Restatement of Familiar Principles

value, production, expenses, retail, commodities, expense, market, increase, competition and wholesale

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The benefits of improved production tend to diffuse themselves throughout society. No im provement, discovery, invention, or increase of wealth materials is of advantage to its owner alone, however little he may care for the inter ests of others. An increase of capital benefits first the capitalist in whose hands it is accumu lated, but by the very fact of its employment in industry other factors are made more produc tive, and so share in the benefit. An important invention, even when patented, is of social ad vantage. It diminishes the cost of production, or utilizes new materials, or permits the employ ment of new energy, or otherwise reveals hidden sources of wealth.' The patent cannot possibly secure all of the advantage to the inventor, and it generally secures but a very small part. Books and newspapers and schools and travel increase the rapidity of circulation of such advances in production, but without these aids the operation of economic law would insure a similar result. When a laborer rises from the ranks to become an employer of labor, he promotes the interests of his fellow-laborers if he is efficient and suc cessful.' When laborers add to their product by more energetic and intelligent effort, they not merely increase their own wages (provided they are free to seek their own interest), but they also confer a benefit upon consumers— among whom other laborers form the chief part —and permit a more advantageous investment of the capital engaged in the industry. It is through changes in consumption that the greater part of the process of the diffusion of benefits takes The value of commodities coincides with the expenses of their production. The classical doc trine that cost of production regulates the value of freely produced commodities has been re placed in our discussion of value by the newer explanation which traces value to marginal utility. Cost has been used only in its more accurate sense of actual expenditure of energy or loss of vitality occasioned by active participation in industry. In this sense it is evident that there is no constant relation between cost and value, 1 See general law of distribution in Ch. XVII., especially p. 395.

2 See Chapter VI., " Propositions concerning Consumption." and it is also clear that values can be measured far more easily than costs, and that they can be more easily compared with each other. In order to ascertain the cost of a commodity, it would be necessary to make actual inquiry of all persons, capitalists, or laborers who have con tributed to it directly or indirectly ; to ascertain whether they have made their contribution at any personal cost to themselves, deducting any other benefits that resulted from the same ac tivity.

When writers have attempted to establish an equivalence between cost and value, they have not taken the trouble to ascertain actual cost, and so they have not really used it at all in the comparison. They have ascertained only the value, and from this have attempted to deduce the cost. What is possible, however, is to com pare the value with the expenses of production to an individual employer. From his own stand point the employer looks upon all the contri butions of his fellow-producers as so many commodities or services to be secured on as favorable terms as possible, and the sum of his investments in the particular commodity must stand in some definite relation to the value of the commodity at the time when he places it upon the market. would prevent

any producer from continuing indefinitely to produce commodities at a greater expense than is warranted by their value. If, on the other hand, the value is greatly in excess of the combined expenses of production, so that there are unusual profits to be made in the manufact ure, an increased competition of others will be attracted, resulting in so great a production that marginal utility will be reduced by the increased supply. If it is practicable to secure concerted action among the entire body of producers of a single commodity, so that competition is abol ished, the value may be kept considerably above the expense of production. This is most easily accomplished in the case of commodities, like coal or oil, where the supply is regulated not so much by the will of the original producers as by those who control transportation facilities. But it is sometimes accomplished even with commodities which would ordinarily be classed among those "freely produced." There is al ways present a potential competition, but the initial obstacles in the way of making it effective allow a wide margin for the rise of values above expenses. A railroad which taps an extensive coal-field may long retain control because of the expense of building a new road and the difficulty of securing a charter and right of way. Profits may be much higher than in other industries without being sufficiently great to justify the building of a competitive road.

Many other exceptions and reservations would be necessary to the validity of the law that value coincides with expense of production, if in the latter term we included all the original invest ments. But in real life any unusual gains are rapidly capitalized, and any new investor finds them added to his expenses as well as to the value of his product. The railway shares, for example, increase in value to correspond with the earning power, and the equivalence of expense and value is thus secured by increasing the expenses rather than by reducing value. The general rule for freely produced commodities is that value tends to equal the sum of expendi tures necessary to bring a product finally upon the market, including in the estimate of expenses an allowance for ordinary profit to the final em ployer or dealer.

There can be but one price for a given commod ity in a given market. By the market, is meant the area within which there is free competition of buyers and sellers, and within which the con ditions are such that both buyers and sellers may readily compare prices. Wholesale and retail prices are not equal because the wholesale market is distinct from the retail market, even in the same cities and towns. Retail buyers are as much cut off from the wholesale sellers as if they were in a different country, and the only ordinary comparison of prices is among retail dealers who add to the wholesale price, repre senting the entire expense of the product up to that point, an allowance for the expenses of retail ing, including the labor of subdividing parcels, exposing for sale, carrying the stock until sold, insurance, and profit. This calculation is made as a means of estimating the success of the retail store, rather than as a means of deciding what the retail price shall be. The successful mer chant does not fix his prices by adding a fixed and uniform percentage to the cost of his goods.

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