The Market

by Faustino Ballvé

The autistic and the co-operative economy. The division of labor, exchange, and the market. Commerce and trade. The sovereignty of the consumer. Monopoly, economic dictatorship, and the black market.

Man is incapable of satisfying all his wants by his own unaided efforts. Individual autarky, i.e., a completely autistic, self-sufficient economy, is impossible. It is a kind of economy that is encountered only in utopias like that of Robinson Crusoe, but never in the actual life of man.

Men need to have recourse to other men to obtain the goods and services they lack, in exchange for other goods and services that they can offer.

Hence resulted the household economy of the individual family, in which the man hunted or fished and at the same time protected the members of his family against danger. They, in exchange, took care of hearth and home, prepared the meals, gathered the wild fruits they found growing in the forests, and fashioned primitive garments. Each individual exchanged goods and services with another.

The basis of the co-operative economy thereby achieved was the division of labor.

There are some who think this a modern innovation. But it is not. It has always been a constant feature of economic activity.

Professor von Mises rightly says in his book Human Action: “The exchange relation is the fundamental social relation.”¹

The exchange relation—or, more simply, in economic terms, exchange—takes place in the market. The family that has eggs to spare exchanges them for meat with another family that needs eggs and has an excess of meat. But this is not enough. Sometimes a family that has eggs and needs meat finds that its neighbor has only fish to spare, which can then be exchanged for meat.

These relations gradually grow more complicated, and it becomes more convenient to go to a public market place to offer for sale whatever one has in superfluity in exchange for what one lacks, whether by direct barter or in an indirect way.

The exchange of commodities was facilitated with the invention of money. At first this appeared in a primitive form, until it developed into the coined money that we all know and use. Then goods and services were exchanged for money, or vice versa.

Exchange or commerce ceased to be local and spread between one town and another until it became international.

Everything mentioned so far, from the exchange of meat for eggs between neighboring families to international trade, constitutes the market, the pivot around which all of economic life revolves. The market is the foundation of every economy.

In the market things are exchanged against things or against services, services against services, or services or things against money. Whatever is susceptible of exchange in the market constitutes a commodity.

From the strictly economic point of view, anything and everything that is exchanged must be classified as a commodity. Whoever goes to the market is in quest of an exchange that will satisfy a want, that is to say, something that will serve to render his life more agreeable. Hence, instead of the word “merchandise,”² English usage prefers the word “commodity”³ in this context to refer to whatever is susceptible of exchange, whether goods or services. A thing has value when it is a commodity and is capable of being exchanged in the market.

Value always expresses a judgment of the estimation in which something is held, because a thing has a value if and only in so far as it is wanted or desired. For example, a millionaire can buy a diamond for a hundred thousand dollars and find himself dying of thirst in the desert and unable to obtain even a glass of water in exchange for his diamond, which there lacks all value.

It is said, especially by the mathematical economists, that the value of a thing increases as it becomes scarcer. But this is by no means certain, for it can happen that a thing may become scarcer every day and yet have no value at all because nobody wants it. Horse-drawn carriages have become very scarce nowadays, and yet nobody wants them. They have no value at all, or hardly any. Nonetheless, only those things are economic goods that we lack and long to have, not free goods that are in the reach of all, like the air that we breathe.

The distinction between value in use and value in exchange was first made by Aristotle, was adopted by the canonists, and was later developed by the classical economists. Value in use is the utility that a thing has in itself. Value in exchange is what it will fetch in the market. It has been contended, as the canonists did in an earlier day, that it is morally wrong to take advantage of a thing’s scarcity in order to obtain more in exchange for it than its value in use.

However, this distinction is untenable. For even though it is true that an automobile generally has more value than a needle, it is altogether possible that in a concrete case (depending on time and circumstances) the contrary could occur. A tailor who is in want of a needle cannot sew with an automobile, and in places where gasoline is not to be had, automobiles have no value at all. Besides, how many needles is an automobile worth? It is difficult—or rather, impossible—to say definitely, because the utility of each varies according to time and place, and, in the last analysis, only the prices quoted in the market tell us the relation of the value in exchange between two commodities. Therefore, it is not possible to establish a quantitative relation of values according to the value in use of the automobile and of the needle. All that is possible is a qualitative estimation of a general character, because an automobile is generally considered more valuable than a needle, but this need not always be the case, nor does this difference in value admit of being expressed in quantitative terms.

For that matter, a thing’s value in use is not constant either, because some new invention or discovery, or simply a change in prevailing tastes, can diminish it or even wipe it out entirely. Our mothers kept in their wardrobes dresses and hats that in their day had a considerable value in use and today have none at all. On the other hand, the hats and dresses of the present, far more simple, but more in fashion, do have value.

Penicillin reduced the value in use of many medicines, but others, like streptomycin, terramycin, and chloromycin, have diminished the value in use of penicillin. For these reasons the concept of value in use, even though it has some basis in fact, serves no purpose in economics.

An attempt has also been made to find in labor a measure of the value of things. This results from insistence on determining the “just” value of things, thereby confounding an economic question with a moral question that has nothing to do with it. The attempt has been made in two ways. In the early days of classical economics it was said that since things are the fruits of human labor expended in the utilization or transformation of natural resources, their value ought to be measured in terms of the labor involved in their production. From this the socialists derived their demand that the workers receive the whole proceeds of their labor, from which, it was charged, the capitalists retain a surplus value consisting of that part of the proceeds of labor which is not indispensable for the bare subsistence of the laborer.

The classical economists were not long in observing that, in the first place, the difficulty of the calculation made it practically impossible to take the labor involved in production as the measure of the value of the product, and, besides, the labor required for the production of a thing varies according to place and time, depending on the skill of the managers and workers at a given moment and on the extent to which techniques and means of production are perfected during the course of the years. Hence, they proposed measuring the value of things, not by the labor that they cost the producer, but by the labor they saved the purchaser. But this criterion, too, proved impracticable because of the difficulty of determining how much labor the purchase of a thing actually saved the buyer in general. The purchase of a delivery wagon will effect a definite saving for a confectionery store and a different amount for a hosiery factory or a radio store. Should each one of them, then, pay a different price?

Must we therefore revert, for our criterion of value, not to the labor saved the purchaser, but to the labor involved in production? Or, to avoid these problems, is the value of each thing to be fixed by the average amount of labor that it presumably cost its various producers? But on what are we to base this average cost? And who is to fix it? The government? Is the price we are to pay for things to be set by the arbitrary decree of the governmental authorities, when they have no more basis than anyone else for arriving at an objective valuation? This is precisely what is done in Russia today, and the result is that when the government sets on any commodity a price that is cheap in the estimation of the consumers, the latter hasten to purchase it until the existing supply is exhausted, and then the government is obliged to raise the price. Contrariwise, when the price that the government sets for a commodity seems dear to the consumer, he abstains from purchasing it, and the commodity remains indefinitely on the shelves as an unsold item of inventory, immobilizing capital and running the risk of deteriorating. Then the government, to extricate itself, is obliged to lower the price. In other words, supply and demand come into play even in a nationalized economy.

Supply and demand constitute the mechanism of the market that determines prices, which are the value of goods and services expressed in terms of another, neutral commodity, viz., money. These prices are formed by competition in the market, not only among those who offer to sell goods and services, but also among those seeking to buy them. When a commodity is in abundant supply and is difficult to sell, the vendors, to avoid immobilizing the capital it represents and running the risk of its depreciation through spoilage or a change in the tastes of the consumers, lower prices and compete with one another to make a sale. When, on the contrary, an article is scarce and is in public demand, people are prepared to pay higher prices in order to obtain it, and competition arises among those seeking to purchase it. However, the latter case is rather rare. Generally it is the sellers who compete and lower their prices in order to satisfy the buyers.

Hence it has been said that free trade or the free market means the sovereignty of the consumer. And so effective, so necessary, so ineluctable is this sovereignty that, as we have just had occasion to observe, not even the communist economy can suppress it completely. And as the consumer is the public in general, without distinction of rank or fortune, the free market is the most obvious expression of the sovereignty of the people and the best guarantee of democracy. Individual guarantees stated in writing in the constitution are of no use to a nation if it is not the people, but a third party, whether government or trade-union, that fixes prices and wages and determines what is to be produced and what is to be sold; for in that case the people, in being deprived of their right of free choice in the market, i.e., their right to assign everything the rank and the value it suits them to give it, from being sovereign are reduced to the status of slaves. Control of the market by the governmental authorities is the instrument of the modern dictatorships, much less cruel in appearance, much less spectacular, but far more effective than the police and resort to naked force.

In clarification of the foregoing, we can conclude with the following remarks:

1.  Nothing has value in itself. The consumer confers value on it by seeking to acquire it. Hence, the value of a thing is never objective, but always subjective.

2.  The monetary price of a thing is not the measure of its value, but only an expression of it. To say that a cow is worth two hundred dollars is nothing else than to say that it is worth twenty ewes or a sewing machine.

3.  It is an error to believe that he who buys a thing wishes to give for it an equivalent value or that he who pays two hundred dollars for a cow thinks that a cow has the same value as two hundred dollars, or vice versa. In the market the buyer as well as the seller gives less than he gets. Whoever pays two hundred dollars for a cow does so because for him the cow that he gets is worth more than the sum that he gives for it, and whoever sells a cow for two hundred dollars does so because for him that sum is worth more than the cow. If this were not so, no exchange would take place: each one of them would keep what he already has.

4.  The sovereignty of the consumer does not mean the tyranny of the consumer. The resistance of the latter, aided by the competition among the sellers, succeeds in keeping prices at a low level that nevertheless allows a margin for the subsistence of those who have participated in the production of the merchandise and its transportation to the market, such as the entrepreneur, the capitalist, the technicians, the workers, and the merchants. If, in spite of this, the consumer still continues to hold back, then prices do not fall any further, because nobody wants to make a gift of his possessions or his labor; what happens is that the merchandise in question ceases to be produced and sold and disappears from the market. But if it is a commodity that the consumer considers useful, he will give up his resistance and relax his pressure on the producer.

5.  Neither does the free market involve the dictatorship of the producer or of the merchant. For if the producer or the tradesman dealing in a particular commodity, or all the producers joined together, demand in the market excessive prices because they are the only ones who have such merchandise (i.e., if they constitute a monopoly), then not only does the consumer abstain from buying and forgo that commodity, replacing it with some substitute (“Better some of a pudding than none of a pie”),⁴ but other, less avaricious suppliers and businessmen produce it and offer it for sale at a lower price. Thus, the price level is necessarily one that both buyer and seller find equally tolerable.

6.  Economic dictatorship arises when production and trade are withdrawn from the mechanism of the market by the action of the governmental authorities. Then neither the consumer nor the seller is sovereign, but only the dictatorship of the bureaucracy over both, even though this is not one hundred per cent effective, as we have already seen in the case of Russia. The market continues to function, nonetheless, albeit in clandestine form (the black market); but in any case, economic dictatorship deprives the people of their liberty and well-being.