VALUE AND THE PFt,ODUCER 1. The producer controls the suppl,y.—In the pre ceding chapter we have seen that the consumer has much to do in the creation of the phenomenon called value. From him comes the demand for commodi ties, and so he might seem to be in absolute control of their value.
But the consumer cannot wholly control his desires. Imperious wants possess his soul and he demands their gratification. The producer, knowing the ex istence of those wants, brings into existence the things that gratify them and demands a price which will give him compensation for his labor and sacrifices.
The producer controls the supply. . If the price offered him is unsatisfactory, he declines to produce, and the competition which follows among consumers for the possession of the lessened supply causes the price to rise.
Thus it is evident that in the determining of market prices or values the producer is a factor quite as im 'portant as the consumer. In one the demand origi nates ; the other brings forth the supply.
2. Value and cost of we have said in a previous chapter, cost of production means the amount of human effort necessary to produce an ar ticle. A farmer who builds a fence around a new pasture, devoting a week to the task. and doing all the work himself, would probably think it had cost him only the amount of money he paid out for posts, boards, nails, but he would be mistaken. That would be merely its expense of production. The real cost would be the week's labor plus the labor that brought him the money which paid for the materials used, plus the care and constraint necessary to save the money.
In the production of goods capital as well as labor is employed. The producer expects to sell at a price that will enable him to replace the capital used up, to pay interest to its owner, to pay the wages of labor, and still have left a surplus or profit at least equal -to what he might have made by working for others. If the market for any article is disappoint ing and some producers are compelled to sell below cost, those who are less able to hold on in the hope of . a higher price in the future will cease to produce, whereupon as a result of the lessening of the supply the market price tends to rise. On the other hand,
if the market for an article is far above the cost, so that its makers are earning unusual profit, new men are tempted to put their capital and energy into the industry, and those already engaged in it are inclined to increase their output; the result is an increase of production, an increase of supply and a tendency of the price to move downward.
Thus it is clear that value or price in the long run fluctuates about the cost of 'production, always tend ing to coincide with it. This fact was so obvious to the economists of the last century, particularly those of' the English Classical School, that many of them made cost the determining factor in the creation of value. ,This was a mistake; as we have seen, utility is also an important factor. Which is the more im portant, cost or utility, it would be idle to discuss. It would be, like trying to decide which is the more important—the fishhook or the fishline, the pipe or the tobacco, the lamp or the kerosene, the button or the button hole, the hook or the eye, the upper or the lower blade of a pair of scissors.
3. Marginal producen—The cost of producing an article varies in different factories and in different locations. This fact is most noticeable in the extrac tive industries, such as agriculture and mining, where production is clearly subject to the law of diminish ing returns and increasing costs. But it is true also in the case of manufacturing industries. The costs in one factory may be relatively low because of its advantageous location near a railway, or because it utilizes water power at little expense, or because its oivner has mastered a process known only to a few, or because it is located in a community where cheap labor is available. On account of circumstances like these it is not possible to say definitely what the cost of any article is. If we knew what its cost was in all the factories where it was produced, we could, of course, get its average cost, but that is impracticable and the information would not be worth the effort to get it.