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An Introduction to the Theory of Value

on the Lines of Menger, Wieser, and Böhm-Bawerk

First Edition – 1891


by William Smart (1853-1915)


Chapter X
Price


ITV-E1-10.1 In an early chapter it was said that the one class of objective values which had an interest for economic science was the (purely objective) value in exchange or purchasing power. We escape using this cumbrous expression if we substitute the word Price. The two terms are of course not equivalent: power in exchange is a different thing from the quantum of goods obtained by that power and measuring it: but obviously the two are inseparable, and the laws of the one are the laws of the other. Our task, then, is the theory of price.1
ITV-E1-10.2 It would perhaps not be very difficult to argue that a universal theory of price is impossible. The attempt to base an entire economy on the motive of Self-Interest has no been so successful, that many of us are willing to risk the credit of the whole science any longer on an assumption that was never quite true, and is becoming less so as wealth increases and is increasingly spent with a directly moral aim. But, if anywhere, in certain great departments of exchange the old competitive laws do hold. In stock exchange dealings, in banking, in international transactions, in great organised markets, as iron, wool, cotton, grain, and so on, the egoistic motive is so strongly marked that it is possible to found on it a law which comes, perhaps, as near a scientific law of exchange as we can expect. It may be described as the law of price under perfect competition. It disregards all motives but those of advantage from the exchange – always, of course, within the recognised limits of law and respectability. In such markets the “strong” exchanger (buyer or seller) is the one who attaches most importance to the good he wishes to get, and the least importance to the good he gives in exchange – as we can see from the simple consideration, that the bidder most likely to carry away a picture from a studio is the one who thinks most of the picture and least of his money, while the artist most likely to clear his stock is the one who thinks least of his pictures and most of the money he will get for them.
ITV-E1-10.3 The assumptions on which the law is based are the following: that the market is an open and organic one; that buyers and sellers are ordinarily conversant with the conditions of stocks and competition; that each party will make an exchange whenever he sees a gain in it, and will prefer a greater gain to a less.
ITV-E1-10.4 These are the assumptions of any ordinary commercial “market.”2 For simplicity’s sake, we shall begin with the simplest possible case, and gradually come to the more complicated.
ITV-E1-10.5 1st Case. (Isolated Exchange.) A peasant B wishes to buy a horse, and his circumstances are such that he puts the same estimate upon £60 as he does on the possession of a horse. His neighbour S has a horse which he values as worth £20. Here there will certainly be an exchange, as, at a price, say, of £40 both make a gain of £20 over the amount at which, in the worst case, they are willing to exchange. But if the exchangers act on the principle “better a small profit than no exchange,” the price may be anything above £20 or under £60, and the actual figure is determined by the “higgling of the market.” Here, then, the price will lie between a minimum of the seller’s subjective valuation and a maximum of the buyer’s subjective valuation.
ITV-E1-10.6 2d case. (One-sided competition of Buyers or Sellers.) First, of Buyers. Suppose, instead of one peasant, there are three, B1, B2 and B3, bidding for one horse. B1 as before values a horse at £60: B2 considers a horse the equivalent of £50: B3 considers it worth £40. Only one can get the horse, but as S values his horse at £20 only, any of the three buyers may get it. Accordingly they will bid against each other till the figures reach £40, when B3 retires from the competition: at £50 B2 is excluded, and B1 is left as the sole competitor. [Online editor’s note: Smart means above rather than at these figures; this is corrected in the second edition. – RTL] Then, as in the former case, the price will be fixed somewhere between £60, the subjective valuation of the purchaser, and £50 that of the most capable of the excluded competitors, or, as we should say, between the subjective valuation of the successful and that of the first unsuccessful buyer.
ITV-E1-10.7 The case of one-sided competition of Sellers is the exact converse of the above.
ITV-E1-10.8 3d Case. This is the ordinary case of what may be called complete competition – where there are several buyers and several sellers of similar articles. Suppose the case of six buyers each wishing to purchase a barrel of apples, and five sellers each wishing to dispose of one barrel. We assume that the barrels are all of equal quantity and offered simultaneously, and that the competitors on both sides know their own interests and follow them.

[Online editor’s note: “18/” means 18 shillings; “18/6” means 18 shillings 6 pence; and so on. – RTL]
ITV-E1-10.9 Here the subjective valuation which the first three buyers put upon the apples is so high that they are, economically, “capable” of purchasing form any of the sellers. But, naturally, they will not pay more than necessary, and the transaction begins by low offers on the side of the buyers, and holding back on the side of the sellers. Let us follow the course of the bids methodically.
ITV-E1-10.10 Thus we see that at any price from 16/1 to 16/11 there will be as many buyers as sellers, and the conditions will have emerged at which exchanges take place and price is determined. For at that price four buyers and four sellers will make a gain by exchanging. The fourth buyer was willing to pay anything under 17/ and the fourth seller willing to clear at anything over 16/; thus both gain by a price which falls between 16/and 17/, while the three more capable pairs gain proportionally more. And at that price the valuations of the remaining competitors, be they few or many, are unable to have any effect on the exchange. 16/1 will not suit buyers 5 and 6, who are not willing to give more than a maximum of 15/11 and 14/11, and 16/11 will not suit sellers who demand at least 17/1.
ITV-E1-10.11 Again, any price above 16/11 would cause the fourth buyer to withdraw, and any price under 16/1 would cause the fourth seller to withdraw. The price, then, will be determined somewhere between the subjective valuations of the last buyer and the last seller – what we may call the Marginal Pair.3 And the most capable exchangers are proved to have been those who put the highest valuation on the commodity they wished (apples or money), and the lowest valuation on the commodity they had (money or apples).



NOTES:
ITV-E1-10.n1.1 1 As might be expected of a reaction against the old position claimed for value in exchange as the sole economic value, the Austrian economists have devoted their energies mainly to the neglected branch, Subjective Value. Böhm-Bawerk alone has followed out the marginal theory of value in detail into the theory of price.
ITV-E1-10.n2.1 2 In justice to that large class of economists who strive to suit the stubborn fingers of the economic man to the lute of social life, it may be said that their dislike of the egoistic motive is due simply to its being egoistic. If struggle and fight is the necessary and healthy condition of industry and commerce, then the utmost demand of the reformer must be a fair field for every one and no favour: if the ethics of commerce are necessarily the ethics of war, we may weep over the fallen but we shall not waste our time crying mercy. But a great many people – and these not the worst economists – think that the economic field may justly be regarded, not as a battle but as a harvest field, where the greatest results are to be had, not by fighting against, but by working with each other. For the last hundred years, they would say, men have been dazzled by the new possibilities of life which the rush of wealth has opened up, and the solidarity of mankind has been broken up by the eagerness of each to get hold of an advantage which, obviously, could only be had by the few. Now that the world is passably rich, should we not draw breath, and try to organise the industrial life with an end to the character and conduct of the workers? Ideas like these have a way of making the egoistic motive seem a little contemptible. But, in justice also to the practical man, it must be said that he ridicules all this mainly because he does not understand that it is a new point of view – the subordination of the economic to a higher law – and because his spiritual advisers have long allowed him to think that the business life has canons of its own, with which “theoretic” morality may not intermeddle.
ITV-E1-10.n3.1 3 To be exact, this limit may be more closely drawn. Böhm-Bawerk’s law is that the price is determined between the valuation of the last buyer and that of the first excluded seller as Higher Limit, and the valuations of the last seller and first excluded buyer as Lower Limit, viz. between the valuations of the Marginal Pairs. But for reasons which will shortly be evident, it is scarcely worth while adding to the difficulty of the subject by too great exactness.



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