Book 2 — Chapter II. Prices.

Section C.

Prices In General.

The price of a commodity is its value in exchange expressed in the quantum of some other definite commodity, against which it is exchanged or to be exchanged. Hence, it is possible for any commodity to have as many different prices as there are other kinds of commodities with which it may be compared.597 But whenever price is spoken of, we think only of a comparison of the commodity whose value is to be estimated, with the commodity which, at that time and place, is most current and has the greatest capacity for circulation. (Money.)598 When two commodities have changed their price-relation to each other, it is not possible, from the simple fact of such change of relation, to determine on which side the change has taken place. If we find that a commodity A stands to all other commodities, C, D, E etc., in the same relation as to price as [pg 304] before, while commodity B, compared with the same, has changed its place in the scale of prices, we may infer that B, and not A, has left its former position.599

The words costly and dear, as contradistinguished from common and cheap, both indicate a high price. We, however, call a commodity costly whose price, compared with that of other similar commodities, is high. On the other hand, we call a commodity dear when we compare it with itself, and with its own average price in other places and at other times.600

In individual cases, the price of a commodity is determined most usually, and at the same time most superficially, by custom; people ask and pay for a commodity what others have asked and paid for it. If we go deeper and inquire what originated this customary price and may continually change it, we come to the struggle of interests between buyers and sellers. And if science would analyze the ultimate elements of the incentives to this struggle and the forces engaged in it, it is necessary that it should keep in view the entire economy of the nation, and even all national life.

Section CI.

Effect Of The Struggle Of Opposing Interests On Price.

No where in the public economy of a people are the workings of self-interest so apparent as in the determination of prices. When the price of a commodity is once fixed by the conflict of opposing interests,601 the self-seeking of every individual dictates that he should thereby gain as much as possible [pg 305] of the goods of others, and lose as little as possible of his own. In this struggle, the victory is generally to the stronger, and the price is higher or lower, according to the superiority of the buyer or seller.602 But who, in such case, is the stronger? Political or physical superiority can turn the balance one way or another only in very barbarous times, and especially in times when legal security is small.603 As a rule, it is the party in whom the desire of holding on to his own commodities is strongest, and who is least moved by the want of the wares of others. As in every conflict, confidence in self, sometimes even unbounded confidence in self, is an important element of success. A party to a contract of sale or barter, who considers his immediate position decidedly stronger than that of the other party, will scarcely depart from his demands. Hence it is, that in exchange, one party so frequently holds back until the other has expressed his terms.604 How different is the [pg 306] price of the same pieces of land which a new railroad enterprise is compelled to pay and the prices it would get for them, from the adjoining owners, in case of the dissolution of the company.

But the struggle to raise prices or to lower them, which is always going on, undergoes modifications of every description among all really commercial nations, partly through the influence of the public conscience, which brands as inhuman and blameworthy the spoilation of the opposing party by acts which the laws do not reach. And this consideration by the public conscience is all the more severe in proportion as real competition in the article sold is wanting.605 But the chief modification in this struggle is produced by the fact, that where civilization has advanced farthest, every commodity is offered for sale by a great many and wanted by a great many.606 As soon as several seek the same object, there naturally results a rivalry among them, which induces each to attain the desired end, even by the making of greater sacrifices than others. [pg 307] The greater the supply of a commodity is, as compared with the demand for it, the lower is its price; the greater the demand as compared with the supply, the higher it is. And, indeed, there is question here, not only of the mass of things supplied or demanded, but also of the intensity of the supply and demand.607

If the exchange-force of both contractants be equal, or, in other words, if both, with equal knowledge, are interested in the completion of the exchange, there results from this attitude of the parties toward each other, what is called an equitable, or average price, in which both meet with their deserts. Here each is a gainer, since each has parted with the commodity which was less necessary to him, and received in exchange the commodity which was more necessary to him. Looked at, however, from the stand-point, not simply of a nation's but of the world's economy, the value given and the value received are equal.608609

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As a rule, the price-relation of two commodities is determined by this relation of demand and supply,—by the desire to possess and the difficulty of obtaining them. We must, therefore, examine on what deeper relations supply and demand themselves depend.610 In the case of the purchaser, the [pg 309] value in use of the commodity and his own ability to pay constitute the maximum limit of its price, which price may, however, be modified by the cost of producing it611 elsewhere or at another time. In the case of the seller, the cost of production is the minimum limit, which may, however, be extended by the cost of procuring the commodity by the purchaser at another time or place.612

Section CII.

Demand.

The purchaser in his demand is wont to consider principally the value in use of a commodity, according as it, in a higher or lower degree, ministers to a necessary want, to a decency or to a luxury. The difference of opinion as to which of these categories any given want belongs depends not only on the nature of the country and the customs of its people, but, for the most part, also, on the prejudices of class and on personal individuality.613 A reasonable man will employ only the [pg 310] surplus of the first class in the satisfaction of wants of the second, and again only the surplus of the second in the satisfaction of wants of the third.614

If the value in use of a commodity rises or falls, and surrounding circumstances remain unchanged, its price also rises or falls.615616

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Section CIII.

Demand.—Indispensable Goods.

When the supply of articles of luxury diminishes, the price of them, it is true, rises. But as now there is a number of purchasers no longer able to pay for them, the demand for them also decreases, and their price, as a consequence, rises in a less degree than might be inferred from the amount and condition of the supply merely. And so, on the other hand, an increase of the supply which lowers the price is wont, in the case of pleasures capable of a wide extension, such as are ministered to by fine roots, vegetables, etc., to produce an increase of the demand, and this operates to arrest the falling price.

It is quite otherwise, in the case of indispensable goods, as for instance, wheat. When there is a want of such an article, men prefer to dispense with all other articles, to some extent, rather than to practice frugality in bread; and all the more, as bread is not so much used as consumed rapidly, while clothes and metallic articles last a long time. And even after an over-abundant harvest, leaving voluntary waste out of the question, consumption is increased by a finer separating of the flour, an increase in the amount of corn fed to cattle, and the distillation of spirits. Hence, demand and supply by no means run in parallel lines at every moment; and indispensable articles tend to greater perturbations in price than those which can be dispensed with.617618 The price of grain, especially, varies in a ratio [pg 312] very different from the inverse ratio of the amount of the harvest;619 although a formula therefor expressed in figures, like that of Gregory King, can never be applicable universally.620 Farmers must everywhere and always withhold a certain amount of their harvest for seed, for home use etc., from the market. Only absolute necessity can induce them to draw on the quantity thus laid by. But the ratio of this part to the whole is very different in different countries.621 In the higher stages of civilization, where payment in money has taken the place of payment in produce, and all other kinds of payment, and where the cultivator of the ground pays the wages of his [pg 313] laborers almost exclusively in money, so that they, like all others, purchase what bread they require in the market; a given deficit in the harvest must be spread over a much larger market supply; and prices, therefore, remain much less affected than in the lower stages of civilization.622 And so, it is clear that a like bad harvest must affect prices very differently, if there be a large importation or exportation of the means of subsistence, and if several bad harvests, or several harvests yielding more than the average have preceded.

In another respect yet, the price of indispensable commodities is very sensitive, because here the mere fear of a future want of them has a far deeper and wider influence, than has the fear of want of articles of luxury. No matter how good the wheat crop may have been, if the weather afterwards interferes with its harvesting, the price of wheat, in countries in which the spirit of speculation is on the alert, will certainly rise, because the prospect of the future crop then becomes somewhat doubtful.623

Section CIV.

Influence Of Purchaser's Solvability On Prices.

The purchaser, besides the value in use of the goods he desires to buy, considers his own solvability (Zahlungsfähigkeit = ability to pay). It is only solvent demand which can influence prices.624 For instance, among a people made up almost entirely [pg 314] of proletarians, there will be a great many cases of starvation and death after a bad harvest, but the price of corn will undergo only a slight increase.625 But where the greater number of inhabitants own property, and where the wealthy come to the help of the poorer classes by means of poor-rates and acts of benevolence, it is scarcely possible to assign limits to the increase of the price of corn. By a necessary connection, when indispensable articles grow dear, the demand for articles that can be dispensed with generally decreases, and vice versa.626 Every merchant, engaged in an extensive business, is interested in knowing in advance the results of the corn crop. The higher the price of a commodity rises, the narrower, of course, grows the circle of those who can pay for it.627628

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Section CV.

Supply.

In the case of isolated chance exchanges, the seller, too, takes into consideration, first of all, value in use, and compares the satisfaction which the commodity to be parted with and that to be received are able to afford. It is true that in making this estimate, he is subject in the highest degree to error and deception.629 In the well ordered trade of a nation whose economy is highly developed, the seller, who had this very trade in view in his production, is wont to consider almost exclusively the value in exchange of his commodity.

Section CVI.

The Cost Of Production.

As no one is willing to lose anything, every seller will consider what his goods have cost him, and the cost of producing or procuring them as the minimum price to be asked for them.630 At the same time, the idea covered by the expression [pg 316] cost of production, although it always embraces whatever disappears from the resources of the producer to enter into production, varies very much according as it is considered from the point of view of the individual's, the nation's or the world's economy.

An individual who pays taxes to his government, and who has rented land and employed labor and capital to engage in production, must indeed, besides the capital he has used in such production, call all his outlay in interest, wages, rent, and taxes, by the name of cost of production;631 since, unless they all come back to him in the price of the commodity, the entire enterprise can only injure him.632 He will, of course, add an equitable profit to remunerate him for his enterprise, since without such profit, he would not be able to live or produce; or else, he would be compelled to consume his capital. The moment the current rates of taxation, interest, wages and rent change in a country, the cost of production is also changed in the case of the individual engaged in production, however unaltered the technic process may remain.633 But taking the [pg 317] nation, or all mankind into consideration, we must not lose sight of the fact that these three great sources of income, as well as taxation, are not, rightly speaking, sources from which income flows, but rather channels through which the aggregate income of the nation or the world is distributed among individuals.634 Hence the wages of labor, for instance, which afford the means of living to the greater part of the population, cannot possibly be looked upon simply as a factor in economic production. The people considered in their entirety have the soil gratis. All saving made from rent, interest on capital, or wages, is nothing but a change of the proportion in which the results of production were distributed hitherto among coöperators in production. Such a change may be either advantageous or the reverse; but it is not a diminution of the amount of sacrifice which the people in general must make for purposes of production. Hence, in a politico-economical sense, to the cost of production, belongs only the capital necessarily expended in production, and which has disappeared as a part of the nation's resources, abstraction made of the personal sacrifices in behalf of production.635 The value of the circulating capital which in the process is entirely used up, must, [pg 318] of course, be entirely restored in the price, that of the fixed capital used only to the extent that it has been used.636

The risk, which the producer runs until the commodity produced is actually consumed must also be borne in mind.637 There are things which are a real risk in small enterprises that by the intervention of an insurance company, or where the enterprises are large and insure themselves, become a more or less variable portion of the cost of production. The price of the product, in the latter instance, rises, by this means, very regularly. In the former case, the rise depends partly on the feeling of the people whether their pleasure in gain is greater than their grief over a corresponding loss.638

Those enterprises which necessarily produce different products at the same time deserve special consideration.639 Here we may speak of “united costs of production,” and all that is needed is that the aggregate of these costs should be covered by the aggregate price of both products. This complicates to a certain extent the calculations which the seller must make to determine his minimum demand for each product. To ascertain this, he must subtract from the united costs of production the amount of value which he expects with certainty for the other product.640

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Section CVII.

Equilibrium Of Prices.

Goods whose cost of reproduction,641 that is, the highest necessary cost of reproduction is the same, have uniformly the same value in exchange. Every deviation from this level immediately sets forces in motion which endeavor to restore the level, just as the water of the sea seeks its level, notwithstanding the mountains and abysses which the winds bring forth from its bosom.642643

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Section CVIII.

Effect Of A Rise Of Price Much Above Cost.

If the market price rises high above the cost of production, producers make a profit greater than the average profit made in the country. This induces them, by the appropriation of new land and the employment of new labor and capital, to increase their business. Other parties also engage in this profitable department of trade. This competition not only makes the means of production dearer, but must eventually, by increasing the demand, reduce the price of the product to the ordinary level of profit, that is to an equilibrium with other commodities.644 Hence, in the beginning, every diminution of [pg 321] the cost of production645 turns to the advantage of the producer; but afterwards and permanently to that of the consumers: an economic law exceedingly beneficent in its operations, and not unlike the action of positive legislation in the matter of patents. There is no greater stimulus to the making of improvements than the certainty of reward to the person who first introduces one. The moment, however, that the improvement is imitated by all producers, the advantage gained by it becomes the common good of the whole nation.646 These are, as J. B. Say says, conquests made over the gratuitous productive force of nature. As a consequence, the value in use of a people's resources increases; generally, also, their value in exchange, in so far as the production of the now cheaper goods increases in a degree greater than their cost of production has diminished.647

As to the alternative so frequently discussed, whether it is preferable to make a large percentage of profit on the sale of a small quantity of goods, or a small percentage on a large quantity, we find that, in the lower stages of civilization, the [pg 322] former is preferred, and the latter in the higher.648 And, indeed, the latter is not only more humane, but, in the long run, it is more profitable to the person who adopts it as his rule in business. In the case of commodities, he now runs but little risk from a change of fashion, because the fashions of the masses change much less rapidly than those of the upper circles of society. In the case of indispensable goods, on the other hand, he may now calculate with more certainty on the increase of population, and, therefore, on a future market for his wares. Competition, which in former times, devoted all its efforts to bringing about the exclusion, by law, of all rivals, is now engaged, principally, in devising means of surpassing them by superiority of workmanship, and in thus increasing the power of the real sources of a nation's wealth.

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Section CIX.

Effect Of A Decline Of Price Below Cost.

If the market price sinks below the cost of production, the producer naturally suffers a loss, and diminishes his stock as soon as possible. That whole establishments engaged in industry should forsake a branch of it which is suffering from depression and enter a flourishing one, must ever remain a rare exception.649 But the discouraged manufacturer may delay renewing his stock on hand,650 replacing his machinery by new machinery; he may dismiss some of his workmen and diminish the number of days during which the others shall work. Moreover, most industries are operated by means of borrowed capital, capital which must therefore, be returned to the lender. Under certain circumstances, however, the industry may be continued for some time, even at a real loss,651 so long as the loss of interest etc., which would follow the entire suspension of the work, exceeds the loss produced by the lowering [pg 324] of price, but hardly any longer. If the supply of the commodity the price of which has fallen has been diminished, the subsequent result depends on the causes which, in the first place, brought about the fall in price. If the diminution in price was caused solely by a too great supply, when this superabundant supply is gotten rid of, the price will rise again.652 If it were produced by a decrease in the value in use of the commodity, the diminution of the supply can restore the former state of things only in so far as at least a part of the purchasers ascribe to the commodity the same value in use as before.653 Lastly, if the lowering of the price came from a decrease in the number of buyers, or from a decrease in their ability to purchase, the former price will be restored when production has been adapted to a correspondingly smaller circle of consumers.654 This last is true especially when the price, without having suffered any absolute change, has become relatively too low, on account of an increase in the cost of production.655

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