LESSON 16: THE PRICE SYSTEM
In the foregoing lessons we have discussed at some length the basic matter and energy relationships to which all events upon the earth, both organic and inorganic, must conform. We have learned in this manner that out of all conceivable things we might imagine to happen upon the earth, only those are possible for which the total matter involved is neither increased nor decreased, and for which the energy transformations are of such a nature that the occurrence does not amount to one kind or another of a perpetual-motion mechanism.
While this kind of analysis has long been fundamental in engineering when dealing with simple, small-scale problems, it has not been extensively recognized that the same technique is applicable and of fundamental importance to the far more intricate problems of the operation of a human social complex. In engineering, for example, it has long been known that if a steam engine be operated between a boiler at the absolute temperature T1 and a condenser at the temperature T2, the maximum possible fraction of the heat Q1 taken from the boiler that can be converted into work is given by [(T1−T2)/T1]Q1. This fact establishes an objective standard of performance. If the performance of the engine is much poorer than this, then it is known that a better engine can be built, and how much better.
A similar analysis may be made with regard to a human society operating within a given geographical area. When the material and energy resources available to that society are known the maximum rate of operation of a social mechanism in that area can be established to a reasonable approximation. If the observed operation be at a greatly inferior level to that which in this manner is known to be possible, then we know that there is room for substantial improvement. Furthermore, as in the case of the steam engine, faulty operation implies faulty design of the operating mechanism which can be corrected only by an improved design in which the faulty characteristics have been omitted.
In our brief review of world resources, it appeared that many areas of the globe are so deficient in material and energy resources essential to a large-scale industry that their populations are effectually doomed to a low-energy standard of living—at least so unless and until technological advances render presently unknown resources available. We learned, however, that the Continent of North America is not so handicapped but with regard to climate, soil, biological, mineralogical, and energy resources is the most richly endowed continent on earth. In fact, it has the resources and the man-power and the technological knowledge necessary to provide every human inhabitant with an optimum physical standard of living at a small and continuously decreasing labor requirement per individual. Yet if we consider the widespread poverty and squalor that is allowed to exist, the wastage and destruction of resources, the destruction of products and maintenance of enforced scarcity both by government and by private industry, and the wholesale unemployment we are obliged to conclude that the actual operation of our social mechanism is vastly inferior to its presently known potentialities.
Hence, we have a clear case of a mechanism whose actual operation is so far below that which is possible as to constitute both a social and technological scandal. That this should be so need not be surprising when it is considered that the fundamental elements of design and operation of our social structure grew up thousands of years ago to meet the needs of an agrarian economy, whereas the transition from such an economy to our present state of technological advance has occurred principally within the last century, and predominantly, so far as growth is concerned, since the year 1900. It is inconceivable that the institutions and customs which evolved to meet the needs of a society composed of hunters, peasants, sheep-herders, warriors, priests, petty merchants, and usurers should be adequate for the needs of a society operating a billion horsepower of prime movers with its consequent array of high-speed transportation, communication, and productive equipment.
A high energy civilization has needs peculiar to itself which must be explicitly recognized in any adequate design. Before we consider that problem, however, let us first examine critically some of the existing customs and folkways handed down to us from an agrarian antiquity, since it is in these that the principal faults of our present mechanism may be expected to lie.
The Concept of Property. One of the most deeply rooted of all these ancient concepts is that of property. So firmly fixed is this concept that ordinarily it is taken to be axiomatic; rarely does it ever occur to one to examine critically into its meaning. One speaks of ‘my horse,’ ‘my dog,’ ‘my house,’ ‘my automobile,’ with never a thought of just what constitutes the difference between a house that belongs, say, to Jones, and the same house if it belonged to Smith.
To make this even more clear, let us suppose that the house formerly belonged to Jones, and that he afterward sold it to Smith. Should a stranger, knowing neither Jones nor Smith, have observed the house from day to day, before and after the transaction, he would probably have been unaware that any such change had occurred. He might have noted that up until a certain date, Jones lived in the house, and that after that date Jones moved out and Smith moved in. The stranger would have observed only that there had been a change of occupancy of the house. Such change of occupancy, however, might have occurred with no change of ownership at all, as in the case of the change of tenants in a house that is rented.
What then constitutes property in a house? A little reflection will show that ownership of, or property in, a house consists entirely in what society will allow an individual to do with regard to the house. If the property in the house is Jones’, that merely means that Jones is allowed by society to live in the house, to rent the house to someone else, to leave it vacant, or to tear it down. Jones may transfer parts of these privileges to other people for a consideration, as in the case of rental, or he may dispense with the privileges altogether, by sale, by gift or by forfeiture. In these latter cases, though the house remains, the right of property in the house is transferred to some other person.
The same line of reasoning applies to any other property. Thus, it becomes evident, as Lawrence T. Frank, of the Rockefeller Institute, has aptly remarked, that property consists not in a physical object, but is a mode of behavior with respect to a physical object.
The significance of this will be, perhaps, even more clearly understood if one should consider the difference between the ownership of an automobile in the middle of a 10-acre field and the ownership of the same automobile in the middle of Fifth Avenue at 2 o’clock on a busy afternoon. It would be the same automobile in either case with the same owner, but what society would allow the owner to do with his automobile in the middle of a ten-acre field is vastly different from what it would allow the same owner to do with the same automobile on Fifth Avenue.
A very similar type of thing occurs in the ownership of land. Suppose one owned a tract of land in the middle of an uninhabited wilderness. In such a case, the rights of property with regard to this land would be absolute, since, by hypothesis, there would be no society in such an instance to limit or curtail one’s freedom of action; it follows that such freedom of action would be limited only by one’s physical ability. He could cut or burn off the timber, cultivate or not as he saw fit, and build wherever it should please him. Suppose that some generations later a thriving city should spring up on this same tract of land. Then, if the original tract were large, it would doubtless be subdivided among many owners and into small tracts. Under these circumstances it becomes immediately obvious that the right of property in the same land would be totally different from the right of property when the area was a wilderness. Even though it were his own land, society would permit the owner only a very limited range of operations in this latter case; it would dictate to him that he could only build residence, industrial or business structures on his land, according to the city zone in which the land happened to be located. What is more, society would tell him within what specifications the wiring, the fire prevention equipment, the water supply, and sanitation equipment must be built.
Property then, or more strictly, the rights of property, are quite relative, and are by no means the fixed and rigid privileges that in a more agrarian society they have been, or that is still unthinkingly implied when one occasionally becomes concerned over the possible discontinuance of private property.
In spite of this relative nature, it still remains that almost every item of physical equipment that can be monopolized is at the present time considered to be the private property of individuals or groups of individuals. The land is owned, mineral resources are owned, in short, everything that is necessary for human existence and that can be so monopolized, has been taken over and monopolized by individuals or groups. The only reason that one does not pay a public utility charge on the air one breathes is that, as yet, there has not been found a way of enforcing such a monopoly.
Trade. As a corollary to the concept of ownership, and to the fact that every monopolizable thing is owned by some person or other, come concepts of trade and of value.
The simplest form of trade is that wherein one exchanges, say, ten sheep for one cow, a pound of butter for one dozen eggs, or in general, one kind of commodity or goods for another kind of commodity or goods. Such an exchange is called barter, and represents one of the most primitive forms of trade.
While, casually, barter would be thought of purely and simply as an exchange of goods, a little consideration will show that what actually is exchanged is the property rights in these goods. If Jones trades Smith ten sheep for one cow, the property rights that society allows Jones with respect to the sheep are transferred to Smith, and vice versa with respect to the cow. Since there are numerous kinds of transfer of physical goods which are not trade, it is important that one keep this distinction in mind. For example, if one goes into a restaurant and orders himself a meal which he pays for with money, he is engaging in trade. If he has ample money, he may seek a very expensive restaurant and dine in style. If he has very little money, he may seek a lunch wagon and content himself with a ham sandwich and a cup of coffee. A similar circumstance holds with regard to clothing. His choice of an expensive or a cheap suit of clothing may likewise be determined by his supply of ready cash. Both of these instances are examples of trade.
In an army, however, one is clothed and fed. In this case clothing passes from the quartermaster corps to the individual. While there is a transfer of custody of the clothing from the hands of the quartermaster corps to the hands of the soldier who is to use it, this clothing in both cases, before and after, is the property of the United States Army, and no trade is involved. What the soldier actually does is to sign an equipment sheet showing that he has received such and such equipment—this for the purpose of record. Here we have a transfer of goods from the custody of one person to the use of another without a trade having taken place in any sense of the word. A similar relation is true as regards a soldier’s rations and housing.
Trade, then, consists in those exchanges, and those only, in which there is an exchange of property rights. In the case of the army when the quartermaster corps obtains its supplies from the manufacturer, this is accomplished by means of trade; when the quartermaster corps distributes these same goods to the soldiers for use or consumption, this latter distribution can in no sense of the word be construed as trade.
The Concept of Value. Intimately associated with the concept of trade is that of value. To consider the simple cases of trade represented by barter, as mentioned previously, it is evident that the number of sheep that would be traded for one cow would depend, among other things, upon the relative abundance in the particular locality wherein the trade was effected of cows and sheep. If sheep were very abundant and cows relatively rare, this ratio might be as high as 50 sheep for one cow; if the inverse relation were true this exchange might be effected for as few as one sheep for one cow. A similar relation holds between butter and eggs, between cotton and wheat, or between any other pair of exchangeable commodities.
It is this variable relationship between the amounts of one commodity that is exchangeable for another that is the basis of the concept of value. Value is fundamentally subjective but is always expressed in the marketplace by the relative amount of one commodity that is exchangeable for another. The amount of one commodity that is exchangeable for another in different times, and in different places, varies widely. In general, the value of a product, that is to say, the amount of other products which is exchangeable for it, increases as that product becomes scarcer.
Thus, the value of diamonds at the present time is high only because diamonds occur but rarely, and are monopolized by the diamond syndicate, which allows them on the market at a very limited rate. Should a process be developed whereby diamonds could be manufactured for a cent or less per carat, their value would rapidly decline. In other words, it is only when a product is scarce that large amounts of other products need be offered in exchange for it.
The value of a thing has no relation to its social importance, for example, both air and water are completely indispensable for the maintenance of life. Air is so abundant that one need not exchange any commodity for its use. It is accordingly without value. Since the relative abundance of water varies from place to place, its value varies also. In a region of heavy rainfall and abundant water supply, both for the purpose of drinking and of irrigation, water has no value; it cannot be bought or sold. In arid regions, however, water both for drinking purposes and for irrigation, due to its scarcity, is bought and sold or traded in, and accordingly has value.
The Concept of Debt. Suppose that in an agrarian system of barter a horse is exchangeable for eight pairs of shoes. Suppose that the shoemaker wishes to buy a horse, and that a farmer who has a horse to sell needs a pair of shoes; then if the farmer should trade the shoemaker his horse and accept only one pair of shoes, the shoemaker would still owe the farmer seven pairs of shoes. These seven pairs of shoes which the shoemaker owes to the farmer are said to be the debt of the shoemaker to the farmer; the farmer is called the creditor, and the shoemaker the debtor.
In such a situation as this, there are two alternatives. The debt may be discharged gradually by (a) the farmer taking the seven remaining pairs of shoes one at a time in succession over an extended period of time, or (b) the shoemaker may give to the farmer at the time of the trade a written statement to the effect that he owes, and will pay, seven pairs of shoes. Such a statement constitutes a certificate of debt. The farmer may then take this certificate of debt to a merchant and trade it in exchange for other goods which he now needs. In this latter case, the shoemaker’s debt of seven pairs of shoes will be transferred from the farmer to the merchant.
Suppose that instead of the shoemaker having given the farmer a debt certificate, stated in terms of shoes, it had been in the form of tokens, which, by common agreement of the community were acceptable, not only in payment for shoes, but also in exchange for all other goods of the community; then this latter token would constitute money. Money then constitutes a form of generalized debt certificate which is exchangeable not merely for a specific product, but for any purchasable product, which the community affords. It is expressed in denominations of value.
Assuming monetary tokens to be already in existence in a given community, one acquires them in exchange for goods or for services rendered. They therefore represent a deferred payment. The holder thereof may exchange them with other members of the community at some future time and receive goods or services in return. Money is, therefore, stated in denominations of value, and is exchangeable for goods or services of an equivalent value. Thus, if two different commodities are exchangeable on a barter basis for each other, the two are said to be of equivalent value, and each is exchangeable for the same amount of money.
It cannot be too strongly emphasized that money, as such, is not a commodity, but is instead mere tokens which by common social agreement represent debt owed by the community at large to their holders.
The substances used for money have varied widely from time to time, and from place to place. The North American Indians used wampum; some of the ancients used coins of copper, bronze, tin, and iron. Some of the South Sea Islanders have used dog’s teeth. Modern countries employ as their monetary standard chiefly the metals silver and gold.
It is true that in the early stages of the evolution of money a particular commodity was frequently chosen as a medium of exchange for other commodities. In these early stages this commodity fulfilled a dual purpose of a usable commodity and a certificate of debt payable in terms of other commodities on demand. In more modern times, this duality has been eliminated by the process of coinage. In the United States of America, copper is both a coin commodity and the material for a certain coin. In the form of a coin, copper represents merely a certificate of debt, and is usable accordingly. The value of a copper coin as a certificate of debt is very much greater than the value of the equivalent copper as a commodity.
It is customary among modern nations to adopt a particular metal, usually gold, as the base of the monetary system, in which case the value of gold as coin is taken to be equal to the value of an equivalent amount of gold as a commodity. That this relationship is purely arbitrary may be seen by the fact that nations have of late gone on or off the gold standard at will and may by edict define the unit of value to be equivalent to any arbitrary amount of gold.
In a monetary economy, the amount of money exchangeable for a given unit commodity is said to be its price. The person who exchanges the commodity for money is said to sell the commodity; the person paying the money is said to buy the commodity.
Definition of a Price System. The foregoing discussion forms the basis for a definition of what is meant by a Price System. The fundamentals of any Price System are the mechanics of exchange and distribution effected by the creation of debt claims or the exchange of property rights on the basis of commodity valuation irrespective of whether property in that system is individually or collectively owned. Hence any social system whatsoever that effects its distribution of goods and services by means of a system of trade or commerce based on commodity valuation and employing any form of debt tokens, or money, constitutes a Price System. It may be added in passing that unless it be in some very remote and primitive community, none other than Price Systems exist at the present time.
- A Primer of Money, Woodward and Rose.
- Wealth, Virtual Wealth, and Debt, Soddy (Chaps. 1-5).