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F.Y. Edgewoth. Exchange, Value in. (Dictionary of Political Economy)

     Exchange, Value in. Value in exchange, or exchangeable value, denotes a ratio of ex­change— "the ratio of the number of units of one commodity to the number of units of another commodity for which it exchanges " ; as Jevons particularly clearly points out (Theory of Political Economy, ch. iv.), and most authori­ties admit. The unsettled question is : What are the circumstances which cause the ratio to be what it is ? " Utility and difficulty of attain­ment," answers Mill (bk. iii. eh. ii.), and similar terms are used by almost all economists, but in various shades of meaning, and with different emphasis on each of the two factors. The confusion is aggravated by the not sufficiently noticed circumstance that the operation of the two causes, utility and difficulty, is different in different classes of transactions. It is proposed here to discriminate those essentially distinct cases ; mapping out and partially exploring the ground, which may be more fully investi­gated under the head Value.

    A convenient tripartite division—Two-sided monopoly, one-sided monopoly (or one-sided competition), two-sided competition—is based upon the degree in which competition is present.

    I. The action of competition is at a minimum where the dealers in two articles exchanged are single individuals, or bodies of persons actuated by one will, e.g. two governments negotiating a commercial treaty, or a trades-union coming to an agreement with a combination of masters about the rate of wages. The general principle in this case is that both parties will be gainers by the bargain ; in technical language the total utility (see Consumer's Rent, Demand, Dupuit, Final Utility), of each will be greater after than without the transaction. But to what extent each party will be gainers is not in general determinate; there is a sort of indefinite tract, a "spielraum" (Bohm-Bawerk), within which the point of equilibrium must be determined by other than purely economic con­siderations. Jevons well says : " the existence of combinations in trade disputes usually re­duces them to a single contract bargain of the same [this] indeterminate kind. The men, for instance, ask for 15 per cent advance of wages all round. Rather than have a strike, it might be for the interest of the employers to give the advance, or for the men to withdraw their demand ; a fortiori, any intermediate arrange­ment, would still more meet their views. But there may be absolutely no economic principle on which to decide the question. Mathematic­ally speaking, the problem is an indeterminate one and must be decided by importing new conditions" {State in Relation to Labour, p. 154).

     II. Where there is a monopolist, sole or corporate, on the one side, and on the other side an indefinite number of buyers, or sellers, competing with each other, the most general principle is that the monopolist will beat down the other parties to the point at which each of them is only just a gainer by his bargain ; the addition to the total utility of each will be a minimum. The "law of indifference" that there should be one price in a market is not in general true of monopoly. The oppressiveness of the monopolist is modified by regard for his own future interests, as when an American railway company "builds up" a customer by giving him favourable terms, by fear of com­petition and of public opinion, and other con­siderations not here relevant (see Monopoly).

Mere convenience will often prompt the monopolist, instead of making separate terms in each transaction, as theoretically conceivable, to prescribe rates for classes of persons and goods. These charges are not in general proportioned to the cost incurred. Thus soldiers, in some foreign theatres, are admitted at a different rate from citizens ; though the accommodation of the former may be as good as that of the latter. The differences between first and third class passenger fares, and between the rates for different kinds of goods, do not correspond to the outlay of the company in each case. For the object of the monopolist is to render his net profits a maximum ; and this result will not in general be reached by apportioning charge to cost. True, if the cost changes, the arrange­ment most advantageous to the monopolist is apt thereby to be disturbed, and accordingly the charge will be in general altered, but not pro­portionately to the cost.   Thus a tax on a monopolised article will in general increase the price, yet not equally with the tax, but, as it happens, by either more or less (Cournot, Theorie Mathematique, ch. vi.); the assertion which is often made that the charge will be unaffected by the tax is true only where the tax is a lump sum, not of a specific or an ad valorem tax.

     In the case of monopoly then value is not measured by cost; but it is measured by utility: by total utility in case the monopolist takes the full advantage of his position ; by final utility in the more usual case, where a rate is fixed for a class of commodities. In that case each consumer will go on purchasing up to the point at which it is just not worth his while to pur­chase another unit of commodity at the prevail­ing price.

     III. The most general, or at least the most frequently treated, case is where there is un­limited competition on both sides of the market. This case may be subdivided into two: A, where value is not measured by cost of production, and B, where it is.

     A, the first subdivision, corresponds to what Mill calls the "law of value anterior to cost of production, and more fundamental, the law of demand and supply " (see Mill, Political Economy, bk. iii. ch. xvi. § 1, and Prof. Marshall's criticism of the passage; Principles, p. 544, 2nd edition). This case may be subdivided into two: (1) where production, or at least repro­duction is impossible, or may be left out of account; (2) where this abstraction is not admissible.

      (Al). To this head belong marketvalues—not only commodities which cannot be multiplied rapidly, but also those of which the quantity in existence cannot be diminished rapidly, namely the precious metals in circulation (Mill, bk. iii. ch. ii. §. 5). Prof. Marshall gives an instruc­tive general type of the '' temporary equilibrium" of market value; unaffected by cost of production which requires a "long period" in order to influence value (Principles, bk. v. ch. ii.).

     Other articles referred by Mill to this category are " ancient sculptures, pictures by old masters, rare books or coins, or other articles of anti­quarian curiosity" (Political Economy, bk. iii. ch. ii. § 2). Compare Prof. Marshall's enumer­ation of articles in the case of which " there is no connection between cost of reproduction and price" (at the end of the chapter last referred to).

      Mill adds to his list of such articles " building grounds in a town of definite extent (such as Venice), the most desirable sites in any town whatever . . . potentially all land whatever" (loc. cit.). It should seem that his limitation of the statement to the case of "countries fully occupied and cultivated," is unnecessary. But it is impossible here adequately to discuss all the difficulties which the subject presents.

     It is a nice question whether it is proper to include in this section (Al) the exchange of present goods for future (cp. Bohm-Bawerk, Positive Theory), the settling of the rate of interest. Mill says "this is evidently a question of demand and supply " used in the same as in the preceding cases (Political Economy, iii. ch. xxiii. § 1). It is usual, however, to regard the "sacrifice" incurred by postponing consump­tion as a mode of cost; and so not to be included in this section.

     (A2) To this class belong "commodities of which, though capable of being increased or diminished to a great extent, the value never depends upon anything but demand and supply " in a sense opposed to determination by cost of production (Mill, bk. iii. ch. ii., last paragraph). Perhaps the most typical ease under this head is international trade, where in Cairnes's phrase (Leading Principles, bk. iii. ch. iv. § 4), cost " controls " but does not " determine " value ; in the terms above used with respect to mono­poly affects, but does not measure, value. Thus suppose tea produced in China exchanges for cutlery made in England. There is no equation between the efforts and sacrifices of the Chinese and the British producer. For the mobility tending to produce that equation is wanting. As an additional verification that value is not proportioned to cost in this case, it may be observed that if the cost of production be altered, e.g. by an improvement or a tax, the value in the international market will be altered indeed, but not in proportion to the alteration of the cost (Mill, bk. iii. ch. xviii. § 5, and bk. v. ch. iv. § 6).

    The cognate case of " non-competing groups " (Cairnes) is amenable to the same law. The labour-market (cp. Mill, bk. iii. ch. ii. last par.) forms a particularly important instance —so far as it is legitimate to abstract efforts and sacrifices incurred with a view to prepara­tion for that market (see below, p. 762, col. 1, par. 3).

     Throughout the whole class of transactions which have been considered (A) there is wanting that adjustment between remuneration and effort and sacrifice which is the essence of the classical doctrine that cost of production determines value. Up to this point those who have impugned or ignored that doctrine are correct.

     (B) A transition from the regime of "non-competing groups," to "industrial competition" (Cairnes) is obtained by supposing removed the barriers which have prevented competition. There ensues with the mobility of industry the equation of "net advantages" (Marshall) in different occupations. It will be convenient to break up class В in two : (1) where abstraction is made of division of labour ; (2) more concrete.

     (Bl) Suppose each worker free to apply his labour in doses, or increments, to any industry —the abstract supposition implicitly made by Jevons in his analysis of labour (Theory, ch. vi.).

No one will work in any branch beyond the point at which the trouble attending the last increment of product is just compensated by its remuneration. In this case then it becomes true that value is measured by the final disutility of the producer ; while it does not cease to be true that, as in former cases, value is measured by the final utility of the consumer. There is no opposition between these verities ; one need not be subordinated to the other.

     In this case the relation between the two factors of value, utility and disutility, is almost as symmetrical as in what Prof. Marshall calls " the simplest case of equilibrium between desire and effort when a person satisfies one of his wants by his own direct action, as for instance when he picks blackberries. . . . After he has eaten a good deal the desire for more diminishes, while the task of picking begins to cause weariness which at last counterbalances the desire for eating, and equilibrium is reached." (Principles, bk. v. ch. iii. § 1). In such a case the question whether it was the desire, or the weariness, which "determined," or "regulated" the equilibrium would be insignificant.

     The "fundamental symmetry" (Marshall) between the forces of demand and supply is aptly represented by mechanical illustrations. "Just in the same way, when several balls are lying in a bowl, they mutually determine one another's positions ; and again, when a heavy weight is suspended by several elastic strings of different strengths and lengths, the equilibrium positions of all the strings and the weight mutually determine one another" (Marshall, Principles, bk. vi. ch. i.). The principle that water seeks its own level has been employed by Dr. Irving Fisher in his masterly Investigations in the Theory of Value and Prices (from Tram-actions of Connecticut Academy, vol. ix., July 1892) to construct a more elaborate illustration of the great principle thus enounced by Cournot, "Le systeme economique est un ensemble dont toutes les parties se tiennent et reagissent les unes sur les autres."

     What has been said of the relation of dis­utility to value applies equally, or even better, to the "sacrifice" of postponing consumption. As Prof. J. B. Clark well says (Yale Review, No. 3), " the final act of abstinence is like the last act of labour, the costliest of all"... '' the cost entailed on society by its final acts of abstinence is a second possible measure of value." It may be observed that the abstrac­tion proper to this section (Bl) is not so violent in the case of capital as labour. The idea of a capitalist distributing his outlay among differ­ent enterprises, from each of which ceteris pari­bus he will expect a similar return—is one that is partially realised in the "share" market. Compare Cournot, Principes de la Theorie des Richesses, 1863, Art. 45.

     (B2) The "fundamental symmetry" between utility and disutility as factors of value, continues to subsist when we restore the concrete circum­stance of division of labour. But superficial differences arise. The individual may be con­ceived as seeking to maximise his total utility, per saltum by a change of occupations, rather than by doses distributed at different points of the industrial system. The equation of "net advantages" in different occupations, rather than of final disutilities, is now the condition. But the analogy of physical equilibrium is still appropriate. " The normal value of everything rests, like the keystone of an arch, balanced between the contending pressures on its two opposing sides. The forces of demand press on the one side, those of supply on the other" (Marshall). We must regard "the various elements of an economic problem—not as deter­mining one another in a chain of causation— A determining В, В determining C, and so on —but as all mutually determining one another" (ibid, preface to 1st ed., p. xiv.).

     To rightly apprehend the relation between value and cost of production it should be con­sidered that one occupation may comprise several commodities. The production of dif­ferent articles has been joined together by nature or custom. It would be idle to expect the value of beef and hides to be respectively proportioned to the quantity of labour "worked up" (Ricardo) or " congealed " (Marx) in each. A person who chooses a literary or academic career may hope to be, on the whole, as well off in that as in any other line open to him ; but he must not expect the pay of each particular task—e.g. writing an article, or giving a lecture—to be proportioned to the trouble (cp. Mill on Sub­sidiary Industries, bk. ii. ch. xiv., and see Joint Production).

     The sense in which value, in the case under consideration (B2), is determined by cost of production, as well as marginal utility, appears to the present writer to have been best stated by Prof. Marshall. Besides showing the inter­dependence of the two factors, as above men­tioned, he also makes it clear that time, "a long period," is required in order that the forces of supply should work themselves out. Thus in the case of labour the adjustment be­tween cost and value must be dated from the time when parents begin to make efforts and sacrifices with a view to the education and advancement of their children. There is pre­sented the vast conception of trained industry put upon a future labour-market, by parental pro­vidence, for vicarious remuneration.

     But perhaps no form of words devised by one person can be expected to recommend itself to all others as the best adapted to express the subtle relations of utility and cost to value. As in higher spheres of speculation, it may be hoped that differences of doctrine are less important than at first sight would appear.

     [As to the indeterminateness of the bargain between two individual or corporate units, see Auspitz and Lieben, Theorie des Preises, p. 381. —Bohm-Bawerk, Positive Theory (translated by W. Smart), bk. iv. ch. ii.—Edgeworth, Mathe­matical Psychics, p. 21, et seq.—Jevons, Theory of Political Economy, pp. 130-137, and Marshall, Principles of Economics, p. 715 ; Mathematical Appendix, Note xii. —Menger, Grundsatze, pp. 176-178. — Price, Industrial Peace, pp. 14 and 54.— Sidgwick, Political Economy, bk. ii. ch. x. § 3 (end), also p. 349.

     On the abstract theory of monopoly, see Cournot, Principes Matematiques, chs. v. and vi. et passim. —Hadley, Railway Transportation, and other books and reports relating to railways.—Marshall, Prin­ciples of Economics,

bk. v.

     The authorities on the more general case of value in exchange defy quotation by their number. Those to whom the present writer is most indebted have been mentioned in the text.]        F. Y. E.

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