2.3 Real and Relative Variation of Price
The price of an item represents a subjective assessment of the quantity of money someone feels the item to be worth in a given locality. A price represents an estimation of the item's value in consideration of all the other articles that might be obtained. Money is used as a medium of exchange, but the real and ultimate object is not the money itself but its power to obtain other commodities.
Price can be understood in three dimensions: the price the buyer wishes to offer to obtain an item and the price the seller is willing to accept to relinquish it. An actual price exists when the two parties' prices agree and an exchange takes place.
The buyer of any item considers the price in the context of his budget - the amount he has to spend on all the items he desires to possess. A seller may consider the total of the revenue he wishes to gain from the sale of his inventory, but is generally more concerned with getting a price that is sufficient to cover the cost of attainment or production.
That is to say, the seller is less concerned with the items he wishes to obtain in future, but the items he has obtained in the past: a merchant's cost of inventory or a producers cost of materials and labor reflect some of the prices they have paid in the past. The variation between the price at which an item is sold and the cost at which it was produced is the gross profit (or loss) of the producer.
(EN: The consideration of historical costs in determining price seems a matter of historical accuracy, but it's also my sense that the producer who means to remain productive must consider future prices: to profit, one must cover historical costs but to perpetuate means having the ability to producer in future. For example, if wages of workmen and materials are rising, present prices must be increased to pay the higher cost of producing the same quantity of goods again.)
Variations in price pose a risk to the producer: he considers the vintner whose customers are happy to pay 40 dollars one month, but offer only 30 dollars the following month. It has cost him no less to produce it. On the other hand if customers are willing to offer 50 dollars the following month, he experiences and unexpected profit.
This variation in price does not constitute a loss to the buyer, who gains the same benefit from a product at whatever price was paid for it. Nor is it of any consequence to the seller's suppliers of labor and materials, who have been paid for their contributions regardless of price, and whose demand for future payment will not be influenced by the seller's profit or loss.
In the aggregate, variations in price do not have an impact on the wealth of the society: the buyer's budget remains the same, and if a good is had cheaply, the buyer spends more on other things, but the same amount in total. However, where the prices of some goods are low, the buyer enjoys greater prosperity in getting the benefit of more products for their budget.
In Says' time, technology is the source of much prosperity: "power is rendered available for human purposes that had before not been known or not directed to any human object." The steam engine enables a producer to produce more goods at lesser cost, and the consumer spends less of his budget on those things and directs the excess to the purchase of other things.
(EN: that technology replaces labor is often a criticism, but labor, like the customer's budget, is redirected to the production of other things that the customer now has the capacity to purchase.)
It's remarked that variation in price may be general and affect all commodities at one, or it may affect only certain commodities. This depends on whether the factor that caused the variation has a general or limited effect, but even where an efficiency affects only one good, it will influence the value of all given time.
Say gives the example of machinery: a producer may find that the implementation of a knitting machine halves his cost to produce stockings by harnessing steam power to do the work of many hands, which enables him to reduce price to sell more stockings to the market and still cover his costs of production. This technology reduces the cost of labor, but does not reduce his cost of materials (and may in fact increase it because his demand is doubled) nor the cost of his rent upon his workshop.
Customers, meanwhile, pay less for stockings - which is to say that the stockings consumer less of their income. A tradesman who sells sugar at a given price now needs to sell only half as much to obtain the stockings he needs. He can continue at his current level of trade and use the income to purchase other things, or he may decrease his production because less income is required to provide for his needs.
To turn thus around, the stocking-maker needed to make a certain number of stockings to purchase a given amount of sugar. Once his costs of production are decreased, he likewise faces to choice to reduce production because he needs to invest less time in producing stockings to trade for the sugar he needs, or produce as much as he is able, buy sugar cheaper, and have additional income to satisfy other needs.
Where both parties continue to produce as much as they can, the price of stockings falls due to their abundance and the price of sugar falls due to the supplier's lesser need of product to trade for stockings that exist in greater quantity relative to fixed demand.
In Say's time, it is observed that wages stand in nearly the same relation to food (grain) as they did five hundred years prior, but the lower classes of society seem to enjoy many luxuries they could not have afforded in the past. He reckons this to be because the reduced amount of labor to produce food, effected by technology, has been transitioned to the production of other things that have been cheapened by their abundance.
In production, cost savings mean that an equal amount of product is had for a smaller amount of exertion, or a larger amount of product is had for an equal amount of exertion. Essentially, both increase the productive capacity of an operation. The problem is that this does not consider that an increase in production does not necessarily cause an increase in demand.
In theory, the increase in production increases supply of a good creates a decrease in price and there is thus a point at which the profit of the producer is reduced because the second is greater than the first. But Say feels this to be a groundless apprehension and he has not seen an instance in which efficiency has been harmful to the income of the producer.
As an example, consider the evolution of the printing industry, in which the printing press has made possible the mass-production of books at a much cheaper cost than hand-copying manuscripts. The cost of production has dropped to one-twentieth, and he feels it is probably reasonable to say that nearly a hundred times as many books are consumed, such that the dramatic decrease in price has not resulted in loss of wealth for the producers.
On the other hand, a decrease in the quantity supplied does not cause a corresponding increase in the price consumers will offer. Suppose an epidemic caused a scarcity of livestock, sheep for example, such that mutton became scarce. The price would rise, but not in proportion to the reduction of supply - those with the means will pay more, but others will do without, or consume something else.
When you consider wealth as the fulfillment of need, any increase in price or decrease in quantity reduces the general welfare; and any decrease in price or increase in quantity improves the general welfare. On the scale of a national economy: a nation is richest when commodities are available in greater amounts and at lower prices.
From the perspective of the producer, the unit cost and unit price of product is of little concern to the profitability of his operation, merely their aggregate effect. In general, it can be witnessed that selling more goods at a lower price does not reduce, and quite often improves, the producer's profit.
Say considers an extreme theory: what if the prices of production of all goods were reduced to absolutely nothing? Every object of human want would stand in the same predicament as the air we breathe, available immediately and at no cost in any quantity we would care to consume. There would be no value in studying economics nor any need for politicians, as there would be no conflict among men or nations for resources if everything needed was at hand. In such a situation of absolute abundance, the prices of things would neither rise nor fall: nothing would be scarce, no object would be any more difficult to obtain than any other.
Naturally, such a situation would not exist: all products require some effort to obtain, some much more than others, and the difference is reflected in their prices in the market. But it does shed some light on situations in which abundance and scarcity of goods influence prices - in that in a situation of complete abundance, it has no effect and the remaining determinant of price is merely the cost of production.
That is, there is a difference between a real variation in price (arising from an change in the cost of production) and a relative variation of price (arising from the ratio of goods in a marketplace, the scarcity of some and the abundance of others).
A change in the real price of goods is considered to be beneficial to producer or consumer without being detrimental to the other party. When only the relative price of a good is change by quantity, the holder of the item in question suffers the greatest loss or profit.
(EN: My sense here is that Say's consideration is based on producer-consumer transactions and does not consider the effect on middlemen. Unlike a producer whose inventory is turned quickly, ideally sold as soon as they are produced the middleman may have a stock of goods that were purchased in the past, prior to the change, and must sell in the future, after the change. It seems any person with an inventory stands to make a significant profit or take a significant loss - but this may also depend on the speed at which his particular inventory is turned.)
Say also obliquely considers the impact to the total market of the fluctuation in the relative price of goods: in effect, it is zero-sum. A producer who makes an inordinate profit will return this profit to the market when he purchases more within that market. Where he spends the profit on goods outside his local economy, it may be perceived that the wealth is lost to his nation and gained by another. On the global scale, it is still zero-sum.
Returning to the topic of colonialization, Say imagines "the time is not very distant" when Europe will recognize that seeking to benefit from the exploitation of colonists is not in the interest of the general welfare of their citizens: the profit made by some is balanced by the price paid by others for the same goods, and one cannot tax the producer without increasing the cost to the consumer. If the promotion of the general welfare be the goal, it is best served by cultivation, to ensure Europe is supplied with the greatest quantity of goods at the lowest price requires the cultivation, rather than exploitation, of producers.