Rural Wealth and Welfare: Economic Principles Illustrated and Applied in Farm Life

by Geo. T. Fairchild

Normal value.—In this way the cost of production is said to fix the normal value of any article of commerce capable of production in indefinite quantity and within limited time. For this reason farmers are interested in finding the average cost of production of wheat, corn, etc., within a region supplying their market. They are even interested in knowing the conditions for wheat raising in India, South Africa and Australia, since the cost of production there may influence the value of wheat throughout the world. The normal value of products capable of indefinite multiplication tends always [pg 071] toward the value of the least costly. This is shown in the effect of labor-saving machinery upon the value of cloths and other goods. It is equally true in agriculture that wheat raising upon cheap land with extensive use of machinery and economical methods of culture and harvesting brings down the normal value. So long as more land can be applied to wheat raising with these advantages, the less productive methods may be too costly for the market.

On the other hand, if any production cannot be largely extended so that the supply in market barely meets the requirements of purchasers, the tendency of normal values is toward the cost of the most costly part of the product required to meet wants. This is because the supply is kept up only by the exertion of the greater amount of labor as well as the less. If farmers in western prairie country can raise corn at an expense of 15 cents per bushel, as they can upon an average, so long as that region can raise all the corn required no less productive region can force the normal price above what will keep western farmers raising corn. When the western crop fails, the price is far above normal value, and may even go above the cost of the most costly corn in market, under a principle called the law of supply and demand.

Since improvements in method so constantly lessen the normal value of products, Mr. Carey made the effort to measure value by “cost of reproduction,” meaning, I suppose, that any article produced at any time and place is likely to bring in any market a price equal to the cost of similar articles produced under the most improved [pg 072] methods anywhere used in the present. This, of course, does not apply to articles not desired in the present, because deteriorated or out of fashion or less useful than some new device for a similar use, but only to those articles of full utility in having all the qualities needed to meet the desire of purchasers. Even a diamond like the famous “Kohinoor” would have its almost priceless value reduced to the cost of securing similar jewels equally desirable if a process of crystallizing carbon were suddenly discovered. It is easy to see, then, that cost measures value only so far as it is directly connected with the available supply in any market. Under ordinary circumstances the supply cannot be increased unless the cost is met, but the rule is modified by any peculiarity of season, or conditions of trade, or production by cheaper methods or cheaper labor, or by the changing wants of a community. The application of all these influences may be studied under the so-called law of supply and demand.

Supply and demand; markets.—The law of supply and demand is only a statement of the general fact that market value tends to increase with increase of demand and to decrease as the supply to meet the demand increases. It must be understood that a market means a particular spot where buyers and sellers of any article of commerce meet at a particular time. The supply is the amount offered for sale at a given price. The demand is the amount buyers will purchase at the same price.

Thus, if on a certain day sellers offer in Chicago 10,000 hogs, with a willingness to take $5 per cwt., they [pg 073] represent the supply. If on the same day in the same place buyers are willing to take 10,000 hogs at $5 per cwt., $5 will be the market price, and the supply and demand will be equal. If, however, only 5,000 hogs would be bought at $5 per cwt., 5,000 hogs will be without buyers, and their owners will seek, by lowering the price, to find buyers at $4.50 per cwt., if necessary. Since all the sellers will feel the same pressure, the tendency of market value will immediately be downward. Buyers willing to pay $5 per cwt., finding many sellers, will expect a reduction in price, and the price will certainly go down until the hogs purchased equal the entire supply. And that will not be until the buyers are stimulated by reduction of price, so that as many hogs are wanted as there are for sale. If that point is reached at a price of $4.50 per cwt., the market value is found there. The limit of time within which this reduction takes place will depend upon the ability and willingness of sellers to wait. If the product offered is perishable, or costly in keeping on the market, the reduction will be speedy. Otherwise it may be held indefinitely with the hope of compelling buyers to come to the higher prices, in which case it is practically taken out of the market. Only those commodities are practically in the market which are held for sale at the market price. Only those buyers practically enter the market who are able and willing to give the market price.

The higgling of the market.—The process of reaching an agreement between buyers and sellers is called the higgling of the market, and represents the conflict between [pg 074] the wishes of sellers to get the most possible for their products, and the wishes of buyers to get the most possible for their money. In fact, both buyers and sellers have the same motive: to make their own exertions go as far as possible in supplying their own wants. The fact that money enters into the transaction makes no difference with the bargain. Two farmers trading horses have exactly the same desire: to get the full worth of the horse to be given. A genuine bargain usually benefits both parties. Even in a horse trade each owner expects to be benefited by the exchange; and only a jockey seeks that benefit in taking advantage of his neighbor's ignorance or inexperience.

So, in the general market, every seller gains what he desires more than what he possesses, and every buyer has exactly the same experience. Two friends may exchange books if either would be benefited by the exchange. In that case the one gaining the less valuable book gains the satisfaction of giving to his friend. Both are still profited, one by the larger value received, and the other by the pleasure of giving. In such an exchange no basis of value is reached, but in any ordinary bargain the final adjustment will be as nearly as possibly upon the test of value in the market. Between one buyer and one seller, the bargain is likely to turn to the advantage of the one who is quickest to discover the weakness of the other. If two persons are discussing the price of a house for which the seller wishes $1,000, but will sell for even $600, and for which the buyer hopes to give only $600, but will pay even $1,000, the seller will gradually lower his price, and the buyer [pg 075] gradually raise his offer until one or the other discovers the working of his neighbor's mind. These are the natural conditions for sharp bargaining.

In the larger market the interests of a multitude of buyers and a multitude of sellers have weight, and no shrewdness can prevent a settlement upon such a price as comes nearest to satisfying all parties. The so-called law of supply and demand is a brief statement of the fact that sales cannot be made in open market above the mark where buyers and sellers agree, and that mark is essentially the price at which all who are willing to buy at the price current are met by those who are willing to sell at the same current price. With reference, then, to all articles sold in open market, it is safe to say that the only test of value is the price which the public is willing to pay. So universal is the acceptance of this principle in practical affairs that everybody estimates the value of his property by the price at which it will sell. Any appraiser or assessor who should adopt a different principle would be considered wholly untrustworthy.

Freedom in markets.—In this higgling of the market it is absolutely necessary that buyers and sellers have essential freedom of choice and fairly equal information. There may be conditions of law preventing free competition, as under the regulation of prices attempted in various countries prior to the present century. In England, during nearly four centuries, limits of prices for nearly every article of food and clothing were named by law. Yet in every instance the conditions of the market were stronger than the laws, and the restriction upon free competition and free discussion of prices actually [pg 076] destroyed the open market. The conditions of a bankrupt sale at auction reduce the competition to a struggle between buyers. In this case a very slight collusion between the buyers may destroy the market. This is frequently illustrated in the sale of real estate after foreclosure of mortgages. The unnatural conditions of auction at any price are so evident as to make common the secret employment of sham bidders, shrewd enough to push actual buyers as far as they will go without preventing the sale. Somewhat similar conditions may exist in a great cattle market, in which immense quantities of cattle are delivered by owners, while the number of buyers is few. The great packing houses have the advantage of being almost the sole bidders for what must be sold at their price. These conditions, however, are not made by the packing houses, but by the large supply subject to immediate sale. Such conditions are much more noticeable in the market for ripe berries, when a slight excess of supply makes these perishable products of trifling value.

Conditions on the other extreme, from scarcity of supply and anxiety of buyers, may also interfere with a free market. Any scarcity in food products leads to an anxiety on the part of consumers to buy and an equal disposition on the part of owners to hold for higher prices. In this case, while the law of supply and demand is still active, the effects are quite out of the ordinary course. Thus, for a long time it has been estimated that a scarcity of one-tenth in the natural supply of wheat raises the price three-tenths, scarcity of two-tenths raises the price eight-tenths, scarcity of three-tenths [pg 077] raises the price one and six-tenths, scarcity of four-tenths raises the price two and eight-tenths, and scarcity of one-half makes the price of the half-crop four and a half times greater. A decrease in the supply of less essential foods evidently cannot have equal effect. Thus, a scarcity of sugar, causing increased price, will directly reduce consumption of sugar, so that the limit may be easily reached. The same conditions may exist with reference to meats, since a high price diminishes the demand from the disposition of people to eat less meat. Indeed it has passed into almost a proverb that dear bread makes cheap meat, for the reason that few will diminish the supply of daily bread, but the mass are willing to lessen the meat diet to save expense.