VALUE AND ITS RELATION TO DIFFERENT INCOMES

Functional distribution controls personal incomes since each man who gets, in a normal way, any income at all performs one or more productive functions, and his total income is the sum of the returns for these several functions. Moreover under such a condition of ideally perfect competition as we have assumed each of these functions is rewarded according to the product that it creates; and each man accordingly is paid an amount that equals the total product which he personally creates. Men’s products, even in the disturbed conditions of actual life, set the standards to which their returns tend to conform, though they vary from them in ways that we shall not fail to notice.

Group Distribution. - The grand total of the social income has to go through a preliminary division before it is shared by laborers, capitalists, and entrepreneurs. In each industry the pay of all these functionaries comes from the selling price of the commercial article that they cooeperate in making. The price of shoes pays all shoemakers, whether what they contribute to the manufacturing is labor, capital, or mere cooerdination; and it also pays ranchmen and tanners for what they contribute in the shape of leather, raw and dressed. If the price of shoes should rise, there would be a larger income for the group whose activities create them. So if woolen clothing were to become dearer, there would be more money for the group that makes it, and this would include those who raise sheep and those who convert wool into cloth, as well as the garment makers themselves. The question, what members of a group would get the benefit of a rise in the price of its product, is one that must be discussed in connection with economic dynamics, and we shall find, when we reach this part of the subject, that it is entrepreneurs’ gains which come largely from sources like this. We have already seen that, in a static condition and with prices, wages, and interest immovably held at rates to which perfectly free competition would bring them, entrepreneurs as such would get nil, and the whole price of every article would be distributed among the laborers and the capitalists who make it. The proof of this will appear when we have examined the process by which the values of goods are adjusted, and this will help to prepare the way for a study of the sources of net profits, which are an all-important feature of actual business. Society is honest or dishonest according as this entrepreneurs’ income is gained in one way or in another; and it is not too much to say that before the court of last resort, the body of the people, no system of business will be allowed permanently to stand unless the basic principle of it tends to eliminate dishonest profits. A chief purpose of static studies is to afford a means of testing the legitimacy of the incomes that come to entrepreneurs.

Market Price. - The old phrase supply and demand describes the process by which the market price of anything is determined. The total mercantile stock of goods of a particular kind at any one time on hand is, of course, an exact quantity, and the law of “market value,” when these words are used in a restricted and technical sense, determines the price at which this predetermined amount can be sold.

How a Normal Supply is Determined. - This present stock, however, was brought into existence by producers who looked forward to the time when they could probably sell it at a certain price; and the higher this anticipated return for the article, the more of it they were induced to make. The price, which to-day depends on the quantity on hand, acted in advance as a lure to bring that quantity into existence, and among the different articles which men can produce, they are forever singling out for increased production those things which offer the strongest lures - that is, the things that sell for the largest amounts as compared with the cost of making them. The ultimate tendency of all this is a certain adjustment of the relative supplies of different commodities. It is that adjustment which brings all prices to a level determined by cost.

Natural Value. - This tendency toward cost prices - those which afford to the producers wages for all their labor but no true entrepreneurs’ profit - establishes a further law, that of “natural value,” and this it is that fixes the standard to which, in the long run, market values, as adjusted by supply and demand, tend to conform. A market value is natural or unnatural according as it does or does not conform to a certain standard, and this ultimate standard itself is the cost of producing the several kinds of goods. What the term cost in this connection really means we must later see; but for the present we may take the common and practical view that it is the amount of money that an entrepreneur must pay out in order to bring the article into existence. If there were very little wheat in the granaries of the world, demand acting on this limited supply would determine the selling price of it, and this price would be high as compared with the cost of raising this grain. It would also be higher than the selling prices of other things which are produced by the same expenditure of labor and capital that has to be made in raising the wheat. The market price would, for the time being, be unnatural and would in due time be brought down; but this would have to be done by the raising of more wheat. In other words, though the selling price of a small supply of wheat may be normal for that amount, the amount supplied is itself abnormally small, and in view of that fact the resulting price is too high to be allowed to continue. As a permanent price it would not be natural. The quantity supplied tends to increase till the market price conforms to the cost of raising the wheat. We have to see, first, how demand fixes the price of a definite amount of anything which is offered for sale and, later, how the quantity offered is controlled.

How Prices are Determined. - It is certain that if, in a given market, we increase the quantity of goods that are to be sold, we lower the price, while, if we diminish the quantity, we raise the price. That is the commercial fact and it furnishes a beginning for a theory of value.

Let us suppose that we have a fixed quantity of goods on hand, that all must be sold, and that no one knows at the outset what price they will bring. There might conceivably go on an inverted kind of auctioning process, in which the sellers at the outset would ask a high rate, sell a few of their goods, and then gradually reduce the price till the last article should be sold. At each reduction of the price the “effectual demand,” so-called, would increase. This means that the people who want the article are actually willing to take and pay for larger quantities the lower the price falls. Mere desire does not influence the market, but an “effectual demand” means a desire and a tender of the money that is asked for the goods. It is, in short, an actual purchase and the amount of it becomes larger as the price goes down. People who did not buy the article before now add it to the list of goods that they take for use, and the people who were already taking a certain quantity of it now take more.

Equation of Supply and Effective Demand. - If this effective demand, or amount of goods actually bought and paid for, becomes steadily larger the lower the price becomes, it is clear that, however large the total supply may be, it can all be sold by making the price low enough. It was once thought that this is all we need to know of prices current or market values. At some selling rate or other the quantity actually offered will come to equal the quantity that is actually bought. This is the equation of demand and supply. The quantity offered is here supposed to be fixed and to include all of the article that is in dealers’ hands and that has to be sold; and the price, starting at a high rate, is supposed to go down till the sale of the entire quantity is effected.

Varying Demand and Price. - The facts that have just been stated account only in a partial way for the adjustment of market price. One who wishes to trace phenomena to their causes cannot help asking why demand and supply insure the selling of a given amount of goods at one rate rather than at another. If apples are offering at two dollars a barrel, why is it that, in a particular local market, one thousand barrels and no more can, at that rate, be sold? We can readily see that at one dollar a barrel more could be sold than at two, and that at three less would be sold. But why is it that, at two dollars, the definite number of one thousand barrels is the amount that is taken and paid for? Why is the equation of demand and supply established at exactly that price?

Demand and Final Utility. - We come nearer to the cause that acts in adjusting the price of apples when we say that they sell at two dollars a barrel because that sum expresses their “final utility.” This means that, if such an auctioning process as we have described were resorted to, the last barrel of apples which would be sold would have to the buyer an amount of utility just equal to that of the final unit of any other article that could have been had for the same money. The auctioning, however, would cause different barrels of apples to sell at different prices, whereas there is something in the working of competition which causes all of them to sell at the same price. It is necessary to see, first, how the price of the “final” one is adjusted and, secondly, how that fixes the price of all the others.

The Law of Diminishing Utility. - We revert here to one of those general laws of economics that we have already stated and see it acting under the conditions of distinctly social life. Goods of a given kind have less and less utility, per unit, the more the user has of them. If you offer him apples in increased quantity, he will value the first part of the supply highly, but will attach less value to the later parts. When the desire for this fruit is fairly well satisfied, he will find other articles of more importance. At the price of two dollars a barrel it is just worth his while to buy a final barrel of them. That quantity, as added to his winter’s supply, will give him two dollars’ worth of benefit. This means that it will do him as much good as anything else which he can get for the same amount of money.

The Equalization of Final Utilities. - Two dollars spent in adding to his previous stock of other things will do the man in the illustration the same amount of good that he can get from a final barrel of apples, and no more. In the case of goods which are all alike and of which consumers are always glad to use an additional amount, prices tend to adjust themselves in such a way that a final unit of any one which the consumer buys with a dollar is worth just as much to him as a final unit of any other article he buys with that amount. The last dollar paid for apples is as remunerative, in the way of pleasure and benefit secured, as is the last dollar used to improve his wardrobe, to add something to his stock of furniture, to buy tickets to the theater, etc. Apples have, as it were, to compete with clothing, furniture, and amusements for the consumer’s favor, and if the vender charges more for them than do the venders of other things having the same power to give pleasure, some of the apples will remain unsold; for though customers will always give as much as they would have to pay for other things of equal final utility, they will not give more.

The Prices of All Increments of Supply Equal. - A consumer always gets a net surplus of benefit from the early increments of the goods he consumes. If the last barrel of apples is worth two dollars, - or, what is the same thing, if the last barrel has in it an amount of utility equal to the final utility of other things that two dollars will buy, - the first barrel has a larger utility; and yet it costs no more than the last one. The sellers of apples, if they expect to dispose of all that they have, must at the outset fix the price at such a point that the very last increment of the supply will successfully compete with other articles for the favor of purchasers. Competition forces them to sell the whole amount so cheaply that the least important part of it may be as important to the purchaser of that part as the corresponding and least important part of the supply of other things. Nothing but a monopoly of the entire available stock would enable them to carry out the auctioning plan and offer the stock piecemeal, so as to get a higher price for the parts offered early. Even then buyers who should perceive the fact that a large part of the stock remained in reserve and that it must ultimately be sold would be able, by delaying their purchases, to get the benefit of a later and lower rate, so that the monopoly itself would be only partially successful in its policy. In the absence of a monopoly venders are compelled to sell all articles of one kind and quality at one price. The man who should fix a higher price on his portion of the supply would be passed by in favor of other sellers who were disposing of their final increments, and his business would quietly drift away from him. There cannot be two prices for one commodity in the same market at the same time. This fact is fundamental. Even the monopoly is able to get different prices for different parts of its output only by offering them at different times; and competing producers cannot do this. They are forced to keep the price of all they offer at a level that expresses its final utility.

The Law of Value affected by the Difficulty of using Two Similar Goods at Once. - There are two imperfections in the common statement of this law of final utility which need to be removed in order that the theory of value, which is based on the law, may be true and useful. The first lies in the assumption that people buy completed articles, such as coats, tables, vehicles, watches, etc., in regular series of units, adding to their stock coat after coat, watch after watch, etc., all just alike, till the utility of the last one becomes so small that it is better to buy other things. On this supposition the price of the whole supply of any such thing corresponds with the utility of the last one in the consumer’s series. This fairly well describes the case of commodities like apples, of which men consume now more and now less per day or per week and are always glad to increase the amount they use. Of most kinds of consumers’ goods a person wants at one time one unit and no more, and a second unit, if he has to use it himself within the same time in which he uses the first, would be an incumbrance. Its utility would be a negative quantity. Two quite similar coats would never be bought by the same person if he had only his own needs in view and must use both coats through the same period. The first unit of his supply is, for this period, also the last.

The Law of Value affected by the Fact that the Final Unit of a Good is usually a Complex of Unlike Utilities. - The second imperfection consists in the assumption that in measuring the utility of such a unit the consumer estimates the importance to himself of the article taken in its entirety. In the case of the apples of our illustration the difficulty is not obvious. A man, as we have just noticed, may increase or diminish his consumption of this fruit; the first few apples that he uses will give him more pleasure than a second similar quantity, and the price of apples in the market may actually depend on the utility of the final peck of apples that each of the customers consumes in a season. In other words, there is, in this instance, a probability that the goods, although supplied at once, may be appraised as if they were offered in a regular series and that the law of final utility, in its common and simple form of statement, may in this particular apply to the case. The second difficulty, however, remains, and even in the case of such goods as apples renders the common statement somewhat inaccurate, while in the case of most kinds of consumers’ goods the inaccuracy is glaring. If the price of fine watches corresponded with the utility of the last one that a consumer uses, it would be many times greater than it is. Rather than go without watches altogether many a man would pay one thousand dollars for one for which he actually gives a hundred; and, moreover, this watch may be the “final” one in his case. The utility of the last overcoat that a man uses in the winter may be such that, if he could have it on no other condition, he would readily give five hundred dollars for it instead of fifty.

How Unlike Services may be rendered by One Good at the Same Time. - What people want of any useful thing is an effect in themselves, - a pleasure or a benefit which they expect to get, - and apart from this subjective result they would not want the thing at all. The power to confer a particular benefit is a utility. Men buy goods solely for their utilities, and they measure these service-rendering powers in the things offered to them and pay for them accordingly. Now, it happens that articles often combine in themselves a considerable number of different utilities, or service-rendering powers, and that in buying an article the man pays for them all. It is as though four or five different servants, each having his own specialty, were to offer themselves for hire and invite an employer to consider what each one could do for him. In buying an article which will serve him in several ways, a man appraises all the unlike services that the article will render. He secures several services at once, as he would do if he hired, in a body, several actual servants. The same thing would happen if, instead of hiring human servants with different aptitudes, one should buy different commodities each of which is, in reality, an inanimate servant, able, in its own way, to do something useful or agreeable for the purchaser. We could bunch a lot of these goods and buy them collectively. Venders of the goods could tie them together in bundles and offer them thus for sale. If the different goods were also sold separately in the market, they would command in the bundles the same prices that they would command when sold each by itself, and a bundle would bring the sum of the several prices of its component articles. In just this way in which an aggregate of different goods would get its valuation does any one article which is made up of different utilities get its rating. The utilities are appraised separately. In buying an article which is a composite of different utilities, we virtually employ a company of servants who have different specialties and insist on being hired all together or not at all.

How the Normal Price of a Bundle of Unlike Goods would be Fixed. - We have now to see how the action of the market analyzes an article and puts a price on the several utilities which compose it. The market does this in exactly the same way in which it would appraise a bundle of dissimilar articles which had to be sold separately, and we will therefore trace the operation by which a package containing the commodities A, B, C, and D would get its value in an actual market.

How the Normal Price of a Single Good in a Bundle of Unlike Goods would be Fixed. - Let us see how a bundle made up of commodities A, B, C, and D would get its value in the market. We will suppose that these articles are here named in the order of their importance, and that A has the highest utility, since it renders the most important service, and that D has the least. It may be that the article A has a utility rated at one hundred dollars in a particular man’s esteem. He would give one hundred dollars for it rather than do without it altogether. The service, then, that one article of this kind can render is expressed by the sum one hundred dollars. Article B taken separately may be worth fifty dollars, since it may render such services that the man would give fifty dollars rather than be without it. A third article, C, may in the same way be valued at twenty dollars and a fourth at ten. Now, if a man has to buy the whole bundle, must he pay one hundred dollars plus fifty plus twenty plus ten, or one hundred and eighty for the whole? This does not by any means follow. The first article may be sold separately at a price far below one hundred dollars. There may be so large a supply of it that, in order to find a market for it all, the makers must take ten dollars for it. This fixes the market price of that amount of this commodity at ten dollars. If we now glance beyond the question of the “market price” of the goods and consider their more permanent or “normal price,” the inquiry requires us to do more than ascertain why a definite quantity of the goods offered at a certain time sells for a certain amount. An appeal to the law of final utility answers that question. To know, however, why the permanent price is what it is, we have to know what fixes the permanent supply, and we discover that the cost of making the goods is here a dominant influence. For the present we assume that this cost does not change, since such changes are a subject for the dynamic studies which will come later. The present fact is that production has been carried to such a point that no more of these goods can be sold at the cost price, and there the enlargement of the output has stopped; the supply has at some time in the past reached this normal point and now remains there. Ten dollars represents the final utility of the article, and this sum is what it costs to make it. If it could be sold for any more than that, competition would bring new producers into this business and would impel those already in it to enlarge their production till the price would stand at the normal or cost level of ten dollars.

The Consumers’ Surplus. - In every such case there are men who would give much more for the article rather than be without it, and we have supposed that some one would pay a hundred dollars for this commodity if he could not otherwise obtain it. Ninety dollars, then, measures what we may call his consumers’ surplus, or the clear benefit he gets from buying at its market price an article that is worth to him so much more. This comes about by the fact that the makers of article A, in order to sell the amount of goods that competition has impelled them to make, must accept the offers of persons who can consistently give only ten dollars for it. These are relatively poor persons, and as the sum of ten dollars expended on other articles would benefit them as much as ten dollars spent on this one, it is a “final” purchase, or a final increment of their consumers’ wealth. In order to get it they sacrifice, in some other form, a benefit as great as the one they get from acquiring this commodity and receive, therefore, no consumers’ surplus from it. These are the men whose demand helps to fix the price of the article A, and the willingness of other persons to give more does not make it bring any more. The rich men, who stand ready to pay a hundred dollars, if necessary, are gainers by letting poorer men fix this price. It is by catching the patronage of these poorer men that the makers can dispose of their large output, and in doing this they have to bring the price down to ten dollars.

The Function of a Special Class of Marginal Purchasers of Each Article. - In like manner there is a class of “marginal purchasers” of the article B, or the persons who pay for it so much that they get no net benefit or consumers’ surplus from the purchase. If they did not buy this article, they could get something else that would do them as much good for the same outlay. It costs, let us say, only ten dollars in the making, and enough of these articles are made and offered for sale at that price to supply all customers who are attracted by the offer. The men who would pay more for it do not count. Each of the other articles in the bundle, when it is offered separately and at the cost price which competition establishes, represents a final utility to some one class of purchasers. Competition has made the whole supply so large that, in order to dispose of it, venders must attract the particular class who will take it at the ten-dollar rate. This class is in the strategic position of market-price makers for this one thing. They are the last class to whom the producers can afford to cater. If each of the five articles in the bundle costs the makers ten dollars, and if so many of each are made that they just supply the needs of the classes that will buy them at ten dollars apiece, the price of all five, when sold separately, will be fifty dollars. Most of the purchasers of each article would give more than ten for it if they had to, but some would not do so, and the producers cater to the needs of these marginal persons.

How the Prices of the Goods are fixed when they are sold in Various Combinations. - How do these articles get their valuation when they are tied in bundles containing all five of them and the bundles are sold unbroken? In essentially the same way as when sold separately. Article A, we will suppose, is one of the necessaries of life and is to be had by itself in the market. Article B represents a comfort, and C and D are luxuries. The bundles are so made that A and B are often sold together; as are also A, B, and C; and A, B, C, and D. A purchaser may have at his option the first only, the first and the second combined, the first three, or all four. Article A, when it stands alone, can be had at the natural or cost price and in quantity sufficient to supply the wants of all classes of buyers from the highest down to the class which will take it at ten dollars - the cost of making it - but at no higher price. Any one can have the A either alone or tied to other articles at this price. One who buys A and B in combination will pay for article A only the same price that it commands when sold separately; and since he buys B, the utility of which is less than that of A, at ten dollars, it is clear that he gets A for less than it is worth to him, but the ten dollars may be all he would give for the B. This man is not the marginal purchaser of A, for in buying it he realizes a consumers’ surplus; but for the article B, which is tied to it, he may pay all that it is worth to him. For that he is a marginal purchaser, and as such he gets no consumers’ surplus out of it. What he pays for B will just suffice to buy something else which is equally important to him. The price of this bundle of two articles is ultimately determined by the cost of the two components, which is twenty dollars, and enough of each component is made and offered in the market to supply the wants of a class of persons who will barely decide to take it at the cost rate. The class that hesitates at taking A will not consider B, but the class that hesitates at taking B gets a clear benefit from buying A at the price that expresses the utility of A to a poorer class of persons.

How Different Classes of Purchasers cooeperate in this Price Making. - The rule of one price for one article of course holds, and the man who would have a clear and decisive motive for buying the A for more than ten dollars, if he had to do so, gets the benefit of two facts: first, that it costs only that amount in the producing, and secondly, that competition makes the supply of it so large that it is brought within the reach of those persons who value it at only ten dollars. It takes two different classes of purchasers to fix the price of this package of two articles, and their ratings fix it at twenty dollars. Exactly the same influences regulate the price of the bundle which includes A, B, and C. Men who buy C can afford to have a luxury, and therefore, if they had had to do so, would have given more than they do give for the articles of necessity and comfort. If the price of A and B were higher than it is, they would still buy these two things, but they would not raise their bids for C, since for this they are marginal purchasers. This commodity is therefore sold at the price that will just induce this class of persons to add it to their list of consumers’ goods. There is a further class in whose list of purchases D is marginal, while A, B, and C yield a consumers’ surplus in the form of an uncompensated personal benefit.

Different Utilities in an Article appraised as are Different Goods in a Package. - It is an actual fact that most commodities are like these packages of unlike articles. They are bundles of unlike utilities, and the market actually finds a way to analyze composite things and put a separate price on each utility. It may seem very theoretical to say that a concrete thing, like a watch, a coat, a dining table, or a roast fowl, is made up of such abstract things as utilities and that each of these has its separate price; yet such is actually the fact, and if goods were not valued in the market in this way, the prices of all articles of comfort and luxury would be very much higher than they are.

A man pays seventy-five dollars for an overcoat, but if he could not get the service that the coat as a whole renders without paying five hundred dollars for it, he would pay it; for otherwise he could hardly get through a winter. No man who buys an overcoat worth seventy-five dollars would refuse to pay more if that were the necessary condition of having an overcoat at all. The garment as a whole is far from being a “marginal utility” to any one; and yet there is something in it that is so. This element is like the article D in the fourth bundle referred to in our illustration. There is a particular utility in the composite good for which the man pays all that it is worth to him; and he would go without that utility if the seller charged more than he does. The most important service that the coat renders is that of keeping the man warm; but a very cheap garment would render that service, and six dollars will buy such a garment. The man does not need to pay more than six dollars for that one service. The supply of cheap coats is such that the final one must be offered for six dollars in order to induce certain poor purchasers to buy it, and that, moreover, is all that it costs to make it. No one, therefore, is obliged to pay more than six dollars for something that will keep him warm, however much such a service may be worth to him. Coats of another grade have a second utility combined with this one, since they are made of better cloth and are more comely in appearance. Utilities of an aesthetic kind are combined with the crude qualities represented by the cheapest coats. The supply of coats of this grade is such that they must be offered for twenty dollars in order to induce some one to take the final or marginal one. What does this mean? It means that this purchaser will pay fourteen dollars and no more in order to have the second utility, consisting in comeliness, added to the first utility, capacity to keep him warm. This man would give more than twenty dollars rather than go uncloaked; for it is plain that, if he will pay fourteen dollars for comeliness, he will give more than six for warmth. Probably he would pay one hundred dollars for the article if he had to, and in getting it for twenty he gets a large consumers’ surplus. This is because he secures the first utility (1) for less than it is worth to him, (2) for just what it costs in the making, and (3) for just what it is worth to the poorer purchasers. He is willing to pay only fourteen dollars for the comeliness, which is the second utility that the garment contains, and he is therefore a marginal purchaser of this second utility. It costs only the sum of fourteen dollars to add the second utility to the first, and enough coats of the second grade are made to catch the patronage of the class of buyers who will give so much and no more for it. They are the persons whose demand figures in adjusting the market price of this second utility. Competing producers of coats cause the supply of those of the second grade to be so large that they could not all be sold unless the second utility were offered for fourteen dollars. This makes the price of the entire coat twenty dollars as the result of catering in a detailed way to the demand of two different classes of buyers.

In exactly the same way the price of the third grade is fixed at forty dollars and that of the still higher grade at seventy-five. In the third grade there is a utility which it costs twenty dollars to add to those possessed by garments of the second grade, and this is added to enough of them to supply all persons who will pay twenty dollars or more for it. These coats are made of more highly finished goods and have better linings, and this gives them the third utility which the market appraises at its cost, which is twenty dollars. The men who buy the forty dollar coats get a surplus of benefit in securing the first two of the utilities that are embodied in them, since for these they pay less than they would pay if they had to; but they get no surplus over the cost of the third utility. It is to secure their custom that the vender must sell it for twenty dollars. In a like manner a coat of the next grade, which is a more fashionable garment, sells for seventy-five dollars because it has a fourth utility which costs another sum of thirty-five dollars and, to the marginal buyers, is worth that amount. These men get a surplus from buying the first three utilities at what they cost their producers and what they are worth to poorer purchasers. It appears, then, that a seventy-five dollar coat is a bundle of distinct elements, or utilities, each of which has its separate cost and is sold at that cost price to a particular marginal class of purchasers. Each element is valued exactly as if it were in itself a complete article tied in this case to others, but also offered separately in the market. Persons of one class are final purchasers of the first utility when it is offered at its cost, six dollars. Another class, in a like manner, helps to set the price of the second utility at fourteen, and still other classes figure in the adjustment of the prices of the third and fourth utilities. These cost the manufacturers twenty dollars and thirty-five dollars respectively, and competition insures the making of enough of them to catch the patronage of those who will pay just these amounts. Members of one class act as marginal purchasers in price making in the case of one utility only. The concurrent action of all of them results in setting the price of the best coat at eighty dollars. It is a very practical fact that the rates at which all fine articles sell in the market are fixed in this way. Such articles contain utilities unlike each other. They have power to render services of varying degrees of importance, and each of the several services gets its normal valuation when producers make enough to supply the want of a particular group of persons to whom it is a marginal service and who are willing to pay only what it costs. They would go without that one service if they had to pay more for it.

This Method of Valuation Applicable to All Commodities of High Grade. - Illustrations of this principle might be multiplied indefinitely. A fine watch tells the time of day, but something that would do that could be had for a dollar, and that is all that this fundamental element in the fine watch sells for. It takes a series of purchasers bidding on the higher utilities of the fine watch to make it sell for five hundred dollars. The man who buys such a watch would give, perhaps, ten thousand for it rather than be without a watch altogether, but he is saved from the necessity of doing so by the fact that poorer customers have done the appraising in the case of all the more fundamental qualities which the watch possesses. So long as an Ingersoll “dollar watch” will tell the time of day, no one will pay more than a dollar for exactly that same service rendered by any watch whatever; and the same thing is true of other services. Social in a very concrete and literal sense is the operation of fixing prices. Only the simplest and cheapest things that are sold in the market at all bring just what they are worth to the buyers, and all articles of higher grade offer to all who buy them a surplus of service not offset by what is paid for them. If we rule out the cheapest and poorest grades of articles, we find all others affording a “consumers’ surplus."