298
ECONOMICS.
and in every case the demand and the supply tend to seek
an equilibrium.
Market Demand.
Other things being equal, the single demand of a person
is a fair representative of the whole market. What one
individual is doing in satisfying his wants, thousands are
doing; and very often they want the same article at the
same time. It is hardly fair to say that the average de-
mand in a given market is the sum of the individual
demands, but it is true that the greater amount to be sold
the smaller will be the price at which it will find purchas-
ers ; and yet the universal demand for an article by many
people increases the intensity of the desire and increases
its value.
ECONOMICS. 299
To generalize Fig. II, we have Fig. Ill, in which we
let An on the line AY represent the demand, and Am on
the line AX the supply. Erect vertical lines from m and n,
and where they meet the point p will represent the price
or valuation, for this point will illustrate the place where
exchanges take place. Suppose now that Ao represent the
demand and the relative supply increased to Az and p 1 ,
the intersection of the lines erected at o and z respectively,
will be lower than p. Again, suppose As represent the
supply, and Ae represent the demand, and p" will be the
point where exchanges take place. Now pass a curve
through p",p f i and JE?, and we have a demand curve, which
represents the operation of every market in which trans-
actions take place.
Competition and Demand.
Competition goes on in never-ceasing activity, tending
to level the prices of all commodities of a similar nature.
Each demand schedule is continually leveled or merged
in the general market demand. There is also another
competition going on in the market, between articles of
a different kind. If corn becomes high, people will use
wheat, and vice versa. Thus, competition is observed
everywhere among substitute articles. When we measure
men's desires and calculate the influence of each demand
schedule for each separate article, we see that this method
of substitution is universal, and that the appearance in the
market of any commodity which can be used as a substitute
for another already in use will lower the price of the latter.
300 ECONOMICS.
CHAPTER II.
VALUE.
Definition.
Value is a relative term, which is applied to different
articles to represent their degree of desirability. As it
is the desire for economic goods which makes them valua-
ble, and as utility represents the want-satisfying power
of goods, value has been called the measure of utility;
and in one sense this is true, for value always accompanies
utility although it is never identical with it.
The various uses of the term value by economists, and
the popular conception of the term, have led to great con-
fusion. Even able writers have been often careless in its
use. It is stated that at one time the celebrated Sydney
Smith joined a club for the purpose of studying political
economy. His sole purpose, as he stated, was to find out
the use and true meaning of the word value; but after
remaining in the club for some time he finally withdrew
because, as he said, the club knew no more on the question
than he did. Owing to the controversy on this subject,
it was with a sigh of relief that some economists welcomed
the work of Stanley Jevons, which discarded the use of
the term altogether. In the light of recent discussion it
seems very odd that John Stuart Mill should have stated
in 1848 that there remained nothing for him or any other
writer to state concerning the laws of value. Since that
time modern economists have accepted the loose usage of
ECONOMICS. 301
the word, giving it their own peculiar meaning. Recently,
however, the Austrian economists have reopened the sub-
ject, and given a clear and satisfactory analysis of value.
This discussion has given evidence of the differences of
opinion on the subject.
Differences of Opinion.
Much of the difficulty in modern discussion has arisen
from misinterpretations of loose statements made by
Adam Smith. In his Wealth of Nations (Bk. I, Ch. IV)
he states : " The word value, it is to be observed, has
two meanings, and sometimes expresses the utility of some
particular object and sometimes the power of purchasing
other goods which the possession of that object conveys.
The one may be called value in use and the other
value in exchange. The things which have the great-
est value in use have frequently little or no value
in exchange; on the contrary, those which have the
greatest value in exchange have little or no value in
use. Nothing is more useful than water; it will
purchase scarcely anything, scarce anything can be
had in exchange for it. A diamond, on the contrary, has
scarce any value in use, but a very great quantity of
goods may frequently be had in exchange for it." While
it was evidently not intended by the author to divide all
values into two great independent comprehensive classes,
he intended to point out two separate uses of the term.
Perhaps his greatest error is found in his misconception
of the term utility. In an economic sense a diamond is
very useful, because men desire it and use it, although
water may be more beneficial. Whisky and beer are use-
302 ECONOMICS.
fill, although they may not be beneficial. Economic value
rests upon the use of articles, and the use depends upon
their desirability.
Free Goods and Economic Goods.
A discrimination should be made between economic
goods and what are termed free goods. Air and light
are useful and beneficial, but they are provided in such
great quantities and without any effort on the part of man
that they are said to have no value. Water is sometimes
classified in the same category, but its scarcity and its en-
larged use in supplying cities and in irrigation have devel-
oped in it an economic quality. The only goods that we
economize or about which we have economic care are those
which are just sufficient to supply our wants or insufficient
for that purpose; consequently, the free gifts of nature,
which are bestowed in such abundance as to be in no sense
objects of care to man a are said to be valueless. Hence
it is, if no want is created there is naught to be satisfied,
and consequently there is no utility, and if there is no
utility there can consequently be no value.
Value an Index of Utility.
If utility is the want-satisfying power of goods, value
is a sort of index, expressive of the variations of utility.
It is the valuometer which measures the intensity of desire.
Hence it is that value changes with utility, increment by
increment, and this value indicates the rise and fall of
utility. However, the sum total of utility is not equivalent
to the sum total of value, any more than the sum total of
the readings of a thermometer during the day will meas-
ure the sum total of the heat in a given mass of water
ECONOMICS.
303
during the same period. Both utility and value are rela-
tive terms, and the changes in utility are recorded by the
changes in value; nevertheless, the utility of the mass of
a given good may increase while the value of the mass
may decline.
n
X
b c d e f <J
Fig. IV.
Let us illustrate these. principles by Fig. IV. Let the
base AX represent the quantity of wheat to be had for
all purposes. Let the vertical line AY be the want-satisfy-
ing power of this mass. Let Ab represent the first incre-
ment, used for sowing wheat, be for making bread, cd for
feeding horses, de feeding cattle, etc., (each increment
supposed to represent the want-satisfying power.) Let
304
ECONOMICS.
bx represent the want-satisfying power of the first incre-
ment, cy of the second, dz of the third, etc. If we extend
a curve through the extremities of these lines we shall
have a curve of valuation as well as an utility curve, the
value of each separate increment varying as the utility of
each separate increment. The sum total of the utility
will be found hy taking the sum of the rectangles Ax, by,
cz, etc. Suppose now that es represents the last want-
satisfying power of wheat. No more wheat will be pur-
chased or be desired for any purpose whatever. This will
represent the value of the last increment ; it will also be
the utility of the last increment: but as the value of the
mass is measured by the value of the last increment multi-
plied by the number of increments, the total value will be
measured by the rectangle Aesm, which is much less than
the figure AesY. This occurs from the fact that of any
article in the market the value of the entire mass will be
governed by the lowest valuation in the market.
Theories of the Cause of Value.
There are many theories as to the cause of value.
First are those which teach that labor is the cause of value,
and that articles are valued in the market according to the
labor it has taken to produce them. This theory was first
propounded by Ricardo, and subsequently defended by Bas-
tiat and Karl Marx. It is true that labor has much to do
with the increase or decrease in the value of goods, but
it cannot be taken as the primary origin of value. If this
were true, that the value of an object is determined by the
labor spent in its production, then it would follow that
value would be unchangeable; on the contrary, we see
ECONOMICS.
305
that the values of articles constantly change. Machines
and implements that cost excessive and long-continued
labor are finally rendered valueless because they are no
longer desired for service. The same idea is expressed in
the exchange of articles in the market at the same price,
which cost different amounts of labor. If labor were the
cause of value, articles that cost the same amount of
labor would exchange equally; and again, if labor were
the cause of value, there would be no value without
labor, yet things which are of great value are found or
discovered without any particular labor. But labor itself
is valuable, and we could not estimate it if it were the sole
cause of value in other things. It is evident that this
theory, formerly accepted, is untenable.
Another theory is called "the difficulty-of -attainment
theory." But it presents a condition of value, and not
a cause. It hinders us from placing desirable goods upon
the market, and thus makes a scarcity in the market and
the value of the articles rises; that is, the demand re-
maining the same, the supply becomes deficient and values
rise. But suppose no person wanted these goods, however
difficult of attainment, they would be of no value.
Closely allied to this is the scarcity theory. It simply
asserts that because these goods which are furnished us
gratuitously and in abundance without labor have no value,
other goods are valuable because they are scarce. It is true
that if desirable goods become scarce their value will be
enhanced, but scarcity may not be called the primary cause
of value. Frequently there are goods in the market, very
scarce, but no one wants them and they have no value.
20
306 ECONOMICS.
Utility the Cause of Value.
The last group of theories to be mentioned is that of
those who say that utility is the cause of value. Taking
utility in the sense of satisfying wants, this is a correct
theory, for it is the want-satisfying power of goods which
makes them valuable. This want-satisfying power and the
demand remaining constant, goods will increase or decrease
in value in accordance with their difficulty of attainment,
just as they are scarce or plentiful in the market. As we
desire goods very keenly their value rises, and our desire
is greatly increased if we find them insufficient for our
wants; their quantity, moreover, is more or less insuffi-
cient in accordance with the ease or difficulty with which
they are multiplied.
Objective and Subjective Value.
It is convenient to classify value into objective and sub-
jective, for a better understanding of its nature. When
we consider personal well-being, value is considered to
be subjective; but when we consider some technical or
mechanical result without any immediate reference to
personal well-being, then we have objective value. The
latter may again be divided into two divisions, the first
represented by the amount of potential energy in material
goods, and the second in the power of exchange. These
represent the relation of potential energy and relative
capacity between different articles. To illustrate, let us
take the subject of coal. The subjective value of coal
is determined by the amount of satisfaction I get in
warming myself before the fire. The objective value of
coal will be the amount of power it creates through its
ECONOMICS.
307
heating capacity; and in the other objective sense, the
amount of economic goods it will exchange for in the
market. In economics we have nothing to do with the
first two divisions of objective value. We may not con-
sider the heating capacity of coal, the resisting power of
different kinds of wood, the feeding power of corn, nor
the life-giving power of sunshine; we have to do with
but one objective phase of value, and that is exchange
value. The power or capacity, if we may say this of
objects in exchange, is economic value.
It will be observed, however, that this phase of objective
value rests upon personal or subjective value. In other
words, exchange value rests upon men's desire for goods
and their personal estimates of what goods are worth in
the market. Thus will value, which represents power or
capacity in exchange, rest upon man's attempt to satisfy
wants. Wherever there is a want to satisfy, there value
arises. If a surplus occurs so that want is impossible, or
if desire ceases on account of satiety, value declines and
tends to pass out of existence. But wherever a want
exists, a lack of something, there is an accompanying
desire to find the thing needful. Therefore, both utility
and value rest upon the basis of the wants of man. The
degree to which wants are felt depends upon the extent
of the supply needed before the point of satiety is reached,
and also upon the common supply in relation to the need;
consequently we must come to measure all wants relatively
by the laws of supply and demand. By the demand for an
object is meant the desire for it, accompanied by the will-
ingness and ability to pay for it in goods, services, or
money.
308
ECONOMICS.
Intrinsic Value.
The tendency in people to insist that the physical
qualities of an object determine its value, turns the whole
matter into objective relations, as there is a tendency to
believe that objects carry with them some inherent quality
that makes them valuable. So far as they satisfy the
wants of man this is true, for it is the quality of goods
that makes them desirable, and by quality we mean their
capacity for service or pleasure, and this makes them de-
sirable and hence valuable. The so-called intrinsic value
of an article means nothing more than its capacity to
satisfy desires. The intrinsic value of a hat is simply
hat-service or hat-satisfaction ; intrinsic value of money is
its exchange value; intrinsic value of a gold watch is its
service and beauty. The term is more frequently used
in respect to money than in any other way. Thus, gold
and silver are said to have intrinsic value. For the pur-
pose of exchange, the desire for a gold dollar is just the
same as the desire for a paper dollar, for the two will
perform the same service, no more, no less. Hence it is
that the intrinsic value of an article must rest upon de-
sire alone, and that simply means that it is subjective.
Now the real point at issue is that gold can be used for
some other purpose than that of mere exchange. Its
market is large and its demand is constant for a thousand
purposes, while the paper dollar can be used for only
one purpose, or possibly two, because the paper might be
used in the manufacture of other paper; hence the in-
trinsic value of paper money is nothing, or very small,
while the intrinsic value of gold, being universally desira-
ble, is very large. We reach the conclusion, then, that
ECONOMICS. 309
all values in the ultimate must be traced to the subjective
conditions. Primarily, gold, silver, lead, copper, iron,
tin, will be valued according to their service and satisfac-
tion, and of course their service and satisfaction will de-
pend, secondarily, upon the qualities which they possess.
References: Smart, William, Introduction to the Theory of
Value ; Marshall, Principles of Economics ; Commons, Distribu-
tion ; Ely, Outlines of Economics ; Wieser, Fred von, Natural Value;
Seligman, Principles of Economics.
310
ECONOMICS.
CHAPTEK III.
PRICE.
Definition.
Price is tlie value of an article measured in the terms
of money. As all commodities are measured in terms of
one called money, a general rise in prices is indicated by
a general fall in the value of the measuring unit. As all
values are relative, there could not be a general rise or
general fall of values, for if articles <z, &, and c have their
values represented by 10, 20, and 30, it means that their
ratios of value are 1, 2, and 3. If now the value of each
is doubled they will become 20, 40, and 60, or if it is
reduced to 50 per cent, they will be 5, 10, and 15. In
each case the ratio of 1, 2, and 3 remains. There may be
a rise or fall in the price of one or more articles in rela-
tion to other articles without any necessary change in the
money value, but when all prices go up or down it is an
indication that the values of the articles of the group have
changed their relation to the measuring unit called money.
Manner in which Market Price is Established.
We have already noted, in Chapters I and II, the nature
of subjective value and the individual-demand schedule.
The marginal demand and the marginal utility are now
understood, and the relation of marginal utility to value
and price have been theoretically explained. It now re-
mains to be determined how, from a practical standpoint,
ECONOMICS. 311
prices are established. Remembering that the law of
supply and demand indicates an equilibrium, and that
in individual cases the demand decreases with the lowering
of the marginal utility, let us enter an ideal market, and
by illustrations see what actually takes place between indi-
viduals.
Suppose A wishes to sell a horse, the only one of its kind
in the market, and B is the only purchaser. Suppose A's
minimum price is $30 and B's maximum is $25. If the
two parties hold to this there will be no sale; A would
be willing to take $30 for the horse, but no less ; B would
be willing to pay $25 for the horse, but no more. There
are other ways in which he would rather invest his money
rather than pay a dollar more than $25 ; A knows no othe'r
way more to successfully invest his money than at the
price, $30.
Second proposition: Suppose A's minimum price is
$30 and B's maximum price is $40. That is, rather than
not get the horse, B would pay $40 ; rather than not sell ?
A would take $30. At first each man's proposition is un-
known to the other. A desires to get all he can for the
horse ; B wishes to purchase it at the smallest price possi-
ble. There will be a sale, the price being fixed between $30
and $40, according to the skill of buyer or seller. This is
a simple illustration of what is known as "the haggling
of the market. 7 ' As a third case, suppose A's minimum
price is $30 and B's maximum price is $30; there will
probably be a sale at that figure. It may happen that such
a case actually occurs.
Again, suppose ihere are three purchasers of horses,
312
ECONOMICS.
willing to give $30, $35, and $40, respectively, for the
horse, and there is only one horse of the kind in the
market. Then A, B and C bid for the horse. It is a
case of competition in buying, but not a competition in
selling. A ceases to bid above $30, B ceases to bid above
$35, and the difference is settled between C and the seller.
If C is a shrewd buyer he will not pay much over $35,
because he has discerned that the seller would be willing
to take $30 rather than not sell.
Suppose now there are three horses in the market and
three purchasers, and that A will sell at $30 mimimum,
B at $35 minimum, C at $40 minimum. D will pay $35
maximum, E $35 maximum, and F $40. Now if the
three horses are similar and are sold in the open market,
a fair price will be fixed for the horses. F does not pro-
pose to pay more than E or D. And D expects to pay as
much as either E or F. The sale takes place. The price
of the horses will be fixed between $30 and $40, and as D
and E offer each $35, and there is one horse offered at this
price and one at less, the majority of buyers and sellers
would indicate a price at $35 whether the horse is sold
or not.
This is an elementary case of buyers and sellers. If we
enlarge this market, and have many buyers and many
sellers, we shall have universal competition in buying and
selling in the open market; and it is by this method that
prices are finally fixed. Where a series of buyers and a
series of sellers are competing, exchanges will take placs
where each individual sees a gain. Every individual will
prefer a greater gain to a less, and the price is established
somewhere between the minimum of the seller's subjective
ECONOMICS. 313
valuation and the buyer's maximum valuation, or between
the subjective valuation of the first of the successful and
the first unsuccessful buyers where only competition takes
place ; or, in competition of many buyers and sellers, be-
tween the subjective valuations of the last buyer and the
last seller. In this manner a market price is established
for all bidders.
Market Interferences.
In any market the supply of a given article is the amount
offered at a given price, and it is different from the stock
of the article on hand. Th,is discrimination must be
kept carefully in mind. The supply of an article always
decreases with a decrease in price and increases with an
increase in price. Now a market is a place where prices
are determined by competition, and the market demand
for an article is the amount that will be taken at any given
price. It diminishes as the price increases. It is differ-
ent from mere desire. It represents the willingness and
ability to take a certain quantity of a given article at
a given price. A monopoly destroys the market, and prin-
ciples laid down for the establishment of a market price
can prevail only under free competition. Under our mod-
ern system of competitive trading, the price at which the
demand is equal to the supply will be the market price
of the article.
Take, for instance, the example of cotton. Suppose it
be selling at eight cents in the New York market. So long
as the demand equals the supply, the price will remain
at eight cents. If a large stock is thrown upon the market
the sellers will begin to fear that they cannot dispose of
their stock, and will offer to sell for less. The buyers,
314
ECONOMICS.
observing this, each strives to obtain it at a lower price,
and so two groups of people strive to fix on the market
rate, the bulls and the bears. In the Berlin Stock Ex-
change the equalizing of the supply and demand and the
fixing of a market rate is left to a commission. The
committee settles upon the price which will secure the
maximum number of transactions. In an ordinary market
this- settled price is fixed by the self-interest of groups of
Y P
bOOOO
40000
35000
30000
25000
4567
Figure V.
10
buyers and sellers acting under free competition and in-
dependently. There are interferences in the establish-
ment of this market through corners of market valuations,
and through custom by which prices are sometimes fixed
for a long period of time, and finally through combinations
of buyers and sellers in fixing the price.
ECONOMICS.
315
Keferring again to the market of copper for a single
day in New York city, let us suppose in Figure Y that on
the. line AX we have 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, as repre-
senting prices of copper demanded in quantities ranging
from 102, 97/, Sx y 1w, 6w, 5v, etc. Now since the quantity
tends to increase as the price decreases and diminish as
the price increases, if lOx equals 25,000 pounds we shall
find there will be demanded that amount at 10 cents, 30,000
at nine cents, 35,000 at eight cents, 40,000 at seven cents,
and 60,000 at six cents.
Y
D
\
y y y
Figure VI.
Generalizing this as in Figure VI, at a price Ay' there