Direct and indirect means of livelihood
ECONOMICS, as pointed out in Chapter I, is the study of the various problems which arise when men try to make a living. Making a living is getting the means of living — first, the barest physical necessities, and then the comforts and refinements that men desire. A solitary man getting his living on a desert island would be dealing only with the impersonal materials and forces of nature, the physical environment. Nevertheless certain economic problems arise even there, and certain simple economic principles apply. The most primitive group of men which lives without trading with other groups likewise gets its livelihood from its environment, but the older and younger members in the group frequently combine their efforts in various ways and share the results in some customary manner. Here, therefore, other economic problems arise that involve dealings between men. Finally, in our more complex economic society with its division of labor, specialized occupations, and use of money, most men obtain the means of livelihood directly in their dealings with other men and only indirectly in dealing with the impersonal environment. The means of livelihood come in the first instance as monetary incomes. These are derived from other men, in various ways and by various contracts and after goods have been bought and sold, perhaps several times. These monetary incomes constitute purchasing power by which their possessors may eventually obtain physical goods and their uses and human services — the direct goods which, after all, constitute the real means of living.
Choice, the source of prices relations
The attempt to explain the process and the attendant relations of exchange is called the “theory of price.” Each price in a market, as we shall see, is the resultant of various co-operating conditions, and the numerous prices in a community form a more or less orderly price system. But no matter how complex may be the organization of our modern economic society, the starting point in the explanation of prices must be in the desires of men for the things about them. A continual succession of choices among things is from first to last necessary for all living beings, for man as well as for the lower animals. A striking difference, however, is that while the desires of animal species are comparatively simple and stable, mankind’s needs and desires tend to become ever more numerous and complex.
The nature of desire
Desire, primarily a psychological term, is used also in economics. A desire is a feeling on incompleteness, a state of wishing for the possession and control of something in the environment. Desire is more than a vague feeling of unrest, discomfort, or pain, such as hunger of a crying infant; it is a feeling directed toward obtaining a definite object — perhaps food to allay hunger, fuel for heat, or gems for their beauty and for ostentation. Desire always therefore implies an object; it is desire for something. The person having a desire may be called “the economic subject,” and the thing desired, “the economic object.” Two or more desires may exist at the same time in a person’s consciousness. They may be more or less harmonious and may both be fully attainable together. Or they may be more or less conflicting, either mutually exclusive (this or that) or mutually limiting each other, both being attainable in part but neither completely to the point where the desire for any more of the object ceases. The choices made in these various conditions give rise to valuations, to demand, and then to prices.
Biological evolution of desires and choice
The fuller study of the nature and sources of human desires is primarily the task of biology and psychology; it is enough here to indicate some of the influences determining the economic desires at any place and time. Desires are the results of biological evolution from the very beginnings of life on this planet. Every species of animal has desires which are built into its nervous system as the resultant of multitudes of choices made by its ancestors. Those individuals which chose things “had” for them were eliminated, and those which chose “good” things survived to transmit their nervous organizations to their offspring. The different choices make for greater or less health, strength, and success in the life struggle, and thus determine the direction of evolutionary change throughout the successive generations. Thus the desires of wild animals which have continued to live for a period in the same environment are pretty closely adapted to their needs of survival; whereas domestic animals taken by man to new environments are less adapted and are, for example, more likely to be poisoned by strange plants and fruits which taste good to them. The desires of civilized men are often very unsafe guides in the choice of things that are of lasting utility. The desires of the individuals of the same species are pretty much alike, but they also may differ in greater or less degree. The variations of desire among men are greater than among animals because of man’s great and rapid changes of environment, but human intelligence enables individuals to inhibit and control those desires that are found to be false guides to choice.
Desires and choice modified by experience
Desires may mislead choice either as to the more immediate “good” of pleasant sensation or as to the more distant and lasting good of well-being and survival. For example, the thing desired and chosen may be as pleasant to the taste as was expected and yet prove to be harmful or fatal to health; or quite the contrary may be the case. Note here, for constant future attention, therefore, that (1) desire, (2) the gratification or the satisfaction (of the senses) resulting from use, and (3) the lasting benefit (true utility) are not the same and do not always agree.
The choices made in accordance with our desires are, however, continually being put to the test of experience, which shows first whether we like the sense gratification resulting from choice, and then whether we like the more lasting results. Experience thus reacts upon the desires of men and of the higher animals, modifies them in kind and in degree, makes them more conscious, deliberate, and rational, and thus even changes the habitual attitude, or readiness to respond to certain stimuli. An actual choice is often made as the net resultant of various innate impulses, experiences, and conscious desires which are more or less conflicting. The economic subject often hesitates but is finally forced by disagreeable necessity to make a choice. Choosing is often very hard work.
Habit further shapes the desires of individuals with reference to large classes of things where biologic (or congenital) taste is not determining. For example, range cattle when first brought in to be fed have never seen oats, corn, and other grains, and have to be taught to eat them. Famine-stricken natives in the East Indies accustomed to a rice diet are said to trample under foot the wheat brought to them by relief trains and to continue to starve. In innumerable in cases young and old people have to be educated into new desires in order to choose what is good for them or to abandon the choice of bad things.
Choice and rational calculation
A single act of choice may be a very sort of behavior, a mere im impulse or reflex action like that of the lowest animals. But again, human choice may follow long and careful calculations or be somewhere between these two extremes. It is justly charged in the name of modern psychology that current economics in its treatment of desire, choice, and value still uses the phrases of the discredited psychology of the later eighteenth and early century called utilitarianism or rationalism. Choice is thereby assumed to be the result of a cold, conscious, rational calculation of “utility,” the balancing of pleasures and pains in sense gratification. This is the doctrine of choice known as hedonism. It is not in place to discuss this problem here other than to point out that desire and choice as before described and as they are viewed in the following discussion are not hedonistic. Choice need not be thought of as necessarily determined (except among merchants) by a conscious calculation, or normally, even by ultimate consumers, as a calculation of pleasurable sensation or of ultimate and lasting utility. However, this view does not ignore the influence of experience upon desires, as already observed above.
Social molding of individual desires
Social customs shared by large classes of people or even by entire nations are inculcated from earliest childhood and are transmitted with little change for centuries, determining in large part the desires and economic choices of all the individuals in the group.
The ever-increasing contacts of the various national cultures and systems of civilization create conflicts and compel rapid readjustments of individual desires in respect to food, clothing, architecture, and all the arts and amenities of life.
Modern changing fashions in dress, ornament, manners, and the aesthetic arts cause the choices of individuals to change more within a year than was possible over a period of centuries under the old conservative standards. How much would a 1935 bathing suit have been worth in 1905, and how much would it take in 1935 to get a debutante to wear a 1905 costume on the sands at Newport or Palm Beach?
Technical progress in the various practical arts of is constantly altering the qualities and increasing the amounts of familiar things, is creating new products and is making them available at lower prices. At the time things that were once the free gifts of nature — abundant fish in the streams, game in the forests, lumber, minerals, useful plants — may be growing scarcer as the population increase. As the environment of men is modified in these ways by their actions, so also are desires and choices modified.
In what sense are values social?
While desires exist only in individual minds, the individuals rarely live completely isolated from their fellow men. Even the desires of a Robinson Crusoe or of a hermit have been largely determined by social evolution and by his past social contacts. As desires have both subjective and objective aspects — a person desiring and an object desired — so they have both individual and social aspects. Sociability, affection, imitation, love of approval, and all the other social impulses in human nature make the desires of individuals interact upon each other in manifold ways. In view of these facts, some have declared with a certain exaggeration that all value is social value, implying that desires and choices originate in a so-called “social mind” from which they are merely reflected, or transmitted, to individuals. We cannot subscribe to this concept: for one reason because it ignores the manifest differences and variations of desires of individuals; and further because it is impossible to discover a “mind of society” other than the rather confused thought of the sum total of individual minds mutually influencing each other. Yet it might be said, paradoxically, that everyone’s desires are his own but not fully his own. Values and valuations are individual, but every individual is a more or less socialized being.
The world as modified by man
Obviously choice is limited to the things available, but every act of choice somewhat affects the environment for better or for worse. Most of the things used my primitive men and animals and game self-renewing, of streams such as the grass and fruits of the fields, the fish and game of streams and forests. These durable sources of desirable things are conserved without thought or effort, merely because they are used in simple ways. But as mankind has adopted a more settled agriculture and gradually improved tools and crafts, the original environment has been constantly modified in time and in space. In some ways it is increased and improved by man’s efforts, and in other ways it is heedlessly wasted or is destroyed in the using. The connection of desires with environment is to be borne in the mind as we consider in turn the origin and nature of human desires and the nature of goods. Though we may for clearer analysis focus our attention now upon desires and then upon goods, actually each is constantly influenced and modified by the other.
Wealth and illth
Every desire implies something desired, a “good” thing. Man’s environment contains innumerable things desired in varying degrees at any moment, and varying from one to another in their desirability. These desirable things are called “goods,” and together constitute wealth. On the other hand, there are many things which men do not desire to possess nd enjoy, but rather desire to avoid. Ruskin called them illth, in contrast to goods and wealth. Desire in respect to them may be said to be negative. But in accord with what we have already observed in relation to desires, “good” is a relative term, because a thing may be (1) good in desire or esteem at the instant of choice; (2) good in the different meaning of being pleasurable to the sense when later used; or (3) good in long run and for lasting benefit (real utility). The same sort of distinction must be made on the negative scale in the case of undesirable things.
Scarcity and desire
Things identical in physical form and properties vary in their “goodness” in all three senses, according to their quantity and in relation to the changing desires of men. When there is less of a good thing than is desired, it is scarce, but there are degrees of scarcity up to the point where the amount becomes plentiful, or causes satiation of desires and finally becomes superabundant. Water us very scarce in the desert or during a drought and is desired intensely. The waters from abundant rains may still be good until they turn into destructive floods. Fire, which in moderation warms the body, cooks our food, and has many other valuable uses, may get beyond control and destroy the lives of men and their goods with them. Somewhere midway there is usually an optimum quantity of the uses of any good thing, grading off on one side to zero when desire is not met at all, and on the other side toward excess, injury, and negative desirability. Goods in moderate amounts up to the optimum serve to gratify desire; in greater amounts they satiate desire; and with further excess serve to disgust and injure the economic subject. There we touch the central principle of economics — right proportionality.
Scarcity, therefore, is not a mathematical term expressing a definite quantity or even a definite ratio of goods to desires, but is rather an economic term of a psychological nature. One thing, of which there are thousands of units, may be scarce (foodstuffs, yards of cloth, houses), while another thing may not be scarce even though there arw very few units of it. In economic language a thing is scarce whenever it is limited to an amount less than entirely satisfies desires at the time. In popular language, however, a thing is sometimes said to be scarce merely when it is more limited than usual.
Concrete goods as bundles of uses
Men desire and choose concrete goods, but the source of the goodness of these things lies in their various uses — uses which often depend on some intangible force such as heat, electricity, chemical constitution, specific gravity. A piece of wood may be desired for its brief consumptive use as fuel for heating, or for its long-lasting use as a footbridge across a stream, or as a raft in water, or for numerous other possible purposes.
So any concrete good may be thought of as a bundle of uses, a container of uses, a use bearer. A use is any specific application of a thing to some desired end. Use is a term applied generally to the desirable functioning either of physical objects or of human beings; but services (Latin servus, meaning slave or servant) is the more exact word for the specific kind of uses rendered by human beings. An economic good is said to have a use, to be put to a use, to render a use, to yield a use (or different uses), and so on, in various expressions.
Most of the uses of concrete goods are latent, or potential, while the one use which is the most desired at any given time is what causes the goods to be chosen just then, as in the example just given of the piece of wood. In other cases the concrete goods are bundles of like uses, to he had serially over a period of time, as the successive uses of durable agents — clothing, furniture, machines, houses, orchards, lands, and similar things.
Direct and indirect uses
The uses of goods differ not only in respect to the desirable ends to which they may be put — for example, food, clothing, shelter, recreation — but also in respect to their directness or indirectness in relation with those ends. Bread ready to eat has direct uses; whereas wheat has an indirect use in making flour; flour in turn has an indirect use in making bread. So the land on which the wheat is grown, the plow, the seed, the agricultural labor, all are rendering indirect uses toward the ultimate direct uses inherent in goods to be consumed and enjoyed. The desirable effect which direct uses of goods produce in their users is called psychic income. This is often compared and valued in terms of other goods and of money just as are physical things.
Present and future uses
Both direct and indirect uses differ in respect to their timeliness, or their availability in time. For example, in some goods direct uses solely are present — ripe, perishable fruit which is to be eaten now if at all — whereas many durable foods such as grains, nuts, apples, and potatoes in storage, and foods preserved by drying, canning or refrigerating offer alternative choices between present or future uses. Still other goods, at certain times and places, have only future direct uses, available only after some period of waiting as green apples on the tree. All existing forms of wealth — such as natural agents, machinery, and stocks of materials — whether for business purposes or for personal use, are “present goods,” but a large part of the direct or indirect uses which make them goods are to occur in the future. Within limits the owner of present goods has a choice as to the time at which he will take their direct or indirect uses.
Consumptive and durative uses
Uses also differ in respect to their effects upon the use bearers. Some physical goods are destroyed in a single use — food, for example. In that case the goods are perishable and the use is consumptive (in the sense of destroying the use bearer). Other goods may be used repeatedly, and perhaps for very long periods, and still be capable of continuing to yield uses. In such cases the goods are durable, the use bearer is still conserved, and the uses are called durative.
Various kinds of uses and business contracts
These different characteristics of uses cause men to buy and sell goods and the uses of goods, and to exchange and make contracts regarding goods in a variety of ways according to the circumstances. For instance, perishable goods are usually bought outright for immediate or for future delivery. Durable goods are often temporarily hired or rented for short or for long periods;1 or they are sold on credit, or bought with money borrowed at interest.2 The various forms of business organization and the various types of income — profits, dividends, wages, rents, and interest — result mainly from these different characteristics of the uses of goods, and the different sorts of contracts made in buying and selling their uses.
Choice, value, and valuation
Human choice, the act of choosing, is always the resultant of two conditions existing at any time and place: first, men’s desires, and second, those things and their uses, good and bad, which are available to be chosen. Any choice implies some expression of the relative importance to the chooser of the things chosen. It is all a matter of relativity. For example the simplest choice may show at least that the chooser regards one orange as more important than one apple, or perhaps than two or three apples. The numerical expression (as two dollars for a box of oranges) of the relative importance of two or more goods, as implied in choice, is a valuation.
Value is the importance imputed to goods, as indicated more or less exactly by valuations. And valuations, one must remember, are always ratios between two things. Values and valuations are determined or expressed by acts of choice. There is nothing abstruse about these simple facts and concepts, but they are the foundation upon which all of the seemingly difficult theory of value and price is built. The theory need not present great difficulties if the problem be first analyzed aright and each minor difficulty then met in due order.
Original scarcity of desirable things
Let us assume much simpler conditions than are ordinarily found in our complex economic society today, although not unlike those under which primitive men constantly lived. Let us assume that desires and choices are confined to the direct (enjoyable), present, and consumptive uses of goods. This means that there is no regard for the future, indirect (instrumental) uses, or for durative uses, or for things having such uses. Under these conditions the only goods known are those things that appear in quantities, at times, and at rates of flow, determined by nature and by chance. There is here no original preceding cost of labor or effort to increase uses and use bearers. All goods are like manna from heaven, the gifts of nature. Man’s activity consists merely in choosing and appropriating the various available desirable things.
Would things have any value under such conditions? Surely, if they were scarce, that is, unless everything appeared in such large quantities, and was so distributed in time and among the individuals, that every desire for those goods was satiated. Thus, if some kinds of “manna goods” were in excess, others moderately scarce, and still others very scarce and only sufficient to meet the more urgent desires, the felt relative importance (value) of the various goods would differ greatly. Where and how value would appear would depend much upon the way in which the goods chanced to be distributed in ownership. If they came to the community as a whole to be divided by the patriarch or by some official authority, the goods might be distributed by lot. Then, because the different individuals with their differing desires would have different valuations for goods, the goods would actually take on different valuations. Exchange of goods might arise under such conditions because of the different proportions of goods to desires, and person A, having little desire or none whatever for the X which he has, might be able to get from B in exchange another good, Y, which A values greatly.
Scarcity of gifts of nature
From this simplified example it may be seen that the original and fundamental cause of economic value is not labor or cost of any kind but scarcity. We shall, however, consider later how labor comes to be applied to shift and alter the kinds and quantities of indirect goods for the purpose of increasing direct goods, and how cost in various senses enters into the problem of valuations.
It is well to observe at this point that the gifts of nature in the world today are distributed among the various countries and to individuals much on the unequal, hit-or-miss manner of our imaginary example. However, these gifts of nature are not usually provided in the form of present, direct goods, ready to be gathered and consumed; more often they come as goods with indirect uses — raw materials and agents for making ripe goods or for making other indirect agents, machines, and so on. They are, however, at most times and places scarce in relation to the direct and future uses; this scarcity is the necessary condition of the value which they bear.
Uniques and substitutes
Let us now consider the simplest principles of valuation that apply even in the complicated problems of market prices. When there is but one unit of each kind of goods, as one loaf of bread to eat and one glass of water to drink, choice is said to be between uniques. Substitution of goods takes place when the scarcity and value of one kind of good increases so that choice goes over to other goods that before were either not used at all or were used to less urgent desires. The difference in physical kind and qualities of goods first used and those substituted for them may range from very slight to very great. For example, defective apples or potatoes which ordinarily would be left ungathered, are used when the better qualities became scarcer; or more vegetables are used when meat becomes dearer; and precious jewels are exchanged for a crust of bread in times of famine.
Figure VIII. Use-valuations of Uniques and Substitutes
This graph illustrates the interrated valuations of quite different commodities (A1 and B1), and of inferior grades of the same (A2, and B2) as expressed in a unit of still another commodity (V). Under existing conditions A1 has a valuation of 4V, whereas but for the presence of A2 as a possible substitute in some uses, its valuation would be 5V. Similarly B1 has a valuation of 2V, whereas but for the presence of B2 its valuation would lie 3V. Thus, four different valuations are expressed in terms of V (A1 = 4V, A2 = 3V, B1 = 2V, B3 = 1V) and reciprocally, the valuation of V is expressed four times, in the two different commodities and two different qualities respectively, thus constituting a “system of valuations” as discussed in the later section under that title.
Two kinds of goods are said to be complementary when certain amounts of each enhance the desirability of the other: bread and butter, peaches and cream, a pair of gloves, horse and buggy, a matched span of horses, or gasoline and automobile. Desires do not exist in isolation but are limited by and associated with other desires in many subtle and complicated ways, one good by its presence sometimes reducing the intensity of desire for another good, sometimes increasing it by giving it new or more desirable uses.
Multiple units and marginal uses
Often choice is not between uniques, that is between single units of each of two kinds of goods, but there may be several units of the same kind chosen at once. In such cases the various like units of goods may be put to different kinds of uses (the first bag of grain for man’s food, the second as seed, the third for feeding animals, and so on). Or, quite as often, the several like units may be put to successive uses of the same general kind for which the desires are less intense: the first loaf of bread, if that were the only one, might save a man from starvation, the second would appease hunger further, and the third would fully satisfy the desire for bread. The least urgent of the uses which is met (that is, included) is the one which will be rejected if choice lies between it and any of the others. This use is called the marginal use, or, more specifically, the included marginal use. The excluded marginal use means the next less urgent use which just fails to be met by the number of units chosen. The more urgent uses are called intramarginal.
Principle of indifference and marginal uses
Now observe this interesting and important fact: When several uses (or grades of uses) may be met at the same time with several units of like goods, the desires for the several units are no longer of unequal intensity. Instead they become of equal intensity. In the examples above, when there are three bags of grain, all three uses are met, and when there are three loaves of bread, the man is not starving when he is choosing any one of the three loaves. Since all of these uses (which, under other conditions, or if presented successively one at a time, would differ greatly in urgency) are being met by like units of goods, there can be no difference in the felt importance (value) of the different units. The different units cannot continue to have different values because several like units of goods, presented to choice at the same time and interchangeable in their uses, have the same value. In other words the principle of indifference applies.
The value of a unit for the marginal use is the same as that of each of the other units of goods constituting the stock at the moment. Sometimes it is said mistakenly that the marginal unit “fixes” the value of all the other units; rather, it may be seen that the value of the whole stock is determined in the whole situation at once. If there were fewer units, no matter which one were subtracted, this would exclude the former marginal use and cause the margin to be shifted. The greater intensity of desire for the intramarginal uses and the correspondingly greater values of the earlier units of goods are, under the actual conditions, merely hypothetical, or conditional; they are what might be under other conditions.
Figure IX. Principles of Indifference and Marginal Valuation
The valuation unit is a unit of another commodity (V) as in the last figure; but the units evaluated are in this case all units of the same commodity and or identical quality. The presence of a second and later like units of A changes the whole situation in which choice is made. The possibility of substituting A” or A’” for A’ in the formerly more urgent uses reduces the valuation of A’ as expressed in terms V. These higher latent, or merely potential, valuations (represented by the unshaded blocks) are nonexistent under the actual conditions and cannot logically be summated as a surplus of value.
Streams of desires and of goods
Life itself is a never-ending process of choice made by each living being to adjust itself to its environment and to alter and adapt its environment in accord with its desires. We might think of various needs and desires and of various goods fitted to gratify them as so many roughly parallel streams flowing at different rates and in irregular volume and meeting at intervals of time. Certain general desires, as those for food and drink, recur in every animal at fairly regular intervals and subside for a time after being satisfied. The more specific desires such as those for various sorts of foods in the desired combinations and conditions — green, ripe, raw, cooked, cold, or hot — are continually fluctuating in short and in long periods, according to age, health or illness, climate, season, amount of exercise, and many other circumstances. In a simple state of nature the streams of various specific goods necessary to gratify these different desires also vary greatly in amount, often being largest when desires are least, and least when desires are greatest. Every tribe of savages has its occasional periods of plenty when all are sated with food, and its pretty regularly recurring starving time in winter when game and natural fruits are scarce.
Beginning of man’s production of goods
Primitive economy consists largely of efforts to modify the natural scanty and haphazard rate of flow of direct goods in the environment so that they will arrive more nearly at the right points of time and in right amounts to gratify desires. In periods of plenty the excess is saved, preserved, and stored against the days of greater need — that is, the stream of direct-use goods is dammed back to keep it from running to waste. Gradually, as men become more provident, they discover other ways to increase and stabilize the volume of direct-use goods by means of indirect-use goods, by multiplying flocks and herds, by settled agriculture, and by improvements in the practical arts. Evidently, as this goes on, the relative scarceness of things and the values of goods are greatly modified over periods of time. The extremes of both scarcity and superfluity are moderated, and desires are more fully and evenly met. In these various ways men intervene and modify the process of production that is being constantly carried on by nature.
Changing things to alter valuations
All economic choice and value may be said to begin with the natural scarcity of direct goods at the right times and places, before labor enters the picture at all. This is the historical fact and this is the logic of its explanation. Then man applies his labor wherever his art and skill can shift, change, increase or decrease, hasten or retard the natural flow of things in the environment so as to make their uses better meet his desires. In primitive society man’s intervention in the processes of nature is slight; in advanced industrial societies it is stupendous. Man is thus enabled more and more by his choices and actions to modify and influence values and valuations, but always within the limits of natural scarcity of materials and forces at his command, including his own labor powers and skills.
The many specific ways in which man may modify the physical environment and thus alter his valuations of goods may be grouped first under four headings: changes in stuff, form, place, and time. All these changes may be made by a solitary individual, and when men come into relations of exchange there may be added to these a fifth type of change, legal in nature, that of ownership. These are sometimes called so many kinds of value, but they are merely changes in the various aspects of value wherever found. All profitable economic activity consists in making changes of these kinds in the relationship of goods to desires.
Systems of individual valuations
The valuations of goods as implied and expressed in the choices made by an individual, even under simple conditions, form a system of valuations. Every separate valuation by a person, directly and indirectly, affects every one of his other valuations. Values are interrelated like the positions and pressures of the molecules of water in a reservoir. For example, the values of fruit and bread, of meat and eggs, of wheat and potatoes, and of every other special kind and quality of food, are mutually related, for the plenty or scarcity of each modifies the desires for each and all the others. People began to discover this when the attempt was made to control agricultural production under the A.A.A. in 1933–1935. Any individual’s valuations of articles of clothing, housing, fuel, ornament, and every other thing, are linked by many ties with each other, for all draw upon the limited fund of uses and services which constitute his total power to produce or to purchase goods.
Such an individual system of valuations, uninfluenced by the valuations of other persons, is seen in its simplest form in the case of Robinson Crusoe on a desert island. Somewhat less independent of other individual systems are the valuations of hunters, trappers, frontiersmen, and colonists venturing for beyond settled areas and regular lines of trade. In such cases, the individual systems of valuations are out of touch with those of other individuals for long periods, but even during such times they may be somewhat modified by the prospect of occasional contact with visiting ships, with traveling merchants, or with the distant markets.
Valuations modified in simple societies
Somewhat less independent of each other were the individual valuations in feudal times, when the population was nearly all living in little scattered villages of a few hundred people. In the Middle Ages the villages were cut off from the towns and larger markets for much of the year by impassable roads. The real incomes of goods accruing to each man or family were determined by their customary rights and by the varying bounties of nature; and the use of money and regular exchange was almost unknown to the common people. Under these conditions individual systems of valuation were only imperfectly adjusted to each other by borrowing and lending in kind, by charitable gifts, by meager local trading, and by occasional resort to more distant markets and fairs.
Before going on to consider the problems of price, we need to emphasize here that even under modern conditions of developed markets and exchange, each individual, while constantly adjusting his possessions to his desires and his desires to his possessions by buying and selling, still retains to a considerable degree the independence of his personal system of valuation. Individual valuation systems historically preceded the price system, and even today they are logically the basis on which prices are built.
Summary and conclusions
The aim of this and the next three chapters is to show how the price system develops and is maintained. From primitive times to the present, men have tended to get their living less by dealing directly with nature and more by dealing with other men in order to secure finally, after a complex series of exchanges, the use-goods they desired.
Two conditions are necessary for valuations and prices to arise: first, desires to be met; and second, objects to be chosen. We considered first the nature of desires, as shaped by biologic evolution and by many forces acting upon the natures of men through social institutions. We then examined briefly the objective conditions of choice in the relative plenty or scarcity of goods. Each concrete good is the bearer, or container, of a variety of uses differing in kind and in time, each of which affects the valuation of the concrete good.
The simplest choice reveals something of the relative strength of the desires for two goods. The presence of other goods, more or less like the scarce ones, modifies the intensity of desires for each (by substitution). In many other ways, the values of very different goods are mutually dependent. Here we made our first acquaintance with the marginal principle.
Man’s part in production begins when he tries to control the rate of flow of natural forces, to hasten or retard them.
The central thought and conclusion of the whole chapter is that valuations are related to each other more or less consistently. A man’s valuations are, in a sense, his character, and they determine his economic behavior both when he is alone and when he comes into contact with other men. Personal valuations are the ultimate foundation of all prices in a market.
Suggested Readings
Clay, Henry. Economics, an Introduction for the General Reader, The Macmillan Co. New York. 1918. Pp. xviii, 456.
Fetter, Frank A. Economic Principles. The Century Co. New York. 1915. Pp. x, 523. See especially Chaps. 1–4.
Hoyt, Elizabeth E. Primitive Trade, Its Psychology and Economics. K. Paul, Trench, Trubner and Co. Ltd. London. 1926. Pp. 191.
McDougall, William. An Introduction to Social Psychology. J.W. Luce and Co. Boston. 1921. 14th ed. Pp. 418. See especially pp. 1–18.
Mitchel, Wesley C. “The Backward Art of Spending Money.” The American Economic Review. June, 1912. Vol. 2. Pp. 269–281.
Sumner, William G. Folkways. Ginn and Co. Boston. 1907, Pp. 692. This book contains a discussion of the influence of habit, usages, customs, and social inheritance on choice.
Veblen, Thorstein. The Theory of the Leisure Class. Viking Press. New York. 1912. Pp. viii, 404. An analysis of the motives of choice is presented in the first four chapters.
See also the suggested readings in the chapter on Consumption.
Questions and Problems
1. What is meant by direct and indirect ways of earning a living?
2. What is the starting point in the explanation of prices? Explain.
3. What are some of the more important factors which give rise to economic desires, and modify them?
4. Distinguish the terms “desire,” “choice,” “value,” and “valuation.”
5. Explain the phrase “Your desires are your own and yet not your own.”
6. How are desires dependent on the environment?
7. In what three general ways do the uses contained in concrete goods differ? Give specific illustrations of the uses in each category.
8. Explain the marginal principle of valuation. Why do all other like units have the same valuation at the same time even though applied to different uses?
9. In the words of Adam Smith “Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it.” Under what conditions might this not be true? Make a list of some of the uses of water in order of their importance. What are some of the marginal uses for water?
10. What five types of change are effected in productive processes? Give examples of each type of change.
11. What is meant by individual’s “system of valuations”? Is your system of valuations independent on the valuations of other persons? Why or why not?
12. What is the fundamental cause of economic value?
13. Which of the following things have economic value? Why or why not? Water in the ocean, a five-dollar bill, a public park, a delightful climate, an artist’s skill, wheat, a theater ticket, a bond, a coal mine.
