PRICE
In an early chapter, it was said that the one class of objective values
which had an interest for economic science was the (purely objective)
value in exchange or purchasing power. We escape using this cumbrous
expression if we substitute the word Price. The two terms are of course
not equivalent: power in exchange is a different thing from the quantum
of goods obtained by that power and measuring it: but obviously the two
are inseparable, and the laws of the one are the laws of the other. Our
present task, then, is the theory of price.[14]
[14] As might be expected of a reaction against the old position
claimed for value in exchange as the sole economic value, the Austrian
economists have devoted their energies mainly to the neglected branch,
Subjective Value. Böhm-Bawerk alone has followed out the marginal
theory of value in detail into the theory of price.
It would, perhaps, not be very difficult to argue that a universal
theory of price is impossible. The attempt to base an _entire_ economy
on the motive of Self-Interest has not been so successful, that many
of us are willing to risk the credit of the whole science any longer
on an assumption that was never quite true, and is becoming less so as
wealth increases and is increasingly spent with a directly moral aim.
But, in certain great departments of exchange, if anywhere, the old
competitive laws do hold. In stock exchange dealings, in banking, in
international transactions, in great organised markets, as iron, wool,
cotton, grain, and so on, the egoistic motive is so strongly marked
that it is possible to found on it a law which comes, perhaps, as near
a scientific law of exchange as we can expect. It may be described as
the law of price under perfect competition. It disregards all motives
but those of _advantage from the exchange_—always, of course, within
the recognised limits of law and respectability. In such markets the
“strong” exchanger (buyer or seller) is the one who attaches most
importance to the good he wishes to get, and the least importance
to the good he gives in exchange—as we can see from the simple
consideration that the bidder most likely to carry away a picture from
a studio is the one who thinks most of the picture and least of his
money, while the artist most likely to clear his stock is the one who
thinks least of his pictures and most of the money he will get for them.
The assumptions on which the law is based are the following: that
the market is an open and organic one; that buyers and sellers are
ordinarily conversant with the conditions of supply and competition;
that each party will make an exchange whenever he sees a gain in it;
and that he will prefer a greater gain to a less.
They are the assumptions of any ordinary commercial “market.”[15] For
simplicity’s sake, we shall begin with the simplest possible case, and
gradually come to the more complicated.
[15] In justice to that large class of economists who strive to suit
the stubborn fingers of the economic man to the lute of social life,
it may be said that their dislike of the egoistic motive is due simply
to its being egoistic. If struggle and fight is the necessary and
healthy condition of industry and commerce, then the utmost demand of
the reformer must be a fair field for every one and no favour; if the
ethics of commerce are necessarily the ethics of war, we may weep over
the fallen but we shall not waste our time crying mercy. But a great
many people—and these not the worst economists—think that the economic
field may justly be regarded, not as a battle, but as a harvest field,
where the greatest results are to be had, not by fighting against, but
by working with each other. For the last hundred years, they would say,
men have been dazzled by the new possibilities of life which the great
increase of wealth has opened up, and the solidarity of mankind has
been broken up by the eagerness of each to get hold of an advantage
which, obviously, could only be had by the few. Now that the world
is passably rich, should we not draw breath, and try to organise the
industrial life with an end to the _character_ and _conduct_ of the
workers? Ideas like these have a way of making the egoistic motive
seem a little contemptible. But, in justice also to the practical man,
it must be said that he ridicules all this mainly because he does not
understand that it is a new point of view—the subordination of the
economic to the higher life—and because his spiritual advisers have
long allowed him to think that the business life has canons of its own,
with which “theoretic” morality may not intermeddle.
_1st Case._ (Isolated Exchange.) A peasant B wishes to buy a horse,
and his circumstances are such that he puts the same estimate upon
£60 as he does on the possession of a horse. His neighbour S has a
horse which he values as worth £20. Here there will certainly be an
exchange, as, at a price, say of £40 both make a gain of £20 over the
amount at which, in the worst case, they are willing to exchange. But
if the exchangers act on the principle “better a small profit than no
exchange,” the price may be anything above £20 or under £60, and the
actual figure is determined by the “higgling of the market.” Here,
then, the price will lie between a minimum of the seller’s subjective
valuation and a maximum of the buyer’s subjective valuation.
_2d Case._ (One-sided competition of Buyers or Sellers.) First, of
Buyers. Suppose, instead of one peasant, there are three, B₁ B₂ and
B₃ bidding for one horse. B₁ values it at £60: B₂ considers it worth
£50: B₃ thinks it worth only £40. Only one can get the horse; but, as
S values his horse at £20 only, any of the three buyers may get it.
Accordingly they will bid against each other till the figure goes above
£40, when B₃ retires from the competition: above £50 B₂ is excluded,
and B₁ is left the sole competitor. Then, as in the former case, the
price will be fixed somewhere between £60, the subjective valuation
of the purchaser, and £50, that of the most capable of the excluded
competitors, or, as we should say, between the subjective valuation of
the successful and that of the first unsuccessful buyer.
The case of one-sided competition of Sellers is the exact converse of
the above.
_3d Case._ This is the ordinary case of what may be called complete
competition—where there are several buyers and several sellers of
similar articles. Suppose the case of six buyers each wishing to
purchase a barrel of apples, and five sellers each wishing to dispose
of one barrel. We assume that the barrels are all of equal quality and
offered simultaneously, and that the competitors on both sides know
their own interests and follow them.
Buyer 1 values the barrel Seller 1 values the barrel
at 18/6 at 13/
and will pay any price under and will accept any price above
----------------------------------------------------------------
Buyer 2 ” 18/ Seller 2 ” 14/
Buyer 3 ” 17/6 Seller 3 ” 15/
Buyer 4 ” 17/ Seller 4 ” 16/
Buyer 5 ” 16/ Seller 5 ” 17/
Buyer 6 ” 15/
Here the subjective valuation which the first three buyers put upon the
apples is so high that they are, economically, “capable” of purchasing
from any of the sellers. But, naturally, they will not pay more than
necessary, and the transaction begins by low offers on the side of the
buyers, and holding back on the side of the sellers. Let us follow the
course of the bids methodically.
At 13/6 there are 6 Buyers and 1 Seller
14/ ” 6 ” 1 ”
14/6 ” 6 ” 2 ”
15/ ” 5 ” 2 ”
15/6 ” 5 ” 3 ”
16/ ” 4 ” 3 ”
16/1 ” 4 ” 4 ”
16/6 ” 4 ” 4 ”
16/11 ” 4 ” 4 ”
17/ ” 3 ” 4 ”
Thus we see that, at any price from 16/1 to 16/11, there will be as
many buyers as sellers, and the conditions will have emerged at which
exchanges take place and price is determined. For, at that price, four
buyers and four sellers will make a gain by exchanging. The fourth
buyer was willing to pay anything under 17/ and the fourth seller
willing to clear anything over 16/; thus both gain by a price which
falls between 16/ and 17/, while the three more capable pairs gain
proportionally more. And at that price the valuations of the remaining
competitors, be they few or many, are unable to have any effect on the
exchange. 16/1 will not suit buyers 5 and 6, who are not willing to
give more than a maximum of 15/11 and 14/11, and 16/11 will not suit
sellers who demand at least 17/1.
Again, any price above 16/11 would cause the fourth buyer to withdraw,
and any price under 16/1 would cause the fourth seller to withdraw.
The price, then, will be determined somewhere between the subjective
valuations of the last buyer and the last seller—what we may call the
Marginal Pair.[16] And the most capable exchangers are proved to have
been those who put the highest valuation on the commodity they wished
(apples or money), and the lowest valuation on the commodity they had
(money or apples).
[16] To be exact, this limit may be more closely drawn. Böhm-Bawerk’s
law is that the price is determined between the valuation of the last
buyer and that of the first excluded seller as Higher Limit, and the
valuations of the last seller and first excluded buyer as Lower Limit,
viz. between the valuations of the Marginal _Pairs_. But, for reasons
which will shortly be evident, it is scarcely worth while adding to the
difficulty of the subject by too great exactness.