Book 2 — Chapter CX.

Different Cost Of Production Of The Same Goods.

Most goods are produced at the same time, but under different circumstances, at a very different cost. In order to estimate the influence of this fact upon price, we must distinguish between those commodities the cheapest manner of the production of which may be extended at pleasure, and those in the production of which it is necessary, in order to satisfy the aggregate want of them, to call in the dearest mode of production to aid the cheapest.

In the former instance, the price of commodities is naturally regulated by the least cost of production. The person who is unable to sustain this competition permanently, would do a great deal better to abandon the industry altogether; for it is not in his power to raise the price by diminishing the supply; more powerful rivals would then only need to correspondingly increase theirs.656

If the same law were applicable, in the latter case, producers [pg 326] placed in a less favorable situation would be compelled to immediately abandon the market. The market, in consequence, would no longer be able to provide for the aggregate need; and the price of the commodity would continue to rise until the producers who had been driven from the market returned to it again. Hence, here, price in the long run is determined by the cost of the production of the commodity, produced under the least advantageous conditions, while such production is necessary in order to satisfy the aggregate need. The person engaged in production under more advantageous conditions receives in the same price of the goods, which are cheaper to him, an excess of profit; one which is greater in proportion as his situation, vis-a-vis of production, is superior to that of his less favored competitors.657658

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Section CXI.

Different Cost Of Production Of The Same Goods. (Continued.)

Hence the price of a commodity and the ratio between its supply and demand mutually condition each other. On the height of the price depends, in great part, how many purchasers shall resolve to make an effectual demand; but, at the same time, to what amount of cost of production, sellers shall extend their supply.659 We can speak of an equilibrium between supply and demand only when the former corresponds with the wish of those who are ready to make good the full cost of production. (Malthus.) It has been asked, indeed, whether it were more natural and better that demand should precede supply or supply demand.660 But the inquiry is an illogical one, when expressed in so general a manner, since supply and [pg 328] demand are only two sides of the same transaction. But, we may say that in the case of indispensable goods, the want of them (demand) is always felt sooner than the excess of them (supply), and that in the case of goods which may be dispensed with, including, originally, money, the reverse is true. Besides, a person engaging in the production of any kind of goods, can, as a rule, only seldom directly investigate the relation between supply and demand. Generally, he can do no more than compare the market price of the commodity with the cost at which he can produce it. Many mistakes are inevitable here; but the making of them is the necessary sacrifice which must be endured to purchase the more than counterbalancing advantages of free competition.661

Section CXII.

Exceptions.

The rule that goods which have the same cost of production have also equal value in exchange, is applicable only to the extent that it is possible to transfer the factors of production at will from one branch of production to another. Where this really free competition does not exist, the price depends entirely on the quantity of the supply, compared with the solvability or capacity to pay of the purchaser; and hence, it may sometimes rise far above the cost of production (monopoly-price), and sometimes sink far below it (forced price, or under-price).662 Such hindrances to competition depend, in part, [pg 329] upon natural causes. Thus, in the case of the works of art of a deceased artist, which cannot be increased in number;663 or in that of living celebrities who cannot extend their mental activity in the same degree that their reputation has grown. So, also, in the case of precious stones, which are sometimes found free, and therefore cost nothing, but which, at the same time, have a high price.664 Many valuable agricultural products are, together with their production, limited to a definite and sometimes very small district.665 It is to be regarded as a modification of such natural monopolies when substitutes for a kind of goods which diminish, at least in part, the demand for them, are found, at a cheaper price; for instance, ordinary table-wines in the stead of fine wines. The rule applies much more strictly to those goods which, on account of their greater quantity, can replace inferior ones,666 than it does to those where this is not possible.

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The principal cause of forced or under-prices (Schleuderpreise) is the facility with which the product deteriorates, and must, therefore, find a quick sale, especially when its storage or transportation is attended by further difficulties.667 But, very durable commodities are also subject to under-prices, and especially those which last longest, because the supply of them can be diminished only very slowly. Thus, for instance, houses, in a declining city. Distress-prices are found most usually in the case of such commodities as are produced without any intention to produce them, as for instance, rags and excrementitious substances. The more the mere forces of nature preponderate in production, the less can the supply be increased or decreased at pleasure, the more frequently, as a consequence, do we find monopoly-prices and under-prices. (Compare § 131 ff.) Thus the production of wheat is invariably connected with the order of the seasons. Between seed-time and harvest, there are a number of months which neither capital nor skill can shorten to any extent. The cultivation of land, to be very much greater and more lasting, supposes so many conditions precedent, increase of live stock, buildings etc., that it can be attained only after a series of years. Hence it happens that wheat, much more than manufactured products, is subject to oppressively high prices and oppressively low ones, during a long period of time. No matter what the influence of the forces operating in the opposite direction may be, the [pg 331] price of wheat depends most largely on the result of the last crop.668

Section CXIII.

Exceptions. (Continued.)

Other impediments in the way of freedom of competition have their origin in social conditions. The rule governing prices applies only where the vendor and purchaser are equally ready to exchange. But in every case in which the producer carries on his business, not for the sake of free gain, but simply to obtain a means of livelihood, it may be subject to many important exceptions.669 The richer a seller is, the longer can he wait for a favorable opportunity to sell. Thus, for instance, wheat is somewhat lower in price at times when payments are universally made than at other seasons of the year, because a great many country people are then compelled to sell. Where the country population are universally needy, it sinks after a harvest to an unusually low figure, and in spring rises again very high.

Sometimes price is affected by the agreements of the purchaser or seller, but most readily by those of middlemen between [pg 332] consumer and producer.670 Customs peculiar to whole classes may exert the same influence, and such customs are especially powerful in the lower stages of business and industrial development. They, even at the present time, take the place, frequently, of freedom of competition in retail business, in the book business, and in the determination of lawyers' and doctors' fees, as well as in the distribution of a nation's income among the three great branches of its general economy,671 deciding, instead of competition, how much shall go to each. Wherever there are guilds, communities, castes etc. with legal privileges; wherever there are difficulties placed in the way of exportation and importation; wherever preëmption rights or monopolies,672 in the strict sense of the word, exist, the leveling ebb and flow of the elements of production may be still more seriously interfered with. Legislation673 of this sort injures the non-privileged portion of the population more than it helps the privileged portion. (See § 97.)674

The word usury, so arbitrarily used in every-day language, should be admitted in science only to designate a famine-price, fraudulently and intentionally caused or intensified.

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Section CXIV.

Prices Fixed By Government.

No power can, of course, fix the price of a commodity in the long run, which cannot at the same time fix the relation of supply and demand. Hence, set prices fixed by governmental authority can be made to play a part in practice only in so far as they do not establish a price in opposition to the real state of things, only to the extent that they give undoubted expression to it in a manner in harmony with natural conditions. With this restriction, set or fixed prices may, in the absence of real competition, which can always best determine prices, be useful to both parties; otherwise one party would at one time, and the other at another, profit by an unjust advantage; but it would not be long before both would suffer from the perturbation caused thereby in all commercial transactions. How pleasant it is for a traveler in Switzerland, or even in Italy, to find set prices established there.675 Especially where competition is prevented by state privileges, the establishment of set prices by the state for the protection of the public may be necessary.676 It is more difficult to fix a [pg 334] set price for a commodity in proportion to its complexity and to its variableness in quality; and where there are different grades of quality of the same commodity, and the transition from one grade to another is almost imperceptible, such price is easily evaded.677 In the case of every enterprise carried on [pg 335] by many in common, where no competition is possible, it is necessary to supply the defect by means similar to the establishment of fixed prices; as in the case of government, by fees for governmental services, and the coöperation of a chamber of deputies in the imposition of taxes and the determination of official salaries etc.678

Section CXV.

Influence Of Growing Civilization On Prices.

On the whole, prices become more and more regular as national-economic civilization advances. Progress in civilization tends to bring the parties engaged in the struggle for prices that is buyers and sellers, nearer to one another, in so far as it uniformly decreases the cost of production, and increases the purchaser's ability to pay.679 (See § 101.) The more universal division of labor makes commercial intercourse more necessary to every one, at the same time that it makes it more of a habit to him; and hence exchange ceases more and more to be a matter of caprice or chance. The better means of transportation and communication render it easier, in every way, for supply and demand to meet. With the advance of general enlightenment and education, an acquaintance with commodities also becomes more general, and every purchaser is on a better way to be able to estimate the cost of production which the seller has to bear. Hence, fraudulent prices and prices founded [pg 336] in error become less frequent; and all this is helped forward by the greater accuracy of weights and measures. The increase of population makes competition more active in all branches of trade, while at the same time, with the greater freedom of circulation, a number of causes which previously operated to produce very high prices in one place and very low ones in another are removed.680 But especially, the growth of a distinct class of merchants leads to a uniformity in price. This class are incited by their own interest to purchase at low prices and sell at high prices. Thus, their competition in the former case raises prices, and lowers them in the latter.681 In all lower stages of civilization, the custom of making offers and beating down in price plays a great part, while where culture is higher, the system of fixed prices (but not by government) gains ground continually. Here Turgot's principle is applicable, viz.: that the current price of an article is tacitly understood when one asks a merchant the price of his wares.682

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This proposition is true in the case of individuals, as well as of classes and of whole nations.683 It is plain, that under a system of fixed prices we can more certainly discover what the equitable price is, than in the heat of higgling which besides consumes a great deal of precious time. Lastly, one of the principal requisites of a well developed scale of prices is national honor, and this, doubtless, increases in the higher stages of civilization, not only because of the greater moral culture which [pg 338] then prevails, but also and especially because that which constitutes a people's real and best interests is better understood.684 Among declining nations, many of these developments take a retrogressive road. The very great distinction between rich and poor, between educated and uneducated, again produces great fluctuations in price. A proletarian people who have sunk so low as to live on potatoes will suffer much more from variations in price and of the means of subsistence than a people who live on wheat; for the reason that it is so difficult to export or to preserve685 potatoes. Nor can it be doubted, that the greatest possible constancy of prices is the most beneficial condition that the general economy of a people can be in. Where prices change while the cost of production remains the [pg 339] same, one person can only gain what the other has lost. But such unmerited gains and undeserved losses have an invariable tendency to destroy the deepest roots of a people's economic activity; and intentional speculation based upon such change usually assumes an immoral character. (Stock-jobbing.)686 Even if Macleod be right, that an increase or decrease in prices is to be regarded as a warning of excess, the former of excess of consumption, the latter of production, no one will doubt that it is the interest of every organism to confine pain within the smallest possible limits, even if its consequences are so beneficial to the preservation of the whole body.

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