Further Essays in Economics
Leon Maclaren

IX

VALUE AND PRICE

VALUE is a measurement, and, like all measurements, is a comparison. To say that a surveyor's tape is three yards long is only to state that it is three times as long as something else. As yards are measurements of length, so value is a measurement of desire; and as length can only be measured by length, so desire can only be measured by desire.

Everyone is constantly weighing his desires one against another and the stronger determine what he does. Because he is an individual and his desires reflect his individuality, his valuation is different from that of others. He used a yard-stick which is his own. Though all may desire to live, yet each has a personal view of what constitutes living. Plainly the sense of values of an intellectual genius is radically different from that of an unlettered newsboy.

Consequently in considering the things of the world each puts his own values upon them. Some he prefers to others and values more highly, many he does not desire at all and values at nothing. There are as many values in respect of any one thing as there are people who desire it and all these individual values are measured by personal standards.

An object isolated from its admirer has no value. "Intrinsic value" is a fiction, for plainly a thing which nobody wants is valueless. There can be no value apart from some person's preference or liking, and value resides in the preference and not in the thing preferred. For anything to be valuable there need only be one person to desire it; its value will depend upon his estimation of its worth; and his estimate will be calculated by his own personal standards.

For example there may be two brands of some ordinary commodity, such as soap, one of which is of inferior quality but strongly advertised, another of better quality but little known. It will be common for people to prefer the advertised soap and refuse the other. Some few, aware of the superiority of the little-known brand, will seek it out and go to considerable trouble to find it. The relative esteem in which each customer holds the two soaps will determine which he buys and the trouble and expense he is prepared to suffer to obtain it. If his preference is strong he will go to greater lengths to satisfy it than if it is weak.

Advertising cannot improve the quality of advertised goods, but it can awaken a desire for a commodity in the minds of men and raise the esteem in which the commodity is held by them. It acts on the customer, not on the goods; it affects peoples' desires and the values they put on things. By this means, it can increase sales and raise prices; for it is the people's valuations which make them customers.

More important, however, and beyond the range of advertising are those deeper desires which grow from the nature of each person. One with a natural bent for historical research, whose interest has been caught by some remote period in the records of the human race, may devote his main energies to searching out and studying rare documents and other remains of former times. He may travel far and dangerously just to secure the sight of some object which he hopes may afford some vital information but which equally, as he knows, may yield little of importance to his researches. Another with no less enthusiasm, determination and endurance may attend upon his favourite football team and find his keenest delight in lending his voice to the lusty crowds who pack those great arenas where men devote their lives to playing games for money. Needless, almost, to say, these two will rarely view anything in a similar way. Their standards will be altogether different.

Plainly one man's values cannot be compared with those of another. Each person's scale of values is graded upon a different measure and no common standard exists between these different scales.

This fact becomes of major importance in the consideration of exchanges. Suppose two persons negotiate to exchange tea for sugar. Other things being equal, the vendor of the tea will not agree to the exchange unless he would rather have the sugar than the tea; that is, unless he values the sugar at more than the tea. For him, two values exist, that of the sugar and that of the tea, and upon the relationship between these values his action depends. On the other hand, the purchaser of the tea will not normally agree to a bargain unless he prefers the tea to the sugar. For him also there are two values. In short, in every exchange at least four values come into play; two of the vendor and two of the purchaser. Before agreement can be reached in the case under examination, the vendor must value the sugar at more than the tea and the purchaser must value the tea at more than the sugar.

It makes no difference if the vendor sells the tea for money instead of sugar. Normally he will not sell the tea unless he would rather have the money than the tea, and the purchaser would not pay the money unless he would rather have the tea.

Evidently, in all bargaining, each party compares his own values one with another, but there is no relationship between the vendor's values and the purchaser's values. Indeed, the values the vendor puts upon the commodities being exchanged will normally be arranged in inverse order to those of the purchaser. If it were not so, there would be no trade.

Therefore, as there must be at best two sets of values with at least two in each set before an exchange can take place, it is confusing to speak of "exchange value" or "market value," for no such thing exists.

To use such phrases is to confuse value with price and, in so doing, to conceal the vital relationship between values and prices. Those who call themselves "valuers" have no better claim to that title than anyone else. They would better be called "assessors" as in Scotland, for their function is to assess the market price of things. These notions of "exchange value" or "market value" are related to "intrinsic value" with which they are often contrasted. All carry the idea of a disembodied value, existing apart from persons, and somehow or other attaching to things. If, however, values and their relationship to prices is to be understood, it is essential to grasp the personal nature of values and to dispel any confusion between value and price.

While there need only be one person for value to exist, there must be two at least to bring price into being, because a price is only realised upon an exchange. When a trader marks his goods with "prices" as he calls them, these markings are not prices at all, but indicate the prices he hopes to obtain. They are invitations to the public to offer to purchase the goods at or about the named figure. (See Pharmaceutical Society of Great Britain and Boots Cash Chemists (Southern) Ltd., 1952, 2 Q-B. 795)

The practice of exchanging things for money and money for things having become so general, the word "price" in ordinary usage has become restricted to the money paid upon an exchange. To accept this restricted meaning, however, is to put many of the matters which affect particular exchanges outside the range of the enquiry.

When goods are bartered or exchanged for services rendered, the goods or services given are as much a price paid as money could be.

Thus if housewives exchange tea for sugar, the tea is the price of the sugar, and the sugar the price of the tea. Again if a man gives oats delivered at a house in exchange for coal collected there, the oats plus the delivery is the price of the coal and the coal the price of the oats plus delivery. Likewise, if a tailor sells a suit of clothes delivered to his customer for a promise to pay £45, at the end of the month, the price of the suit so delivered is not £45, but is the promise to pay it - a very different matter. Recognising this fact, the law does not permit a tailor to go and recover a suit from his customer who has dishonoured such a promise, it only permits him to sue upon the promise.

For the purpose of these essays, the word "price" will be used to mean all that is given, done, and promised by one party to an exchange in return for all that is given, done and promised by the other.

Now, except where the exchange is affected by extraneous considerations which will be noted later, the top and bottom limits between which the price may move will be fixed by the values put upon the things being exchanged by the purchaser and the vendor. Thus in the case of a simple exchange of tea for sugar, the top limit upon the quantity of sugar which the parties will agree to exchange for a fixed amount of tea will be fixed by the buyer who is purchasing the tea with the sugar. He will not normally give so much that he would rather keep the sugar than have the tea. On the other hand, the smallest quantity of sugar which may be given will be determined by the vendor who is selling the tea for the sugar. He will not normally agree to accept so little sugar that he would rather keep the tea than have the sugar. In short the top limit on the price will be fixed by the purchaser's values and the bottom limit by the vendor's. Each will ordinarily seek to receive better value than he gives, and if this is not possible, then, in the ordinary case, there will be no exchange.

These top and bottom limits may be very far apart. For example, a connoisseur of painting may discover a masterpiece in a junk shop. It may be that he would be willing to give £1,000 for it if that were the only way he could obtain it. For the dealer's part, he might be willing to dispose of the dirty old daub for ten shillings to be rid of it. At which point between these extremes the price agreed would depend upon the bargaining powers of the parties.

This is the way every price is fixed. There is a top limit to the price beyond which the purchaser will not go, and there will normally be the point at which he prefers to keep the price rather than have what is offered in exchange. At the other end there is a bottom limit set by the vendor, when the vendor would prefer to keep the goods rather than accept the price offered. If the vendor's bottom limit is above the purchaser's top limit then negotiations will lead to nothing. Only between these limits can agreement be reached and the price which is ultimately agreed will obviously be the conclusion of the bargaining.

So far as the argument has proceeded, the much vaunted theory of supply and demand has had no application at all. Indeed when the questions are asked "what is supply?" and "what is demand?" the vague and indeterminate nature of this general explanation of the exchanges becomes apparent. The truth is that every exchange is a question between two persons, each with his own desires and his own valuations, and each with his own powers of bargaining. It is for this reason that it pays merchants to employ salesmen skilled in bargaining, to whom each sale is a separate problem.

This fundamental fact - that every exchange and every price results from a human relationship of buyer and seller - is entirely overlooked in the theory of supply and demand: and yet this relationship is vital to all trade. Not merely will an individual's view of life give him his scale of values which, when applied to things about to be exchanged will settle the top or bottom limit to which the price may move, but when applied to his relationships with the other party may modify this limit and will modify the extent to which he will drive his bargaining. Traders know this and are frequently at pains to establish good relationships with their suppliers and customers.

True a buyer's relationships with his seller is not the only matter he has to consider. He will set in the balance against this relationship the conditions imposed by his employer or the state of his own business, if he is a master man. It is all a question of valuation and each person will evaluate these things in his own way.

Thus it is to be observed that individuals will value the service which particular sellers will give them, or even the social prestige that flows from dealing with particular traders, and will be prepared to pay for these advantages. Some will not knowingly buy anything from a co-operative society while others will not buy anything obtainable from a co-operative society from any other trader. Considerations of every imaginable kind are weighed and valued by parties to particular exchanges and affect both the price they are willing to pay or receive and the bargain they are willing to drive.

The theory of supply and demand has not gained its hold on popular thought for no reason at all. In bargaining there is probably no stronger influence than the existence of an alternative market. In many cases vendors will not sell to one for less than they can obtain from another and purchasers will not buy from one for more than they will have to pay another. Moreover, even when they will agree to pay more or receive less, the alternative market will supply a standard by which they will judge the amount they are willing to pay or receive.

It is for this reason that prices tend towards a common level. As a general rule each seeks to gratify his desires with the least effort and to make the best bargain. The knowledge of an alternative market will therefore strongly affect the minds of the parties to an exchange during negotiations.

The power of the monopolist lies in his capacity to remove the alternative market. This gives him a strong bargaining power when dealing with his intending customers. On the other hand, trade slumps may take away the manufacturers' and merchants' alternative markets and give the intending purchaser a strong bargaining advantage. However complete the monopoly, and however drastic the slump, the price of each bargain will not exceed the most the purchaser is willing to pay nor fall below the least the vendor is willing to accept: and these limits will be set by the purchaser's and the vendor's valuations. The effect of the alternative market upon individual bargains is the subject of the theory of supply and demand. At best that is the theory's sphere of application. Its validity even within this sphere is not very great.

To sum up: Price arises only on an exchange. It is all that is given, done, and promised by one party to an exchange that is given, done, and promised by the other. Every price flows from a deal between two persons though they may be only servants or agents of the buyer and seller. The limits within which the price may move will be set by the vendor's and purchaser's respective values and between those limits the price will be fixed by the agreement which concludes negotiations between the parties. These values will come into play in the negotiations and will affect the bargaining. Subject to the over-riding effect of these valuations each will seek for himself the best bargain. Normally each will seek better value than he gives. Where force or deceit play no part each will normally receive better value than he gives, for what he receives and what he gives are valued by him and his scale of values is different from that of the other party.

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