Value And The Trader
( Originally Published Early 1900's )
1. Importance of exchange.—Exchange is perhaps the most conspicuous phenomenon in modern industrial and commercial civilization. If a visitor could come to the earth from a planet where there was no buying and selling, each person producing all that he consumed, he would be amazed and dazed by our complicated system of markets, railroads, telephone and telegraph lines. On his planet there would be no such things, for there would be no need for them.
People are so accustomed to exchange that they give little or no thought to its advantages. Some indeed are so foolish as to think that the mere trader, the merchant, is a parasite living on the labor of others. They do not realize that if they should eliminate the trader they would destroy the present demand for labor, make the division of labor impracticable, and bring on industrial chaos.
The first critics of exchange condemned it on the ground that only one of the two parties could make a profit, the other being cheated. They held that an exchange could be fair only in the supposedly rare cases where the articles exchanged were equal in value. Their error lay in the crude supposition that value is something inherent in an article and that, therefore, it must be the same to all men. We know that men's valuations of goods differ. I may have something which I value but little, tho you may value it highly; and you may possess an article which I value much more than you do. Evidently here is an opportunity for an exchange in which both will make a profit.
But we need not take space to indulge in arguments to prove that the modern system of exchange is justified by its advantages. We need only call attention to the fact that without it there could be no division of labor, no specialization in industry and no specialization in the development of human talents, and that the resources of a country could not be developed to advantage. Exchange has made England rich and has made possible and profitable utilization of her great resources in coal. Exchange permits Italy and France to specialize in vineyards, Australia in the pursuits of agriculture, and the United States and Canada in the numerous and various industries for which they are best fitted. The French physiocrats who assumed that the trader was a bur-den on society were certainly mistaken.
2. Transportation and communication.—The highly developed modern systems of transportation are the outgrowth of exchange. They are its necessary agents. Without the aid of the railroad and the steamship, the production of wealth could not possibly go on as at present, for the goods produced could not find consumers. We must, therefore, think of them as productive agencies and of all their employes as being actively engaged in the production of wealth.
The reader must get rid of the popular notion that only that labor is productive which is engaged in the manufacture of tangible commodities or in the ex-traction of desired articles from the soil. Railroad managers are open to criticism if they are wasteful of capital or human energy, but so are the farmer and the manufacturer. They are all equally liable to be inefficient, and any one of them by inefficiency injures himself and causes a social loss.
The development of the exchange system or ex-change civilization has in all its stages kept pace with improvements in means of communication and transportation. In the beginning there was only the human voice and the human back—usually the woman's back—and trade was necessarily small in volume and scope; the trained dog, the ox, the donkey, and perhaps the horse followed; dugout canoes and rowboats came next, and then the first professional trader appeared, but he could not travel far or deal with many customers. The sailing vessel gave birth to foreign trade; but its movement was slow and its cargoes possessed little variety, for the people of different parts of the earth knew little about one another's wants and tastes. The steam engine, the railroad and steamship, furnishing quicker methods of communication and transportation and bringing the different peoples into closer relationship, broadened the field of exchange and started the evolution of modern industry with all its specialization.
The telegraph and the cable have made all countries of the earth a single, industrial and commercial unit. The producer of shoes in Lynn, Massachusetts, or of cutlery in Birmingham, England, or of olive oil in Tuscany, Italy, no longer knows his customers; they are scattered all over the earth.
3. Subjective valuations measured by exchange.—Adherents of the Austrian school of political economy use value in its subjective sense, meaning by it the importance which men attach to a good as a means of satisfying their wants. In this sense value and marginal utility are virtually synonyms and the ex-change value of a good is its objective measurement in comparison with other goods.
In this Text the word value is used more nearly as it is in the business world, meaning power in ex-change. Nevertheless it seems worth while to call the reader's attention not only to the different uses of the word, but to the fact that different men value goods differently and that market values or prices are the outcome of these different subjective valuations, tending, as we have seen, always to coincide with the valuation of the marginal group of consumers.
4. Trader's service.—The trader or merchant is not himself a producer of material goods, nor is he a producer and consumer of the goods which he buys and sells. His buying and selling as a trader are entirely independent of his preferences as a consumer. He trades or deals in the commodities purchased by others, not because he himself wants them, but because others want them and because he is able thru his service and forethought to sell them, as a rule, at a price above that at which he buys them.
In various ways the trader adds to the utility of goods which he handles. The wholesaler collects into one establishment goods of a certain kind and thereby makes them more accessible to the retailer, thus giving them additional place value; the retailer in his turn adds to their place utility or value by making them more accessible to the consumer. These traders and others of the same sort, such as the commission merchant, stand between the fanner or manufacturer and the ultimate consumer and are commonly referred to as middlemen. When competition is, free no one of them can make an extraordinary profit unless he has extraordinary talent as a trader.
The trader's most important service is the part he plays in the fixing of market value and price. In doing this he does not add to the utility or value of the goods he handles, yet he performs a great social service, for he furnishes to both producers and consumers price standards with which they can measure the value of their possessions and by the use of which they can make exchanges if they wish without the intervention of the merchant or professional trader. It is the trader who gives us market prices, and it is upon these that people rely in their daily buying and selling.
5. Trader indispensable.—On account of the great rise of prices during the twenty years following 1897 there was much complaint in newspapers and magazines about the high prices exacted and big profits made by the middleman and much agitation in favor of his elimination. It is exceedingly doubtful if the needs of society can be satisfactorily served without the aid of the middleman. Doubtless some dealers have been guilty of extortion and have taken advantage of the ignorance and necessities of their customers. But such traders were no more numerous after 1897 than they were before, and we are certainly not justified in holding the trading classes responsible for the increase in the cost of living. This can be fully explained by other causes, especially by the cheapening of gold due to the increase of the gold supply, and by the increase of population, which under the law of diminishing returns has lifted the cost of nearly all foodstuffs.
Some manufacturers make a specialty of dealing directly with the consumer. They advertise extensively and promise low prices because the middlemen have been eliminated. There is without question much room for further economies in the exchange process, but the world cannot get on without the trader. The manufacturer who sells direct to the consumer does not really fix his price. He is governed by the market price even tho he sells a trifle below it.
6. Different classes of traders.—There are many classes of traders, but for our purpose they can be grouped under the following heads: speculators, wholesalers, commission merchants, retailers. All these have a part in the price fixing process, and it is not worth while to try to determine which one is most important.
The retailer is in direct touch with the consumer and knows, therefore, the existing demand better than anybody else. By means of his orders he transmits his information to the wholesaler or commission merchant, who thru his orders transmits it to the producer.
The speculator in various ways gets possession of the information and decides that the prices of certain commodities are destined to undergo considerable change. If he decides that a rise of price is indicated, he buys from anybody who will sell, expecting to sell later at a profit. If he foresees a fall in the price of any article, he proceeds to sell it, even tho he has none in his possession, confident that he will be able to buy it at a cheaper price when called upon for delivery.
7. Value determined by competition among traders.—Let us for the moment forget these different groups of traders and think of traders in general as embodying all the qualities and rendering all the services of all the groups, and let us take flour as a typical commodity, supposing its present price to be $10 a barrel. Certain traders will believe that price too low and their belief will be based on a study of the consumers demand and the outlook for the next crop of wheat. They believe that both wheat and flour are destined to rise in price. They do not think in terms of marginal utility or marginal cost. Their theory of value is the simple law of demand and sup-ply, the truth of which they have learned thru experience and observation. They feel confident that an increasing demand for wheat, combined with a shortage in the supply, will lead to higher prices. In the language of economics, they believe that the marginal utility of wheat and flour is destined to rise and that the marginal consumer will soon be willing to pay a higher price for it. The traders holding to this view buy wheat and flour in order that they may sell it later at a profit. Popularly these traders are called bulls.
Opposed to the bulls are the bears, who are skeptical about the predicted advance in price. The traders in this class think they have more accurate information than the bulls, or that the bulls fail to take into account certain important circumstances, or that the bulls are placing too much reliance upon pessimistic returns from Russia or Argentina, or that they fail to make proper allowance for the fact that a slight advance in the price of wheat flour would cause many people to substitute cornmeal. Whatever the reason, many of these bears are ready to sell as the bulls offer a higher and higher price.
Before the end of the day half of these traders may have been bulls in the morning and bears in the after-noon, and the net result of their day's work may be that their purchases equal their sales. Some traders, because of sound judgment or good fortune, will find that their average purchase price is less than their average selling price and that they, therefore, have made a profit; others would make a corresponding loss.
All these traders are looking for a profit and a description of their operations makes them seem to be mere gamblers, betting on the course of prices and performing no service for society. This is a mistake. These traders have been matching, not pennies or dollars, but intellect against intellect, judgment against judgment, and the net result of their struggle has been the fixing of the market price of wheat or flour.
The bull represents the marginal producer; he believes that conditions warrant a higher price and he fights for it. The bear stands for the marginal consumer; he believes that prices will go lower, or that any further advance is unwarranted, and is willing to risk money in support of his judgment.
8. Produce and stock exchanges.—This competitive war between opposing groups of traders in all its fierceness and intensity, each man fighting for himself, may be watched in progress almost any day on the floors of stock and produce exchanges in the large cities of Europe and America.
A produce exchange affords a meeting place for those who wish to trade extensively in such staples as wheat, corn, oats, cotton, pork and beef. Buying and selling in such exchanges must be done in accordance with established rules laid down by the governing board. In most exchanges it is possible to buy and sell "futures," by which is meant that during March a man may enter into a contract to pay a certain price for wheat delivered to him at the end of April or May, or even a later month. Commodities are graded, and the buyer will insist that the grade delivered to him be not inferior to the one for which his contract calls.
On the floors of the produce exchanges the market prices of nearly all staple articles are fixed. These are not the wholesale prices, but they influence the wholesaler in making up his list, and changes in the wholesale prices finally affect the prices which the retailer exacts from the consumer.
The stock exchange, called bourse in Paris, Borse in Berlin,, provides a meeting place for men who wish to buy or sell productive capital. The capital may be invested in railroad or industrial corporations and will be represented on the exchange by stock certificates or by mortgage bonds.' Since the return upon the bonds is fixed at a certain per cent, they are not commonly objects of speculation, being bought by investors who have surplus capital on which they wish a sure return. The prices of stocks, how-ever, vary greatly because of present and prospective changes in the earning power of corporations. Certain professional traders, therefore, speculate in stocks just as others do in cotton, wheat and other staple commodities.
9. Speculator's service.—There is a popular notion that speculation is an unmixed evil and that the speculator is no better than a gambler, betting on the future prices of articles instead of on the turn of a card. This notion is due in part to popular ignorance in regard to the real nature of speculation and to the fact that much of the buying and selling on the exchanges is done by amateurs who operate thru brokers.
The trader who deserves to be called a scientific speculator is not a gambler. He backs his judgment with his money just as does the miller when he buys wheat, or the merchant when he lays in a stock of goods. The difference between the ordinary merchant and the scientific speculator is only one of degree, the speculator merely taking a greater risk. His problem is more intricate and difficult than the retailer's or the wholesaler's. Most people think he is taking a gambler's chance merely because they do not have the faintest idea of the nature of his business problem.
As a result of the speculator's operations the prices of staple articles are much steadier than they would otherwise be. He foresees changes in market conditions long before the consumer or the retailer or even the wholesaler, and begins at once to buy. If his judgment is sound, a gradual advance of price begins and a consequent gradual curtailment of consumption; but for him, sales would have gone on at the lower price until the new conditions actually prevailed, when prices would have suddenly jumped to such a height as to cause distress among consumers and dissatisfaction among those producers who had already sold their supplies. The price, it should be noted, would go to a figure higher than it would be permitted to reach under the influence of speculation, for consumption during the preceding months would not have been curtailed by any advance in price. Thus speculation tends to conserve the supply or stock of an article for months before a shortage is indicated, and so tends to prevent sudden and great fluctuations of price.
On the other hand, if the speculator foresees a great increase of supply without a corresponding in-crease of demand, he becomes a bear and is willing to sell at the present market price. If the pressure to sell exceeds that to buy, the price gradually de-clines; and as a rule consumption increases so that the price does not fall so low as it would have fallen if speculation had not caused it gradually to decline for some time before the supply on the market had actually been increased.
It is needless to prove here that society is benefited by stability of prices. Every consumer knows the annoyance occasioned by a sudden advance in price, and every merchant and manufacturer knows the damage that can be done by a sudden drop of prices. The professional trader, when engaged in speculation, is performing a useful task and is really earning a profit.
Not only does he fix the prices of most of the raw materials which are made into the necessaries, comforts and luxuries of life, but he also helps to save the consumer and the dealer from the shock of sudden and great fluctuations.
The word speculation, by the way, comes from a Latin word speculor, meaning to view, to contemplate. Etymologically, therefore, the speculator may be regarded as society's lookout, standing high above the mass of traders—he is in fact a sort of economic fore-caster.
10. Evils of speculation—The foregoing praise of the speculator will doubtless irritate some readers. They know men who have been ruined by speculation just as they know other men who have been ruined by drink, and they condemn speculation and alcohol in the same breath.
There can be no question that much of the buying and selling on the exchanges of any country is pure gambling, or that the exchanges are sometimes made use of for the accomplishment of evil purposes. The governing bodies of exchanges are all perfectly well aware of the evils connected with speculation and, as a rule, are doing their best to abolish them. But some of them have their origin in certain weaknesses of human nature and can never be abolished.
The exchanges undoubtedly possess great charm to men with a taste for gambling, but in the long run the mere gambler on an exchange, the man who takes chances and relies on tips or so-called intuition and does not make the most thoro study possible of the conditions governing demand and supply, faces certain ruin, for the chances are against him. He may bet, for example, that the price of wheat will advance and buy wheat on a margin, borrowing from 80 to 90 per cent of the purchase price. There are three things which the price of wheat may do: It may remain stationary or it may decline, in either of which events he loses; or third, it may rise, in which case he may sell at a profit. An amateur trader on a stock or produce exchange cannot compete with the professionals. They need not seek to rob or ruin him, he will do the trick himself; he might as well hand them his money at the start and save himself a lot of worry.
Certain members of an exchange, often in alliance with outsiders, sometimes attempt to "corner" a commodity by buying up all the available supply; hoping to be able to dictate a high price to the consumer. This is an evil practice and is prohibited by law in the United States and some other countries. Men seeking to corner a commodity are evidently aiming at the advantages of monopoly and are planning to sell a commodity at an abnormal price.
Sometimes the same man or set of men create an artificial market for a commodity or stock in which they are interested by buying .thru certain -brokers and selling thru others. These are known as "wash sales" and are contrary to the rules of most exchanges, for their evident purpose is to deceive the investor or to promote the sale of the stock of a corporation at a price not justified by its condition and prospects.
These and other evils connected with speculation are treated in "The Exchanges and Speculation," Volume 20 of the Modern Business Texts, and need not be considered at length here. It is enough now to have the reader understand that there is a clear distinction between what might be called true and false speculation, between the scientific speculator and the mere gambler. The rewards of successful speculation are great because the risks are great; and it is not strange that these great rewards, which seem to the outsider to be earned so easily, tempt all sorts of foolish people to try their hand at the game. The presence of these people in the market, these lambs, as they are called, offers shrewd and unscrupulous men a chance to make money thru deception and various sharp practices. We cannot on this account condemn speculation or the exchanges. Men have been known to use the church for evil purposes, to start a store for the purpose of collecting fire insurance, to join fraternal organizations for purely commercial purposes, to don the uniform of the Salvation Army in order to get money from the charitable. The greater the influence and reputation of any institution, the greater the risk that evil men will seek to use it for their purposes.
11. General rise of values impossible.—Before we pass on to the consideration of other subjects it is perhaps well that the reader should be warned against the common but fallacious notion that under certain circumstances there may be a general rise or decline of values. The absurdity of this idea will be evident to the reader when he considers the fact that value is an exchange relation. A rise in the value of any good implies necessarily a corresponding decline in the value of other articles.
Objects possessing value may, of course, increase in number, so that it might be right to say that the total value embodied in material objects at one time is greater than at another. This is only another way of saying that the amount of wealth has increased.
In the same way it is possible for the quantity of utilities or objects possessing utility to increase. As man becomes more civilized, his wants becoming finer and more numerous, the total sum of utilities available for his enjoyment increases.
When people speak of a general rise of value they usually have in mind a general rise of prices. That is something quite possible. As money grows cheaper because of an increase in its supply or because of a lessened demand for it, the prices of goods in general tend to rise. This rise of prices is in fact the visible evidence of the cheapening of money. To say that money is getting cheaper is the same thing as saying that prices in general are rising. This important subject of money and prices will be considered in the next few chapters.
What were the early objections to trading? What are the ad-vantages of a modern system of exchange?
How does the trader add to the utility of the goods which he handles? What is his most important service? Name the various classes of traders and indicate the place that each plays in business.
What is the use of a produce exchange? What kind of prices are fixed upon it and what influence have they? Define a "future."
In your opinion what services does the speculator perform? Will the statement that under certain circumstances there may be a general rise or decline of values, stand the test of analysis?