REFERENCES BÖHM-BAWERK, E. VON. Positive Theory of Capital, Book iii, Chaps. iii and iv. CHAPIN, R. C. The Standard of Living in New York City. MARSHALL, ALFRED. Principles of Economics, 6th ed., Book iii. ROWNTREE, B. S. Poverty, Chaps. vi-viii. STREIGHTHOFF, F. H. The Standard of Living among the Industrial People of America, Chap. ii. URWICK, E. J. Luxury and Waste of Life, Chap. iii. VEBLEN, THORSTEIN. The Theory of the Leisure Class. WATKINS, G. P. Welfare as an Economic Quantity, Chaps. i, iv. WICKSTEED, P. H. The Common Sense of Political Economy, Book i, Chaps. i, iii. WITHERS, H. Poverty and Waste, Chap. viii. PART II VALUE AND EXCHANGE CHAPTER X VALUE AND PRICE Ir every family produced all the goods needed to supply the wants of its members, most of the problems which today confront economic science would not exist. Most of the world's workers are, however, contributing their services either directly or indirectly (through the production of goods) toward the satisfaction of the wants of others. One's economic wellbeing today depends primarily on two things: the money income which can be got from others in return for one's services or for the use of one's land or capital, and the amount of things that can be bought with this money income. The federal census of 1910 showed that about 93 per cent of the men over twenty years old and about 18 per cent of the women of corresponding age were employed in money-making occupations; and this number does not include those landlords and capitalists whose income was derived entirely from their investments. The work of the housewife and the services of friendship embody utilities, that is, satisfy human wants, just as do money-making activities, but they are not reported in terms of dollars and cents. The production of wealth is in these days mostly " for the market," and wants are satisfied very largely by goods obtained from the market. In the vast interlocking system of modern economic life most goods get from those who produce them to those who use them by the processes of exchange. The Meaning and Significance of Value. It rarely happens nowadays that goods are directly exchanged for other goods. Goods are usually sold for money,' and the seller uses the money in the purchase of other goods. The amount of money for which a unit of a given commodity exchanges is the price of that commodity. Since prices vary, when we wish to name the actual price of any commodity we must specify the price in a given market at a given time. From this simple and familiar concept of price there has been developed the more general concept of exchange value. If a hat sells for two dollars, a pair of shoes for four dollars, and a pocket knife for fifty cents, we say that the exchange value of the hat is half that of the pair of shoes and four times that of the knife. It thus comes about that we attribute exchange values to goods in accordance with their relative potency in exchange, as shown by the prices at which they sell. In this way values come to be thought of as magnitudes. Just as weight and volume are physical magnitudes by which we express the relative heaviness and the relative bulk of different objects, so exchange values are economic magnitudes or, more specifically, exchange magnitudes. The exchange value of a good is thus the resultant of its exchange relations with other goods. Exchange value is a purely relative or comparative magnitude, and there is no way of expressing or measuring the exchange value of a good except in terms of its command over other goods. In such a measurement exchange value can be expressed either as a quantity or as a ratio. We can say (1) that the value of a pair of shoes is that of eight knives or (2) that the value of the shoes is to the value of a knife as eight is to one. We thus express the exchange value of any good either by stating the quantity of other goods that can be obtained for it or by stating its ratio of exchange with other goods. The exchange value of any one commodity can, of course, be expressed in terms of any other commodity. Price is a statement or expression of exchange value in terms of money. To say that the price of a pair of shoes is four dollars amounts to saying that the value of the pair of shoes is four times the value of a dollar. When the words 1 In this chapter the word "money" is used in its broadest sense, thus including credit instruments, which are, of course, merely promises to pay money. "value" and "price" are used interchangeably, as will sometimes be our practice in this book, there is implied the assumption that the value of money as expressed in terms of other things than the particular commodity we are discussing is constant, an assumption which, of course, does not entirely correspond with the facts. Exchange values are determined by what may be called the "price process." This term is used in a narrow sense as referring to the fixing of the money values of commodities; in a broader sense it includes also the determination of the different rewards received by those who have contributed to the production of these commodities. In this broad sense the problem of prices is the problem of the distribution of wealth. Imagine the case of a mechanic employed at a particular time in the manufacture of machinery that will be used in a flour mill. The final product of the mechanic's labor- the only product directly useful in the satisfaction of human wants is the flour, or bread made from the flour. To the making of this final product thousands besides our mechanic farmers, agricultural laborers, railway officers and employees, other mechanics, and so on in a practically endless list - have contributed. What determines the price of the final product? What proportion of this price goes to the mechanic? What is his share worth to him as the means of getting the necessaries of life? Of these three questions, the first and third fall within the problem of the prices of commodities; the second, relating to the wage-price of the mechanic's services, falls within the problem of the distribution of wealth. At present we are concerned only with prices in their narrower sense, although the principles to be developed apply also in the case of the prices paid for the services of the factors in production. The significance of the subject of value in economic science lies in the fact that, within the conditions set by existing institutions, and within the limits set by the total production of wealth, human welfare, so far as it is dependent upon the possession of economic goods, is largely determined by the process of fixing price relations. The Market. It is conceivable that the prices of goods might be fixed by public authority, or that the production of the most important commodities might be monopolized. Then, too, it is possible to imagine a condition of society in which custom should have such power that prices, when once established, would be changed very infrequently. Still another possibility is a régime of competition in which every man is left free to buy and sell as he pleased at such prices as he can get. The first three factors-public authority, monopoly, and custom are among the things which determine the ratios at which goods are actually exchanged today; but the dominant factor is the fourth one mentioned the free competition of the market. In this connection we mean by the market, not a particular place for buying and selling, but the general field within which the forces determining the price of a particular commodity operate. For some commodities, especially perishable ones, like fresh milk and cream, the market is distinctly a local one. In the case of great staple commodities like wheat and cotton, the market is a world market, for it is impossible that the prices of wheat or cotton in Europe should differ for any considerable time from their prices in America by more than the expense of transport. So-called "international" securities, such as government bonds and the stocks and bonds of certain great corporations, afford even a better example of goods for which the market is a world market. Some commodities are used only in a particular locality or country, although produced in many different places. The American consular reports frequently contain advice to American manufacturers as to special kinds and varieties of goods used in different foreign countries. The cotton mills of England, Germany, and the United States all make special grades of cotton cloth designed especially for the Oriental market. Much more numerous, however, are the goods which, although of wide and general consumption, are produced in but few localities. This is especially evident in the case of agricultural and mineral products, but it is increase noticeab ufactures. Along with this l broadening of the f indur has been a |