EXCHANGE.
#70. How Exchange Arises#. One of the most important ways in which we
can increase wealth consists in exchange--#in giving what we do not want
in return for what we do want#. Wealth, as we have seen, is anything
which is actually useful to us, because we have not enough already, and
which can be transferred to another person. But when our want of any
kind of commodity is satisfied, we want no more of that, but we do want
other kinds of commodity. The result is that exchange constantly
produces a #gain of utility#. Some people have objected that there can
be no good in exchange, because that which is given equals in value that
which is received. Others have said that, if one party gains, it must
evidently be by robbing the other party. According to this view, trade
would consist in trying to beggar your neighbour. That which is given
does really equal in value that which is received, but it does not equal
it in utility, and to increase utility is the purpose of all production
and all commerce. We do not pay for things in proportion to their
usefulness, or else air and water would be the most costly of all
things. A good-sized loaf may be bought for fourpence or sixpence,
although bread is the staff of life. Before attempting to understand
this apparent paradox, we must settle exactly what we mean by value.
#71. What is Value?# In exchanging some goods for other goods, there
arises the question, How much of one kind shall be given for so much of
the other? Some things are said to be #valuable#, as in the case of a
gold watch or a diamond ring, because in exchange for them we can get a
great quantity of other articles. Ashes are of little or no value,
because we cannot get anything in exchange for them. Now this word
#value# is a very difficult one, and is employed to mean different
things. We may say that quinine is valuable for curing fevers, that iron
is valuable for improving the blood, or that water is valuable for
putting out fires. Here we do not mean valuable in exchange, for quinine
would cure fevers just as well if it cost a penny an ounce instead of
some ten shillings. Water, if we can get it at the right time, puts out
a fire whether it costs much or little or nothing. It is clear, then,
that by valuable we often mean #valuable in use#. The words value and
valuable are in fact #ambiguous#. (See Logic Primer, pp. 22-26, on The
Correct Use of Words.) #There is value in use and value in exchange, and
many things which would be commonly said to have little value in
exchange have much value in use.# But of these meanings, "value in use"
is nothing but the #utility# of a thing to us, that is, the utility of
all such portions of it as we can actually employ. Thus, the value in
use of water means the utility of the water that we drink, or wash in,
or cook with, or water the roads with, and this utility is very great.
But of course it cannot mean the utility of water which is not useful to
us, but on the contrary hurtful, as in the case of floods, damp houses,
wet mines, and so forth.
We may now see how true was the remark of Genovesi, the Italian
economist, that "#Exchange consists in giving the superfluous for the
necessary#," or, as I should prefer to say, #the comparatively
superfluous for the comparatively necessary#. He who has more than
enough of one article has already enjoyed all the good which that
article can do to him, but he probably needs supplies of other articles.
The exchange, like an act of mercy, blesses both him who gives and him
who receives, because what each receives in exchange is much wanted and
has high utility. In England, for instance, we possess a great deal of
coal, and France produces plenty of good wine. We could have little or
no wine in England unless we got it from France or some foreign country,
and France also is much in want of coal. It is obvious that there is a
great gain of utility if we give some of our comparatively superfluous
coal in exchange for some of the abundant wine of France.
It has been objected to commerce that it is #sterile# and produces no
new goods. There exist neither more nor less coal and wine after they
are exchanged than before. But in political economy we treat of utility
and wealth; the question is whether things are usefully consumed or not.
Now that which is not wealth if it were consumed by one person, becomes
wealth when handed over to another person for consumption. #Though
exchange cannot create the material of wealth, it creates wealth
because it gives utility to the material.#
#72. Value means Proportion in Exchange.# When we speak of the value of
a thing in exchange, we mean how much of some other thing we can get for
it. This of course will depend upon the nature of that other thing.
Obviously, I can get for a shilling much more potatoes than bread, and
bread than beef, and beef than essence of beef. Therefore, when we speak
of the value of a thing, we ought always to say what it is to be valued
by. #The word value only means that so much of one thing is given for so
much of the other#, and it is the #proportion# of these quantities
(Latin _proportio_ from _pro_, in comparison with, and _portio_, share),
which measures the values of the thing. A ton of pig-iron can usually be
got for a quarter of corn; here the proportion is one to one. To get a
ton of copper, we should probably have to give thirty quarters of corn;
here the proportion is that of one to thirty. There cannot be such a
thing as value in exchange, unless there be proportion--so much of one
commodity for so much of another.
Usually, indeed, we measure the values of things by their #prices#. The
#price is the quantity of money which we give for a thing#; in this case
the proportion is between the quantity of money and the quantity of
goods we get for it, as when we give sixty shillings for ten yards of
carpet. We shall learn later on that money is a kind of commodity, which
has utility and value like other commodities. But there is great
convenience in always thinking and speaking of values in money, because
we can then readily compare the value of one thing with that of any
other. If a pound of potatoes costs one penny, a pound of bread
threepence, and a pound of beef ninepence, we can see at once that a
pound of beef is of the same value as three pounds of bread and nine
pounds of potatoes, and we can judge how much of each to use.
73. #Laws of Supply and Demand.# In the next place, we must try to
understand how the values of things are governed, and made to change
from time to time. The principal laws which govern values are called
#the laws of supply and demand#, and they are very important indeed.
#Supply# means the quantity of any goods which people are willing to
give in exchange at a certain value, and #demand# means similarly the
quantity of goods which people are willing to take in exchange; but,
before a person can judge how much he wishes to buy of a particular kind
of goods, he must know its price, that is, its proportion in exchange
for money. If bread, instead of being threepence per pound, becomes
fourpence, a poor person would perhaps decide to take less bread, and to
buy more potatoes. If beef, instead of being ninepence, should rise to a
shilling, or fourteenpence a pound, some people would refuse to buy it
altogether, and others would buy less than before. The supply of things
varies similarly; if the price of meat rises high, farmers who own
cattle bring them to market, in order to get a good profit by selling
them; if the price falls low, they keep their cattle to sell at another
time.
#The Laws of Supply and Demand# may be thus stated: a rise of price
tends to produce a greater supply and a less demand; a fall of price
tends to produce a less supply and a greater demand. Conversely, an
increase of supply or a decrease of demand tends to lower price, and a
decrease of supply or an increase of demand to raise price.
These laws are so important that I will state them over again, in the
form of a table:--
|-----------|------------|-------------|
| #Price.# | #Supply.# | #Demand.# |
|-----------|------------|-------------|
| Higher. | Greater. | Less. |
|-----------|------------|-------------|
| Lower. | Less. | Greater. |
|-----------|------------|-------------|
We can now understand how the price of any kind of goods is decided. The
price must be such that the quantity demanded at any time is equal to
the quantity supplied. If those who want goods at a certain price,
cannot get them, they will have to offer a higher price, so that they
may induce other people to sell. The higher the price the greater the
supply, as we have seen; moreover, if some people in a market are
offering a higher price, it soon becomes known to other dealers. When a
farmer's wife carries a basket of butter to sell at the Butter Cross in
the neighbouring market town, she soon learns whether the supply is
greater or less than usual. If the purchasers are few and slow in
buying, she begins to fear that she may have to carry her butter back
unsold, and go without the crockery and calico and other things which
she intended to buy with the money. Then she begins to ask a penny or
twopence a pound less, and the other sellers of butter are obliged to
lower their prices also, since no one would buy butter from one woman at
1s. 6d., if he could get it as good from the next person at 1s. 4d. But,
if few people bring butter to market, or if there are many purchasers
with money in their pockets, the scene is quite changed. Those who have
brought butter, find that they will have no difficulty in selling all
they have; it is the purchasers who now become anxious to buy before all
is gone, and their eagerness soon shows the sellers that they may ask
higher prices. It is by this #higgling of the market#, by sellers asking
the highest price they think they can get, and buyers trying to buy at
the lowest price which they think will be taken--that the market price
of any commodity is settled.
#The market price will be such that the demand at that price will equal
the supply at that price.# The quantity of butter or any other commodity
that is sold must equal what is bought, because it is not sold until it
is bought; but the price will settle itself accordingly.
#74. How Value depends upon Labour.# We now come to the great question
whether value is produced by labour, or how it is connected with labour.
Some economists, observing that, when a thing like gold is very
valuable, men spend a great deal of labour in getting it, have said that
#the labour spent upon it is the cause of the high value#. #This is
quite wrong#; for if it were true, anything, upon which great labour has
been spent, ought to be very valuable; everybody knows that such is not
the case. Great labour may be expended in writing, printing, and binding
a book; but, if nobody wants the book, it is valueless, except as waste
paper. A vast amount of labour was spent on building the Thames Tunnel,
but, as few people wished to go through it, the tunnel was of small
value, until it was required for a railway. Thus it is quite certain
that we cannot make a thing valuable by simply labouring at it; we must
labour in such a way as to make the thing useful.
On the other hand, substances may be very valuable which have cost
little or no labour. When a shepherd in Australia happens to pick up a
nugget of gold on the mountain side, it takes no labour worth mentioning
to pick it up, yet the gold is just as valuable in proportion to its
weight as any other gold. Some gold mines produce a great quantity of
gold: others which have cost quite as much to sink, produce little;
nevertheless the gold out of the one mine is sold at the same price in
proportion to its weight and fineness as that out of the other mine.
#Thus it is quite certain that labour is not the cause of value.# Gold
is valuable because a great many people want more gold than they have
already got, and whenever a thing is valuable it is because somebody
wants it.
But we may look at this matter in another way. If it were possible to
get a valuable thing like gold with little labour, many people would
become gold miners. Much gold would then be produced; if this were
wanted as much as what was already in use, it would be as valuable. But
no one wants an unlimited quantity of any substance. Wealth, as we saw,
must be limited in supply; if gold became as plentiful as lead or iron,
it could not possibly remain as valuable as it is now. People would have
far more than they could employ for ornaments, watches, gilding and so
forth; there would be a large surplus to be used in making pots and
pans, for which it is less needed. Now we can see through the whole
subject of value. When much of a substance can usually be produced with
little labour, the substance becomes so plentiful that people are
satisfied with the supplies of it which they have; they do not want
more, or at least do not want it so urgently. It follows that they are
unwilling to give much wealth for it. Thus the labour spent upon
producing a commodity does not affect the value of that commodity,
unless it alters the quantity of it which people can get, and thus makes
a further supply of the commodity more or less useful than before.
#75. Why Pearls are valuable#. To make this still more plain, let us
endeavour to answer this difficult question, "Do men dive for pearls
because pearls fetch a high price, or do pearls fetch a high price
because men must dive in order to get them?" Pearl-diving is a very
dangerous and laborious kind of work. The divers have to jump into the
deep sea with heavy weights to carry them down, and they must hold their
breath a long time while they are engaged in collecting the oyster
shells at the bottom. The number of good pearls which they generally get
is small compared with the great toil of getting them. It follows that,
on the average, they must receive a high price for what they do find,
otherwise they would not have adequate wages for such work. But this
alone is not a sufficient reason for the pearls being so valuable,
otherwise the mother of pearl shells, in which the pearls are found, and
brought up, would be as valuable as the pearls. But mother of pearl is
a very cheap substance. Again, if it were merely a question of labour, a
diver might go down anywhere, and, bringing up the first stone or shell
he found, insist on selling it for a high price, because he had dived
for it. The truth is, that pearls are valuable because there are many
ladies who have not got pearl necklaces, and who would like to have
them; and those who have some pearls would like to get more and finer
ones. In short, then, pearls are valuable because they are useful to
ladies who want more pearl ornaments: they are thus useful because the
ladies have not hitherto been able to get as many as they would like;
and they have not been able to get many, because it is so difficult to
fish them up from the bottom of the sea. Here we have the whole theory
of value and labour. #The labour which is required to get more of a
commodity governs the supply of it; the supply determines whether people
do or do not want more of it eagerly; and this eagerness of want or
demand governs value.#