Definition of price.
But price is quite another thing. The price of a commodity is the ratio at which it will exchange, not for all other goods and services but for one specific thing, namely, money. Price is value expressed in terms of the medium of exchange. We habitually translate our economic goods into terms of money before we buy or sell them. A general rise or fall in prices is quite possible, for this is merely another way of saying that money will buy less or more of all other things. It is immaterial whether we say that prices have gone up or that money has gone down; we mean exactly the same thing.
What determines the level of prices?
Competition and Monopoly.—Exchange is conducted, for the most part, under free competition. Buyers give as little as they can in money for goods; sellers get as much as they can. When goods bring higher prices, more will be produced until prices are forced down again; if prices fall, production will decline until the reduction in supply serves to bring them up again. This is the theory of free competition. In practice, however, it does not always work so automatically. Some things, such as diamonds and platinum, cannot be produced in unlimited quantities no matter how much labor, capital, and organization we may apply. Other things are legal monopolies, or patented articles, which can be produced by only one concern and are not subject to the direct influence of competition. Still others are natural monopolies due to the fact that from the nature of things only one concern can produce the goods or render the service. A telephone company, for example, has a natural monopoly. Competition involves a complete duplication of the service. It means that many subscribers have to put two telephones in their stores or homes in order to get into full touch with other users of telephones. The net cost of telephone service to customers cannot be reduced in this way. Finally, some things are the subject of artificial monopoly, that is to say, they are produced or distributed under arrangements which restrict or eliminate competition (see pp. 386-388).
The effects of monopoly.
All these forms of monopoly interfere with free competition and they cover a great many of the things which are in common use by the people.[[15]] Recent investigations have shown that the number of commodities which are either wholly or in large part controlled by monopolistic combines is larger than people commonly realize. A certain amount of legal monopoly is essential in order to encourage research and invention.[[16]] Men will not strive to invent new machines and appliances if the invention at once becomes common property. Natural monopolies arise from the essential nature of things and it is difficult to see how most of them can ever be avoided. We cannot very well have two competing street railways on the same street, for example. There would then be little room in the street for anything else. Artificial monopolies are often objectionable because they enable a few persons or corporations to obtain excessive prices from the public; but even an artificial monopoly can in some cases be advantageous. Occasionally some corporation, by producing things on a very large scale, is able to do it so cheaply that small producers are driven out of business. The large concern then finds that it has become a monopoly, but so long as it does not arbitrarily raise prices the public is not injured by the mere fact that a monopoly exists.
The principle of freedom in economic relations
Freedom of Contract.—An outstanding characteristic of modern economic organization is the encouragement of private enterprise through freedom of contract. By the laws of the land the worker is not forced to take employment from anybody; he may contract with whomsoever he pleases. He may even join with other workers in a union and make a collective bargain, that is, a group of workers, large or small, may contract with one or more employees or with a group of employers. The employer, on his side, is not forced to hire anybody; he also has freedom of contract. It is true, of course, that this legal theory of individual freedom does not find complete exemplification in actual practice. The right of the wage-earner to bargain collectively is not everywhere conceded by employers; the right of the employer to hire non-union men is not everywhere conceded by the unions (see p. [406]). The landlord is not obliged to rent his house, nor the tenant to stay against his will. Both are bound by the terms of their contract and no more. Buying and selling are conducted with similar freedom. All this affords a great spur to private initiative. Everyone depends for his own prosperity and advancement upon the skill with which he can use his freedom. A well-known English writer, Sir Henry Maine, once declared that the progress of civilization has been a movement from status to contract. He meant that in primitive times all men had their careers virtually determined for them by the station in which they were born. The child of a noble became a nobleman; the child of a peasant remained a peasant through life. In modern economic society the individual’s own efforts, exerted through his freedom to contract with others for his own advantage, count far more heavily in determining his ultimate station in life.
Why the institution of private property is maintained.
Private Property.—Freedom of contract would prove a poor incentive to progress were it not accompanied by a provision whereby industrious men can enjoy the fruits of their labor and thrift. Hence we guarantee to every man not only the right to earn but the right to save, for future enjoyment, a portion of his earnings. These savings become his property and within certain limits he may use them as he pleases. He may utilize his savings during his own lifetime or leave them to his children when he dies. Savings may take the form of private property in land and buildings, or movable goods, or such investments as bonds, stocks, mortgages, and bank deposits. Property in land and buildings is commonly known as real property or real estate. All other forms of property are called personal property. Sometimes we distinguish between two kinds of personal property, tangible, which includes all goods and chattels, and intangible, which comprises stocks, bonds, mortgages, notes, deposits, and other obligations.