pay if he had the money. This is the state of mind of a large part of the population most of the time regarding most kinds of goods.

§ 8. The point of price-adjustment. Picture now a market, let us say a village, to which the farmers of the surrounding country are bringing eggs, butter, apples, etc. The price of eggs to-day is 20 cents a dozen, and at that price just 100 dozen are brought to market and sold. If but 80 dozen a day come to market the price will rise, let us say, to 25 cents. Altogether there must be 20 dozen fewer bought. Who ceases to demand eggs because price has risen only five cents a dozen? Some few wealthier families may continue to buy the same number as before, a few poorer families will stop using eggs entirely, and between these two extremes will be many families which will use eggs a little more sparingly. Now the group of poorest families, which before was buying some eggs, was just at the margin of choice as regards its whole demand; the middle group was just at the margin as regards a certain part of its demand. In the contrary case, say a fall of price from 20 to 18 cents, many of the families will somewhat increase their use of eggs (substituting them for other kinds of food and packing them for winter use), and perhaps still other families, which could before not afford to use eggs, will now buy some. And so with respect to every good, in a market of any size, there are always persons already buying some, who will be ready to buy more, and there are others not now buying any, who will begin to buy some, at a lower price. At the higher price they are excluded would-be buyers; in respect to certain quantities, they are merely potential buyers, but when the price falls they become actual buyers. (A similar view must be taken of the sellers, actual and potential, at a certain price.) Each price is clearly the resultant of all the actual demand and all the actual supply that brings about the equilibrium; but certain units both of demand and of supply are more responsive to price changes and are more immediately the occasion in bringing about changes than are others. The necessary adjustments of price, of demand, and of supply, are made by those traders who are in a most sensitive, unstable condition in reference to certain units of goods. Therefore our attention in studying price is directed more toward the buyers and the sellers who are just excluded, or are about to be excluded with any alteration of the conditions in the market. When the two pans of a balance are nearly in equilibrium, either a bit taken out of one pan or a bit added to the other will bring the balance to equilibrium. We speak of these bits added or taken away as causing the equilibrium, but we know that this is only on condition that the other contents of the pan are present and remain unchanged while this one change is made.

§ 9. Social factors in individual valuations. Men of to-day are accustomed to look to the market-price as in some measure a guide to their valuations. We have just seen why this must be so, because by trade men are constantly bringing their valuations into accord with that represented in price (so far as they have the purchasing power). But in still other ways, outside of trade and often preceding the actual trade, the influence of other men’s choices comes to play a large part in our valuations. Traditional and conventional values, foolish fashions, fads, and imitation of others in very different walks of life and with very different needs, modify and determine our choices. It is easy to see this in every one but one’s self. These phenomena are variously spoken of as the mob-mind, the hypnotism of the crowd, suggestion, snobbery, social ambition, idealism, etc. Each of us is so affected by his surroundings, his associates, his education from youth up, that even what seem to be our coldest calculations are based on these more or less fixed and fundamental standards of opinion, prejudice, and preference. Nevertheless, the individual’s choice, when he makes it, is his choice and helps to maintain or alter price. It will be recalled that from its very beginning choice was impulsive, not rational, and continues to be in a large part guided by habit as well as by impulse. Choice has become in part rational only as primitive impulses have been inhibited, and choice, which is action, has been postponed in view of larger interests.

§ 10. Objective conditions to be studied. In the foregoing analysis there is not an ultimate explanation of price;6 we must not think that price is fixed by choice rather than by the objective conditions affecting abundance of supply, etc. There is no such contrast between alternative explanations. Each choice is made in a given situation; so far as the choice is deliberate it is made in view of all the conditions, which include the abundance and scarcity of material things. It is impossible to conceive of choice determining price without having regard to the quantities and qualities of economic goods. In choice, men are at nearly all times touching the world of reality. In price, we see a most significant meeting point of economic forces. The market-price of the moment contains within itself many other problems the solution of which must be sought in a study of natural resources, inventions, machinery, growth of population, ability of men to produce, and many other concrete conditions of industry.

CHAPTER 8

COMPETITION AND MONOPOLY

§ 1. Competition defined. The word competition is frequently heard and with various implications. Literally it means “seeking-together,” with the suggestion of rivalry, of mutual exclusion of the seekers. As applied to trade, competition means the attempt of two or more persons to get the same thing, each being guided by his own valuation and not restrained by any outside force. Thus there is an element of competition in the simplest case of barter, for whatever ratio is more favorable to one is less favorable to the other party and gives to one what the other fails to get. But the idea of competition more frequently is applied to a group of traders buying or selling the same class of goods. All the members of the group are thought of as being on one side of the trade, either the buyer’s or the seller’s side. If in such case there is on the other side but one trader (or some agreement or limitation of competition) there is one-sided competition. When there are two groups of competitive traders, one of buyers and one of sellers, there is two-sided competition.

§ 2. Naturalness of competition. Competition has been implied in previous chapters in such words as rivalry, emulation, bidding, least eager buyer, or seller, price-adjustment, etc. Competition is spoken of as a force raising or lowering prices, as a motive acting upon the traders, etc., but competition is not a different force, or a separate motive, apart from the desires of the traders. (Some minor exceptions occur where the motive is the mere wish to outdo for the fun of the game.) Rather competition ordinarily is but an expression for the situation where each trader is exercising his choice in a market without restraint from others of the same group. For unless there is introduced a new personal factor of collusion, conspiracy, agreement not to bid against each other, the market price will be competitive, and a condition of competition exist. Such agreements, being dependent always on the good faith of the parties, often also on secrecy, and being provocative of jealousies in the division of the gains, are dependent on personal factors, and create a more artificial state of price than is found in competitive price, which has a more impersonal character. Hence competitive prices have, since the days of Adam Smith, commonly been spoken of as “natural” prices. The word natural must, however, be used with caution. It can not be said that the choice any trader makes in entering into an agreement not to compete, when he sees that he can gain by so doing is, in one sense, any less “natural” than his choice of the thing when he competes. The choice might be called natural but the situation and the price resulting are not so, viewed from our present standpoint; they are artificial in the sense that they result from an agreement to abstain from the competition which otherwise would take place.

§ 3. Conflicting interests of competition. The buyers have the common interest of low prices; the sellers, the common interest of high prices; and buyers’ interest as a group is opposed to sellers’ interest as a group. The competition of interests is thus in two dimensions, but competition is applied particularly to the rivalry within the group on either side.

If there are more would-be buyers than sellers (or vice versa), some on the buyers’ side will be forced out by the competition of the others; and even if the numbers are equal in each group, and all succeed in trading, it will probably be at a ratio altered by the competition. The presence of competing buyers, having different valuations, raises the price at which some sellers will be able to sell and, vice versa, the presence of competing sellers lowers the price which some buyers must pay.

It would always be to the advantage of the traders on one side (say the sellers) if some of their number would cease to produce, or would produce less, as this would raise the price that those remaining could get. Sometimes the rise of price through decreased production is so great that the total price of the whole supply is greater than the total price of the larger supply (and vice versa, in case of increased production). This is the paradox of value applying to a whole market and to the buyers’ curve of composite demand, rather than to the individual and to his valuation curve. For example, the total amount of money received by all the farmers of a country for a large crop of corn, wheat, tobacco, cotton, may be less than what would be received for a smaller crop. Abundance is good for the purchasers of farm products, but not always advantageous to the farmers as a class. This appears in the comparison of amount produced, price per unit, and value of the total crop, in successive years; for example, of cotton in the United States. This phenomenon appears frequently in the case of many kinds of products. To the sellers it is very disagreeable to get less for a large crop than for a smaller one, and it constitutes a motive for attempting to control the prices to their own advantage whenever they can.

§ 4. Nature of monopoly.Monopoly is derived from the Greek roots, monos (sole, only) and polein (to sell), whence the abstract noun monopolia (exclusive power, or condition of sale). It originally meant the exclusive legal right of selling some article in some market. The typical monopoly of later medieval and early modern times was the power (or person or company granting it) granted in a patent by the sovereign. The name patent survives as the special name for the monopoly granted by law to an inventor. Patents and franchises of public corporations, such as street railways, etc., are the main modern forms of legal monopoly. The idea was extended in one direction to include the right to deal in some article, and has been extended in modern usage in another direction to mean economic power to become (within limits) the sole seller (or buyer) of an article, whether this power is derived from law or springs from the economic conditions. It is applied also to the group of persons, or to the business company or corporation, which has this power. Monopoly, therefore, is essentially opposed to competition, but only within a group on one side of the market, not in the market as a whole. It suggests always the limitation or absence of that rivalry within the group of buyers, or of sellers, respectively, which constitutes competition.

§ 5. Monopoly not merely scarcity. Monopoly should not be used as synonymous with scarcity. Scarcity is the essential condition of all value. The simplest things—bricks, sand, the commonest unskilled labor—would have no value were there not a degree of scarcity. “Monopoly,” whatever else it means, always conveys the idea of some exceptional kind of scarcity due in part to some source or cause not ordinarily present. Many economic writers, for example, have called land-ownership monopoly, saying that land being the work of nature cannot be increased by men, and therefore must always be scarce. Even if it were true that in the economic sense land could not be produced by man, there still would be confusion here between a general class of goods and a special thing. The fact that a particular field cannot be duplicated does not make a monopoly of land as a whole. Nothing can be duplicated exactly, but units very like can be bought of others that will do just as well. It leads to absurdity to use the word monopoly with reference to land-ownership indiscriminately. Neither the humble owner of forty acres of land worth four hundred dollars, nor the owner of a village lot worth a hundred dollars, has any monopoly power. Neither mere scarcity nor the limitation of natural stores should be called monopoly when ownership of like goods is scattered and combination between owners does not exist.

§ 6. Monopoly is not merely superior economic power. Neither does the ability of superior material agents and of skilled workers to secure higher returns than do poor ones constitute monopoly. The free competition assumed in abstract discussions of value does not mean equal capacity or efficiency, but the legal freedom and the personal willingness to move a productive agent into the highest industrial place it is capable of holding. The rocky field does not compete with the fertile one in the sense that it can yield the same uses. The field fit only for potatoes does not compete with those rare and favored localities that can raise the best wines. The gardener earning two dollars a day does not compete with the skilled physician with an income of twenty thousand a year, for he has not the economic capacity to do so; but he is free to compete (as is the owner of the rocky field) unless law, caste, class legislation, social prejudice, or some other objective factor forbids. Anything, however, that prevents the labor or wealth of buyers or sellers from applications for which they are fitted, defeats free competition. To use the term monopoly of any and every limitation of economic ability is to extend it to every case of value. To use it of the high wages of skilled workmen, where no union to suppress competition exists among them, is to make it a colorless synonym of scarcity. It should be confined to a narrower and more exclusive use. Some special kinds of limitation should be connected with the idea of monopoly. The limitation connected with monopoly is not that of economic capacity but that of ownership and control.

§ 7. Partial competition coexisting with monopoly. The limitation of competition in the case of monopoly is usually in some part merely, or on one side of the market. It is true that a condition of double or two-sided monopoly may exist; indeed, this is always the case in isolated trade, but the typical and important problems of monopoly, in advanced industrial conditions, are those where competition is removed from the traders on one side while it continues to press with full force upon the traders on the other side.1

Monopoly-price, therefore, cannot mean one which is determined without the operation of competitive motives, but one which is determined through their more or less partial and one-sided operation.2 When monopoly exists the market is not a full or complete one, but competition may still be very active in many respects.

§ 8. Absolute and relative monopoly. An absolute monopoly might be said to exist whenever the entire group of traders having control of some kind of goods, on one side of the market, is united to act as one person. This situation rarely occurs and even when occurring is modified by the power of substitution of goods somewhat similar. Monopoly, therefore, is nearly always relative rather than absolute. Monopoly and competition both may better be thought of as qualities more or less marking the conduct of traders on either side of a market than as absolute concrete situations. The element of competition is always present in large measure either on both sides of the market or on one side. Monopoly, however, is more likely to occur within the smaller group of traders, while competition is more likely to continue within the larger group, and in varying degrees from the least to the greatest.

Wherever any agreement exists among bidders it makes their action lose, in so far, its competitive, and take on a monopolistic, character, tho this may be very slight and not socially harmful. Likewise the element of monopoly is present among small traders whenever there is but one trader on one side (the buying or the selling side) and he makes a more or less separate bargain, at different prices, with each of the traders on the other side of the trade, forcing each toward the upper limit of valuation.

§ 9. Motives and germs of monopoly. As competition is always forcing buyers to bid up, and sellers to bid down against the general interest of their groups, there is an ever-besetting motive for monopoly. If two or more of the traders on the same side of the market can get together and limit their mutual competition, they often may gain, tho at the corresponding loss of the other parties. Evidences of this practice appear throughout all the history of commerce.

The germs of monopoly are in any device whatever, that is used to keep any trader from competitively bidding in accordance with his individual interest as he sees it. A group of the most eager bidders at an auction sale may combine and pay the least eager buyers each something to keep them from bidding, and then buy up the whole supply for a trifle. Or all would-be buyers may secretly agree to let one or two do all the bidding and to divide the results. If, on the other hand, the auctioneer has confederates who pretend to buy the goods if the price is not as high as the auctioneer expects, a fictitious market price results, and buyers lose the chance that brings them to the auction, that of “picking up a bargain.” An auctioneer often conceals the fact that there is more than one of an article, and having sold it off, brings out a second or a third one of the same kind, thus keeping the buyers in ignorance of the supply and getting somewhere near the estimate of the most eager buyer in each case.3

§ 10. Types of monopoly-price: receipts vs. profits. These petty devices develop, in the case of larger markets and of many important articles of sale, into the systematic practice of manipulating prices artificially. The explanation of the motives and of the limits of monopolistic price-fixing would best be reserved in large part until a later stage of our study, where it can be considered in connection with enterprise. It is in the sale of the products of a business that the most important problems of monopoly are found. There the monopolist is seeking the highest net gain over a considerable period in the sale of a continuous output of goods. The cost per unit is the minimum seller’s valuation and the monopoly-price sought is that which in the long run yields the largest gain (the product of units of sales times margin of gain per unit). Let us here consider merely the case where the monopoly (seller or group of sellers) is seeking the maximum total price (not net gain) for a stock of goods which have no minimum seller’s valuation. Such is the classic example of monopoly in colonial trade related by Adam Smith: “In the spice islands the Dutch are said to burn all the spiceries which a fertile season produces beyond what they expect to dispose of in Europe with such a profit as they think sufficient.”4 This type of cases is of not infrequent occurrence. Such a case is presented whenever the unsold portion of a supply would go to waste, such as perishable goods after they have come to market (fruits, vegetables, etc.), such as vacant seats in an opera house, at athletic games, etc., where the expense of the whole performance has been incurred and will not be increased by more spectators. We may call this price which concerns the gross receipts from sales, crude monopoly-price. It is that which yields the monopolist (with complete control of supply) the maximum gross receipts.

This control of all the seats at a single entertainment is a very restricted kind of monopoly, and does not present a social problem. There is still intense competition among artists of all kinds to provide entertainments having the merits to attract spectators.

§ 11. Uniform monopoly-price. In all such cases the competitive price would be fixed solely by the buyers’ scale of valuation, as in an auction without reserve. If the supply of goods be large, approaching the saturation point of desires, whether there be one seller (without reserve valuation) or competing sellers, the price will tend toward the valuation of the marginal buyer, and in the extreme case may sink to zero. The only way sellers can prevent this is to reserve a part of the supply, even if it has to be burned up or thrown away (fish, fruit, etc.), or remains unused (as the empty seats in a theater). In the case shown (in Fig. 14 and the table) if there were 7 units for sale, the unit price would be 1, the total price 7, and each of the 7 sellers would get 1. But if the owners of these 7 units unite and withhold 3 units, the total receipts are 16, which divided equally, gives 2 units of price to each seller. It is a general truth, that monopoly power can be made effective to raise a uniform market-price above what it would be if the monopolists competed, only by artificially increasing scarcity, by limiting supply. Shown graphically, the maximum crude monopoly-price obtainable is always the largest rectangle that can be inscribed within the coördinate axes and the hypothetical demand-curve. (See above Chapter 4, Section 11, on the paradox of value.)

§ 12. Uniform monopoly-price, inelastic demand. With a more inelastic demand,5 where buyers’ demand increases very little with a rapid fall in price, the monopolist must restrict his offers more narrowly to attain a total price above the competitive. In Figure 15 the offer of 3 units would at the price 6 yield the maximum proceeds (18), and any supply below that would be tapping only the lower levels of valuation. If a few valuations are high, and the others fall very rapidly, the price can be raised very much more; as in Figure 15, if the demand curve were AEFG the monopoly-price would be 9. This is the type of demand for articles of great luxury, limited to the very rich.

§ 13. Uniform monopoly-price: elastic demand. The more elastic the demand the more nearly a monopolistic price approaches a competitive price with a given number of units of supply. In Figure 14 it appears that with any number of units up to 4, the monopolistic and the competitive market-prices would be the same, and any restriction would involve a loss to the monopolist. The motive for monopoly lies in the range of supply of 5 units and beyond. With a more elastic type of demand as in scale A-B (in Figure 16) where there is less difference in the valuations of the most urgent (or capable) and of the less urgent buyer, competitive and monopolistic market-prices are the same up to 7 units (7 × 4⅓ = 30⅓ total). With a still more elastic demand represented by a more flattened curve, as in C-D of Figure 16, the competitive and monopolistic price are the same up to 11 units (11 × 3⅓ = 36⅔ total) and either 10 or 11 units will yield the same total. Beyond that is the region of possible monopolistic price. Compound types of demand scales, made up of different levels of demand, would further strengthen or weaken the motive to limit supply. If the demand curve, after rapidly falling, flattens to a new broad field of demand, a lower price will yield a larger total than the previous monopoly-price. This is the type of non-essential goods which remain luxuries when price is high, but rapidly become looked upon as comforts and necessities when price falls.

§ 14. Discriminatory monopolistic price. It appears from the foregoing that while it is possible for sellers to gain by the fixing of a uniform monopoly-price under some conditions, under other cases it is not. The range of this possibility is, indeed, much narrower than would be anticipated before a study of the problem.6 But where a monopoly exists, why should it confine itself to a uniform price to all buyers? The very scrutiny of the differences in buyers’ valuations needed to fix a monopoly-price, suggests making differences in prices. This fact of practical experience presents the problem of discriminatory monopoly-price. It may often happen that the whole group of would-be buyers may be divided into subgroups, and a different price made for each (see Figure 17). This division may correspond with differences in locality (geographical), as in railroad rates to different places, different prices of petroleum to different cities or states, or different rates to domestic and to foreign shippers on a railroad, etc. Or it may correspond with social ranks, as can be done by making slight differences in quality, the best quality at a very high price for the rich, and the common grades at low prices to the masses. Or it may correspond with the power of different buyers to substitute other goods, or to resort to a different source of supply, the poor in such cases being made to pay more than the rich. Or the distinction may be made with reference to the individual differences in maximum valuations, only to be known by intimate personal knowledge or by an elaborate system of espionage. This is the extremest possible discrimination.7

[1 ]This distinction is developed in Part VI, especially in ch. 39.

[1 ]See note on Aspects of things chosen, at end of chapter.

[2 ]See note at end of chapter on Various meanings of scarcity.

[* ]The dotted valuation line ab drawn through and above y indicates that the valuation of x is greater than that of y, but the degree of the difference is left indefinite.

[3 ]It is, however, but the anticipation and reflection of the choices that purchasers will later make. See on enterprise in Part V.

[4 ]See note below on Value and valuation.

[1 ]This is the sense in which we should regularly use the term in relation to valuation. But sometimes the word gratification is used to denote the pleasure of the senses which accompanies not the mere getting of the thing, but the using of it after it is secured—for example, the sensation which accompanies the eating of food, the listening to a musical instrument, or the looking at a picture. The gratification of desire at the moment of attaining a good reflects a provisional adjustment of choice, which is subject to correction by experience. As far as practice and judgment guide our desires, the ultimate use of a thing and the sensations which accompany that use, may be deemed to be the explanation of the desire. This does not mean that our processes of valuation are a cold calculation of the sensual gratifications to be obtained from goods. But it does mean that the anticipated use of a thing enters into our desire for it. And it means also that judgment, foresight, and calculation play their part along with instinct and impulse in our desires and our evaluations.

[2 ]The directness here considered must not be confused with immediateness in time. Directness here refers to the number of steps or processes that separate the good from the final use to the owner. It is the quality which an object has when it gives the sensual stimulus which results in psychic income. Time-value is the special subject of Part IV.

[1 ]See note on the Weber-Fechner law, at end of chapter.

[* ]To show this graphically, let the units of goods be plotted on the base line. If but one were present its desirability measured on the perpendicular (valuation scale) or parallel with it, is indicated at the height d; if there were a second unit its desirability would be indicated by e; and so on until with six units the value of the sixth would be c. But if the units are perfectly interchangeable, the value of every unit would now be the same as that of the last, and is measured by the height of the straight line bc above the base line, and not by the height of the curve ac.

[2 ]It is evident that the various parts of a stock of goods can be valued on the marginal principle only when it is possible to choose among the various units and to apply them to various uses in such proportions as one will. If another person controls the whole stock and compels us to choose “all or none” we may be forced to value the whole stock according to our more intense desires. This is a fact of great importance in some practical problems, such as those of monopoly.

[1 ]Definition of trade. Of several meanings that the word trade has had, two are still usual: (1) a regular occupation, more especially a handicraft, as the carpenter’s trade, to learn a trade, used thus in reference to labor problems, the trade union, etc.; (2) an exchange of goods. In the latter sense it may have a general meaning, (a) an exchange of goods whether made by the use of money, or otherwise, when there are several traders present or only two; or (b) exchange between two traders, without the use of money. Usually it has this meaning in such expressions as “a horse trade,” a “knife trade,” etc. Used verbally, to trade has as synonyms: (a) to exchange, to traffic, and (b) to barter, to truck, to swap, or swop, used colloquially in England and Scotland as well as in the United States. We shall use “trade” in the broader sense (2a) of exchange by whatever means, and shall employ the word barter in the special sense (2b) of trade without the use of money, while we may call cash trading, or monetary buying and selling, the case of trade where money is used.

[2 ]See ch. 4, sec. 9.

[3 ]Boot means amends, compensation, from the same root as better, best, thus to make good, to even up a trade.

[1 ]By proper safeguards regarding their quantity and their ready exchangeability for gold.

[2 ]This may be called the theoretically exact price, under the assumed conditions. Of course inattention, forgetfulness, etc., on the part of the bidders alter the conditions and therefore the price (both theoretical and practical).

[3 ]This is a case of complementary goods (see above, Chap. 5), the horse being needed to make use of other goods. It also evidently involves time-value, which see later, Part IV.

[* ]Let the buyers be arranged in order of the amount of their maximum valuations, from left to right from the intersection of the coordinates. The dotted horizontal lines represent the successive levels of the bids, rising until the price is fixed at 54, just above the next to the highest bid.

[* ]If each of numerous like articles were put up for sale separately and each were supposed by buyers to be the last, there would result a succession of prices. Each price would be lower than the preceding, each just high enough to exclude the next to the highest remaining bidder. If, however, it was known that there were several like articles but not just how many, there might result a succession of price levels. The dotted curve connects the maximum valuation of the several buyers; successive prices form a curve somewhat lower. A tenth unit would sell only at a price between zero and 20.

[1 ]This set of valuations with which a trader enters a market reflects a disposition, an attitude of choice, a provisional judgment, which is subject to change with new conditions. See below on social factors in individual valuations.

[2 ]Elasticity of demand. The changes of demand (and of supply) relative to a certain amount of change of price are very different according to kinds of goods, to times, and to circumstances. A fall of a particular price by 1 per cent may correspond with an increase of demand by 1 per cent or 2 per cent or 10 per cent as the case may be. When eggs were 35 cents a dozen in Chicago (between 1909-1911) and fell to 34 cents the change in demand was hardly noticeable. But at 30 cents (about 15 per cent less) the demand rose from about 15,000 cases to 30,000 a week (100 per cent),—a considerable degree of elasticity. (The standard case contains 30 dozen.). At 20 cents a dozen demand was remarkably elastic, and additional supplies to the amount of 50,000 to 100,000 cases were taken (probably used as substitutes for meat, and to put into cold-storage) with hardly noticeable decline in price. Later, in June and July, however, when the demand for cold-storage purposes falls off, and possibly because eggs are somewhat less palatable in hot weather, the price fell lower (to 18, and one year even to 15 cents). When at a given price a small reduction in price increases largely the amount that will be bought and sold, demand and supply are said to be elastic. For example, at 35 cents the demand for eggs in Chicago is relatively inelastic, and at 20 cents it is very elastic. See Fetter, Source Book in Economics, pp. 25-33, for description and diagrams of some seasonal price variations in food, from Professor H. C. Taylor’s study of the subject.

[3 ]It must not be thought that in the above diagrams B 1, B 2, B 3, etc., are necessarily all different people B 1, who is willing to pay (if he must) 14 for one unit, may appear again as B 2, willing to buy a second unit, but not willing to pay as much for it as he would for a single unit, or as B 4, B 6, etc. That is, he is willing, like the other buyers individually, and like the group of buyers as a whole, to take a certain sum at a high price, and a larger sum at a lower price. This is in accordance with the principle of diminishing gratification which we have already discussed (ch. 4). Similarly S 1 may enter again as S 2, S 5, S 6, etc. That is to say, each seller (of divisible amounts of goods) is willing to offer more at a high price than at a low price. It is evident, then, that the principle of diminishing gratification lies at the bottom of the demand conditions and also of the supply conditions as they exist in a market at any given time.

[4 ]Effect of trading outside of the market. For example, B 11 might take S 8 apart and persuade him to exchange at the price 8, at which both would gain something as compared with not trading at all. But it would be folly for S 8 to isolate himself in effect from the market in this way. For at that price there would be 8 traders willing to sell and 11 willing to buy. Three buyers able to outbid B 11 must, at the price 8, fail to get into the trade at all. One of them (logically it should be B 10 with a bid of 9) must leave the market without making a purchase (S 10 having a valuation of 9.5). Any buyer from B 11 to B 16 therefore could succeed in getting into the market only as a result of persuading one of the sellers against his own interest, and of outwitting a competing buyer. Similarly, S 11 might get B 9 apart (or any other buyer from B 1 to B 8) and make a trade at 9.5 mutually advantageous (tho not so good for B 9 as he might get otherwise). But at this price there would be 11 sellers and but 9 buyers, and as in the converse case, the less urgent traders would be displacing more urgent traders. Under the assumed valuations any other price than 9 involves the displacing of some more urgent bidder (or bidders) by a less urgent bidder on the same side.

[5 ]This is the logical, or theoretical, market-price in the sense that it is the price which results when all the assumed conditions are fulfilled. Actual market-price is that price at which a trade is made, and this may vary on either side of the theoretical price when something happens such as is described in the last footnote, some one failing to realize his possibilities. When this occurs there is immediately a new theoretical price and the increase of bids from the excluded, more urgent bidders must send the price either higher or lower than at the last trade. In the example above, where 8 was the actual price on one trade, the next theoretical price became 9½.

[6 ]Who is also, from the other point of view, a buyer, his sale-goods being the price he is ready to pay.

[6 ]It is easy “to confuse the idea of natural cause with that of final cause. Science knows nothing of the latter; any natural cause is only a link in the chain of cause and effect; it is itself the result of antecedent causes and the cause of subsequent results.” Conklin, “Heredity and Environment,” p. 164. This warning of the natural scientist is just as important in the social sciences as it is in biology.

[* ]In nine changes that occurred (as compared with the preceding year) production and prices moved in opposite directions eight times, and in the other case (in 1910) price rose but little the same year that production increased a little. No doubt cotton prices would have been on a lower level the last few years (1909-1912) but for two factors: (1) The increasing scale of general prices due to gold production, and (2) the increasing population and the corresponding need for more cotton.

In five of the nine changes the paradox of value appeared; three times (1904, 1908, and 1911) when production increased, and two times (1909 and 1911) when production declined; and in still another year (1905), this nearly occurred, for a crop smaller by 20 per cent had a total value only two-thirds of a per cent less than the year before.

[1 ]See above, sec. 3, on the conflicting interests of competition.

[2 ]This caution is necessary as the student will find frequently the assumption that a monopoly-price is not influenced by competition.

[3 ]See ch. 6, secs. 6-9.

[4 ]“Wealth of Nations,” Routledge ed., p. 487.

[5 ]Note that as demand means number of units demanded, at a price, an elastic demand means a large change of demand with a small change in price. This is represented by a flattened demand-curve; and vice versa an inelastic demand is represented by a steep demand-curve.

[6 ]It must not be forgotten that our study thus far is limited to crude monopoly-price. The problem is different when it is one of profits resulting from the excess of price over cost of production.

[7 ]Thus where the uniform monopoly-price is 4 per unit, yielding proceeds of 16, a group discrimination such as shown in Figure 17, at the left, might yield 23, and personal discrimination, as shown at the right, 28.