SUBJECTIVE VALUATIONS THE BASIS OF PRICE
It was said in the introductory chapter that we should find Objective
Exchange Value to be a superstructure on Subjective Value. The
typical scheme in last chapter will abundantly prove this. It is the
valuations with which the parties on both sides enter the market that
decide;—first, what parties will take part in the competition; second,
what is the degree of each party’s “capability of exchange”; third, who
are the parties that actually come to terms; fourth, who is the last
buyer and who the last seller; and fifth, the price. Thus we arrive at
Böhm-Bawerk’s formal proposition: Price is the resultant of subjective
valuations put upon commodity and price-equivalent within a market.
Unless, however, we remember what has been said of the essential nature
of value, we shall be apt to stumble over this word “valuation.” The
price with which a buyer comes to market as the maximum which he is
willing to give, does not indicate anything of the absolute amount of
wellbeing which the goods he proposes to purchase represent to him. We
saw that the subjective value of anything is given by the dependence of
a want upon it, and that this dependence is measured by two factors:
the want which the good is capable of satisfying and the state of
provision already existing to meet that want—in ordinary circumstances,
the income or wealth of the valuer. To put it concretely: the
valuation of 16/6, which the buyer puts on the barrel of apples in our
illustration, is determined by a calculation, first, of the position
the fruit takes in his household economy as compared with other forms
of food, and, second, of the money figures in which the amount of his
income or available wealth enables him to express that position. This,
among other things, will explain how two very different classes of
competitors may be the “capable” ones; those whose needs are urgent
and those whose resources are plentiful. The valuation of 16/6 may
be either the expression of a poor man’s necessity, interpreted and
limited by the few shillings he can spare from his wages, or the
expression of a rich man’s whim, measured by the loose money in his
pocket.[17]
[17] In connection with this, the following passage is worth attention.
“Goods which can only be obtained in very small quantities and which
only the rich are likely to demand, will obtain the highest prices.
Goods, again, of common quality, suited to the wants of the poor,
obtain very low prices, along with those goods of better quality which
are so numerous that the poorer classes are able, to a considerable
extent, to purchase them. Medium prices, lastly, will rule in the case
of goods of which the middle classes are the principal buyers, while
poorer people either do not compete or compete only so far as compelled
by their most urgent feelings of want. It will readily be understood
that changes in the economical provision and power of great classes
must be followed by changes in the prices of goods. The greater the
inequalities of wealth, the greater will be the differences in price.
Luxuries will rise in price as great fortunes increase and fall as they
diminish.... Thus it is that diamonds and gold stand so very high; they
are luxuries of the rich and richest, and are valued and paid for in
the measure of the purchasing power of these classes. Food and iron are
at the other end of the scale because they are goods for the people,
their value being decided by the valuation and purchasing power of poor
men.”—Wieser, _Der Natürlicher Werth_, pp. 44, 45.
If, then, the subjective valuations on either side do not necessarily
say anything of what we might call the absolute worth of things to
the valuers, much less does the price which is the resultant of these
valuations. It is not even an average of the valuations. However high
the valuations of buyers, and however low the valuations of sellers, in
an organised market the goods will exchange at the marginal price. And
however many be the excluded competitors—the buyers whose subjective
valuations do not allow them to buy, and the sellers whose valuations
do not allow them to sell, at the marginal price—they are unable to
affect the price one way or other.
It should not be necessary to point out that the determination of
price in actual life is not the _conscious_ resultant of all these
valuations. The analysis of price into its factors is as different from
the practical synthesis of price as a statue is from an anatomist’s
plates. The practical man no more knows the machinery set in motion to
determine each day’s market quotations than the child knows the rules
of grammar by which he speaks. It is the same in most economic matters.
The theory of money, for instance, is one of the most difficult and
complicated parts of economical science, and yet we all grow up with
a perfectly definite idea of the relation which a shilling bears
to English commodities in general—so definite, indeed, that, when
travelling in a country where there is an inconvertible paper currency
and where prices are turned upside down by a protective tariff, we do
not notice the leap we take when we turn the quarter-dollar note, in
our mind, into a silver shilling, and calculate prices on the English
basis. In the same way, a business man applies unthinkingly and
unerringly all those canons of marginal value and price which we find
so puzzling.
But in the business world itself, there is one great simplification
of the law of the Marginal Pair. In modern industry, producers do not
make for themselves but for the market, and the amount of their own
product which they could use in their own consumption is insignificant.
Consequently it may almost be said that such goods have no subjective
value for the sellers,[18] and we lose one whole side of our
valuations. But, on the other hand, this very fact enormously increases
the numbers of buyers, and brings their subjective valuations all the
closer. Practically, then, our law takes this form: Price is determined
by the valuation of the Marginal Buyer.
[18] This is not quite true. They have subjective _exchange_ value just
as money has. The product of labour which has been paid by 20/ of wage
has the same sort of subjective value to the wage-payer as the 20/ had.
But as the professional producer anticipates demand the subjective
value is not so calculable.
It will probably be thought that only in the last paragraph have we
come to the normal state of things, and so to the only state of things
which has any practical interest for us. All the tedious discussion
about peasants selling horses, or buyers and sellers wishing to
trade for just one barrel of apples each, is beside the mark, it
will be said, when we consider that the questions of value which are
of importance to us are questions between the innumerable persons
who compete with each other in the business of making and buying
and selling, and the innumerable persons who buy goods for their
own consumption at fixed prices from the shops. The answer to this
has already been suggested. As well might we expect to understand
the organisation of industry by taking our stand on an omnibus in
Cheapside, and watching the surging life below, as begin our study of
the phenomena of value with the smooth-running machinery of exchange
which is the growth of generations. The only way to understand the
completed theory of value is to go back to the simplest cases of
exchange—perhaps even barter; find what principles are involved in all
exchange; and then work out the complications and simplifications which
come with developed trade. It is impossible to explain the “short cuts”
till we know the roundabout road.
It will not have escaped the notice of the critical reader that there
are many resemblances between the law now formulated and that known as
the law of Supply and Demand. It would be strange if there were not. As
in ethics, all theories lead very much to one practical code of morals,
so theories of price must all be more or less accurate analyses of the
actual transactions of the market. For instance, the zone within the
limits of which price is determined is, as we have seen, that lying
between the valuations of the Marginal Pair. But every one will have
noticed that in this zone supply and demand come, quantitatively, to
equilibrium, and hence it is quite correct to say that the market price
is found in that zone where supply and demand balance each other.
The resemblance will become clearer if we look at our individual
determinants of price. There is—
_1st_, The Extent of Demand,—that is, the number of people who wish to
buy goods because they attach a certain value to them.
_2d_, The Intensity of Demand,—that is the subjective valuation which
these buyers attach to the commodity they wish to obtain, and the
subjective valuation of the money they part with.
_3d_, The Extent of Supply,—that is, the number of people who wish to
sell goods because they attach a certain value to the money they expect
to get in exchange.
_4th_, The Intensity of Supply,—that is, the valuation which these
sellers attach to the money they wish to obtain, and which they attach
to the commodity they part with.
We shall cease to wonder at resemblances, however, if we remember that
our law of value cannot be a rival of any other law which has been
recognised as giving, within its sphere, a satisfactory explanation
of actual phenomena of value, except in the qualities of breadth
of basis or accuracy of details. The impression which most of us,
I imagine, have had in relation to the law of Supply and Demand as
usually formulated, is that what it says is undeniable, but that
it does not say enough. It devotes ample space to the phenomena of
supply, but it leaves demand almost entirely without analysis. While
it pays lip-service to value as a relative between the two, it gives
the impression that the side of supply is so overwhelmingly important
that demand may be taken for granted. What the theory which has
been developed in the preceding pages does is indeed to make price
a resultant of Supply and Demand, but at the same time carefully to
analyse these ambiguous expressions, and make price rest finally on
subjective valuations of commodities and of price-equivalents made by
buyers on the one side and sellers on the other.