Normal Value





Natural Supply



We have attained a law of market value, which

determines the price at which a given amount of any commodity will

sell, and have taken a quick glance at the influence which fixes the

amount that is offered and thus furnishes a natural standard to which

the market value tends to conform. At any one moment the amount which

is supplied is an exact quantity, and if it all has to be sold, it

will bring a price which is fixed by the final utility of that amount

of the commodity. If the quantity offered for sale should become

greater or less, the final utility and the price would change. Final

utility controls the immediate selling price, and if that is above the

cost of production, a margin of gain is afforded which appeals to

producers, sets competition working, and brings the quantity made up

to the full amount which can be sold at cost. The amount of the supply

itself is therefore not a matter of chance or caprice. It is natural

that a certain quantity of each article should be supplied, and that

the price should hover about the level which the final utility of that

quantity of the good fixes. "Natural" or "normal" price is, in this

view, the market price of a natural quantity.



Cost as a Standard of Normal Price



It is commonly and correctly

stated that the normal price of anything is that which just covers the

cost of producing it. Cost in this case is the total amount of money

that the entrepreneur pays out in order to bring the commodity into

existence. He buys raw materials and pays for all the labor and

capital that transform them into a new and saleable shape. If he can

make a net profit, he does so; but competition tends to adjust the

quantity produced and the consequent price in such a way that he can

make no net profit. What he gets for the article will then reimburse

him for his total outlay, but it will do no more. Since the quantity

produced is normal when it brings the market price to this level of

cost, it appears that the cost is the ultimate standard in the case.

The quantity supplied varies till it causes the market price just to

cover the cost; and so long as the quantity supplied is thus natural,

other influences remaining the same, the price is so. This states the

cost of production in terms of money paid by an entrepreneur and the

returns from the operation as money received by him; but there is a

more philosophical way of conceiving the law of cost, and to this we

shall soon recur.



Elements of Cost



Whatever the entrepreneur has to pay for in the

production of an article is of course an element in its monetary cost

to him. If he does not begin the making of it by drawing his raw

materials from what nature freely furnishes, he must pay some one for

the raw material. He must also pay for the labor, and this is

equivalent to buying the fraction of the article that is produced by

labor; for the laborer, as we have seen, is the producer of a certain

fractional share of the article and the natural owner of that share,

and when he agrees to let his labor for hire, what he really does is

to sell out his individual interest in the forthcoming product of the

industry in which he is about to engage. When a workman in a shoe

factory agrees to work for two dollars and a half a day, he really

contracts to sell every day for that amount a certain quantity of

shoes. The leather is one element which enters into the finished

shoes, and therefore the entire shoe is not really made in the

factory; but of the part which is there made, namely, the utility that

results from transforming the leather into shoes, one part is made by

labor and another by capital. The entrepreneur has to buy both of

these if he is to acquire a valid title to the product and have a

right to sell it. These costs are therefore "purchase money" paid for

undivided shares of goods.



Labor of Management



It usually happens that an entrepreneur, or

employer of labor and capital, performs some labor himself; and we

have already noted the reason for this in the fact that the kind of

labor that he performs is so important that the fate of the business

often depends on it. He may manage the business so well as to make it

succeed or so ill as to make it fail. He pays himself for this labor

when he draws a salary for his services. As an entrepreneur he

treats his own labor as he does that of any one else and buys the

fraction of the product of his business that his own labor of

management has created. In this he illustrates the general law that

all payments of wages are payments of the purchase of a certain

quantity of product. Though the owner's own contribution to the

product is not always mentioned in terms in the accounting, that is

what his salary is paid for, though it is spoken of as a payment for

his "time," or his labor.



The Capitalist as the Vender of a Share in a Product



Capital, as

we have seen, also contributes a definite share toward the total

amount of every product in the making of which it cooeperates. Labor

does not do all the transforming of leather into shoes which is done

in the factory, since machines, fuel, etc., help; and we shall later

find that there is a way of determining how much of the product the

help so given creates. It adds a certain amount to what labor can

claim as its own special product, and the man who owns the capital

becomes the lawful claimant for this additional share. When he agrees

to let his capital work for an employer, he virtually sells to the

employer the undivided share of the product--shoes or what not--that

the capital really creates. The furnisher of productive instruments,

like the furnisher of labor, is a vender, and the entrepreneur is a

buyer.



Entrepreneur and Capitalist



As was stated in an earlier chapter,

an actual employer nearly always furnishes some of the capital that he

uses. If he did not do so, he would have difficulty in borrowing more,

since banks or other lenders do not loan to empty-handed men. It is

clear that what the employer gets in return for such capital as he may

put into the business is in reality a payment for a contribution which

that particular part of the capital makes to the product. Since each

bit of capital in an establishment contributes something toward the

creating of the product, the employer's own capital has the same right

to the value of its contributary share as has the capital of any one

else. What the employer-capitalist gets for capital the employer,

pure and simple, pays. As the furnisher of instruments the man is a

vender of the product of these instruments, while as an entrepreneur

proper he is the buyer. He must purchase the product of his own

capital just as he purchased the product of his own labor. In paying,

therefore, wages for all labor, including what he performs himself,

interest on all capital, including his own, and the price of raw

materials, he gets something which, if competition does a perfect

work, he has to sell for what he gives for it. The shoes, when he

sells them, tend, under active competition, to yield only what has

been paid for them in the making and, in a perfectly static state,

would actually yield no net profit. All the entrepreneur's costs,

therefore, resolve themselves into purchase money paid, his receipts

are money accruing from sales; and under ideally free competition the

two sums total are equal.



The Entrepreneur's Proper Function not Labor of Management



In some

theoretical discussions the management of a business figures as the

principal function of the entrepreneur, and all or nearly all of the

reward that comes to him is represented as coming in the shape of a

reward for a responsible kind of labor that calls great abilities into

requisition. But it is very clear that, whether he personally performs

any labor or not, the employer has a distinctly mercantile function to

perform; and this in itself is totally unlike the work of overseeing

the mill, the shop, or the salesroom. He acquires a title to the whole

product by paying for the contributions which labor and producers of

raw material separately make toward it, and then parts with the

product; and if he gets any more than he has paid out, he makes a

profit. When industry is in what we have termed a dynamic state, such

a difference between the value of the product and the cost of the

elements that go into it is continually appearing, and that, too,

largely in consequence of causes over which, as a mere manager, the

employer has no control. A profit so gained cannot be wages of

management. It is a purely commercial gain, or a difference between

what is paid for something and what is received for it.



Mercantile Profit



It is best, therefore, to distinguish in some

perfectly clear way between that function of the entrepreneur, which

consists in buying and selling, and any work that he may find it best

to do in the way of superintending the business. At the cost of using

the term entrepreneur in a stricter sense than the one customarily

attached to it, we will make this word describe the purely mercantile

functionary who pays for the elements of a product and then sells the

product. The reason for the very division between gains from this

source and gains from management we shall soon appreciate, for we

shall see that competition tends to reduce one of these incomes to

nothing, but tends to perpetuate the other and to make the amount of

it conform to a positive standard. The entrepreneur, as we shall use

the term, is neither the manager nor the capitalist, and when we have

occasion to speak of either of these functionaries, we shall call him

by his own distinctive name; though we know perfectly well that, in

actual business, it is desirable and often quite essential that the

same one who acts as an entrepreneur should also put into the

business some labor as well as some capital. A man who performs two

unlike functions, buying and selling, on the one hand, and managing

the business, on the other, serves in two capacities that are clearly

distinguished from each other; while if he furnishes any of the

capital, he adds to these a third capacity entitling him to the value

of the product of his capital. As a manager he directly aids in

producing goods, and he gets pay for so doing from his other self, the

entrepreneur, who acquires the title to the goods; as a capitalist

he has another legitimate claim upon himself as entrepreneur.



These Distinctions recognized in Practical Accounting



That this is

no bit of mere theoretical subtlety is proved by the fact that the

bookkeeping of nearly all establishments distinguishes between these

two incomes by actually putting an appraisal on the work the employer

does and paying a salary for it. A man may be a large owner of stock

in a corporation and yet receive a salary that is fixed by an estimate

of what an equally useful man could be hired for. If personal

influence secures more for him than this, the excess is taken from the

pockets of the stockholders, and the amount of it is accounted for in

a way that does not fall within the scope of pure economic law.



How "Natural" Prices exclude Entrepreneur's Profits



The old and

correct view is that the tendency of competition is to make things

sell for enough to cover all costs, as we have defined them, and no

more. Under a different phraseology this is what Ricardo and others

have rightly claimed. They were unconsciously explaining what would

happen in a static state, for if society were actually in this state,

the goods that come out of the factory would be worth just enough to

reimburse the owner for all the outlays that can be called costs. If

they sell for more than this, there is to be had from the business an

income that costs nothing. It is a net profit above all claims based

on personal labor or on the aid furnished by capital, and it furnishes

an incentive for enlarging the business, and labor and capital are

therefore drawn into it. Entrepreneurs bring them and for a time

make a profit by this means; but as their presence increases the

output of goods that are here made, it brings down the price till

there is no inducement to move any more labor and capital in this

direction.



The Significance of a Natural Adjustment of Different

Industries



The "natural" state of general industry is that in which

each particular branch of it is in the no-profit state. It is as

though laborers and capitalists in a shoe factory took all the shoes

that it turns out, sold them in a market, paid for the raw material

out of the proceeds, and kept the remainder, dividing it between

themselves in proportions which corresponded with the amounts they had

severally contributed toward the making of this product; and as though

the laborers in cotton mills and iron foundries received the goods

there made and dealt with them in a like manner. It is as though in

every branch of business the whole product were turned over in kind to

the furnishers of labor and capital.



The Entrepreneur a Passive Functionary under Static

Conditions



Purely passive is the function of the entrepreneur

under static conditions. In so far as any effect on his income is

concerned he might as well reside in a foreign land as in the one

where his business is located, provided always that the management

were unaffected. When the same man is both entrepreneur and manager,

the absence of the first of these functionaries would mean the absence

also of the second, and that would cause trouble; but the purely

mercantile operation of getting a title to a product and then

surrendering it can be carried on as well in one place as in another.

The entrepreneur in his capacity of buyer and seller does not even

do the work which purchases and sales involve. That is commonly done

by agents. Some of it, of course, may be done by the responsible

manager himself, and if that person is also the entrepreneur, it

follows that he does a part of the commercial labor of his business.

In this, however, he goes beyond his function as entrepreneur. In

that capacity he does, as we have said, no labor of any kind. Sales

and purchases are made in his name, but he does none of the work that

leads up to them.[1]



[1] The holders of common stock in a corporation are always

entrepreneurs, and they are also capitalists if the stock

represents any real capital actually paid in. If the bonds

and the preferred stock represent all the real capital that

there is, any dividends that may be paid on the common stock

are a pure entrepreneur's profit. If, on the other hand,

the stock all represents money actually put into the

business, the dividends on it contain an element of net

profit if they exceed simple interest on the capital and

insurance against the risks that are not guarded against by

actual insurance policies. If the rate of simple interest is

four per cent, and the value of the unavoidable risk is one

per cent, then a dividend of six per cent contains a pure

entrepreneur's profit of one per cent. In dynamic

conditions such a return is often to be expected, and we

shall soon study the conditions that afford it.



In the present study we do not need to consider risks,

inasmuch as the greater part of them arise from dynamic

causes; that is, from the changes and disturbances to which

the business world is subject. An invention promises greatly

to cheapen the production of some article and, for a time, to

insure large returns for the men who first utilize it. A

capitalist may be willing to take a risk for the sake of

sharing this gain; but in time both the risk and the gain

will vanish. The capacity of the new appliances will have to

be tested, a market for their output found, etc. A small

remainder of risk is still entailed upon the capitalist if he

leaves his money in this business. The death of the managing

partner, the defaulting of payments for goods sold, the

chances of unwise or dishonest conduct on the part of clerks

or overseers, always impend over a business, but these

dangers are at a minimum when the man who is at the head of

the force of managers has capital of his own in the business.

Risks are at a static level only when they are thus reduced;

and for our present purpose it is best to consider that

competition has eliminated the establishments where any

recklessness has been shown in the management, and that the

unavoidable remainder of risk resolves itself, nearly enough

for practical purposes, into a deduction from the product

which the surviving establishments turn out in a long period

of time. A small percentage of their annual gains, set aside

for meeting unavoidable losses, will make good these losses

as they occur and leave the businesses in a condition in

which they can yield as a steady return to owners of stock,

to lenders of further capital, and to laborers all of their

real product.



How the Entrepreneur contributes to Production under Dynamic

Conditions



In a dynamic state the entrepreneur emerges from this

passive position. He makes the supreme decisions which now and again

lead to changes in the business. "Shall we adopt this new machine?"

"Shall we make this new product?" "Shall we enter this new market?"

are questions which are referred to him, and on the decisions he

reaches depends the prospects of profit for the business. This

activity is not ordinary labor, but in a true sense it is a productive

activity, since it results in placing labor and capital where they can

produce more than they have done and more than they could do were it

not for the enabling act of the entrepreneur which places them on a

vantage ground of superiority. This subject will be discussed in a

later chapter and in connection with other phases of economic

dynamics.



Values at a Static Level only when Entrepreneurs' Gains are

Nil



Any net profit on an entrepreneur's part means that his

product is selling for more than the elements of it have cost him. But

this is a condition which, if labor and capital are as mobile as the

static hypothesis requires that they should be, will cause this

entrepreneur and others to move labor and capital into his industry,

thus increasing its output and lowering the selling price of its

product. If there is no such action going on, it shows that the

entrepreneurs have no incentive for taking it.



Values at a Static Level only when the Gains of Labor in the

Different Industries are Equalized



If labor is creating more in one

subgroup than in others, as it often is in a dynamic condition, that

fact means that some entrepreneurs are making a profit, and,

according to the principle stated in the preceding paragraph, this

means that values are not at their static or "natural" level. If,

owing to new methods or to some other cause, a given amount of

labor[2] in the subgroup that produced the A''' of our table creates

an amount of that product which sells for more than the B''' or the

C''' which labor of like quantity makes, then the manufacturers of

A''' would obviously get a margin of profit. They would not be obliged

to pay for labor any more than the market rate, and that, as we shall

see, cannot exceed what labor produces in the groups B''' and C'''. In

A''' the labor creates more and the employer pockets the difference.

In saying this we assume one fact which we undertake later to prove;

namely, that there is a definite amount of each product which can be

attributed to labor alone as its producer. Capital and labor work

together, but each is, in effect, the creator of a certain fraction of

their joint product.



[2] In measuring labor we, of course, take account of the

quality of the men who perform it, and the work of a skillful

man is counted as more units of labor than that of an

unskillful one.



Values Static only when the Gains of Capital in Different Industries

are Equalized



If capital is creating more in one industry than in

another, there is a margin of profit for the entrepreneurs in the

exceptionally productive industry. They pay as interest on the capital

they use only the market rate, which is what equal amounts of capital

can produce and get elsewhere. If they produce more in the one group,

the entrepreneurs there can pocket the excess as they did in the

case of the product of labor. We assume that there is everywhere a

definite product that can be attributed to capital alone.



Values Normal when Moneys paid out by Entrepreneurs equal Moneys

Received



In the preceding paragraphs we have spoken of exchange

values as being static under certain conditions, but we might have

expressed the essential fact by saying that prices are static under

these conditions since the money a product brings is a true

expression of its value. If A''' sells for as many dollars as does

B''', the two things exchange for each other. In like manner the

product of labor and that of capital may be expressed in terms of

money, since the quantities of goods which they respectively make sell

for certain sums. Wages and interest are nearly always conceived in

terms of money. The commercial mode of computing costs of production

and returns from production is to translate them into moneys paid by

entrepreneurs and moneys received.



Costs of Production as related to Static Incomes



What to an

entrepreneur are costs are to workmen and capitalists incomes. The

one pays out wages and interest, and the others get them; and these

two sums are normal when together they equal the prices received for

goods produced. The entrepreneur is the universal paymaster, and in

a static condition all incomes come from his hand.





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