IT is fashionable to decry Judaism, Christianity, liberalism, capitalism, as idealistic, as impractical in a world where all men have different values. Let us consider the functioning of a market society.

Suppose that the society has advanced to the stage of having a common standard, or measure, of value, i.e. money. Then it is possible to stage an auction, and dispose of any asset, or undertaking, to the highest, or the lowest, bidder. It either will, or will not, be found that values are subjective ¾ i.e. that no auction fails because two bidders are tied and neither will raise. The study of economics is possible if and only if values are subjective, if auctions do succeed ¾ to this extent, economics is only empirical.

Then each individual in the society will have a value, at any moment, for any good (or bad). Typically, the value will vary with quantity; many people will want one cup of coffee, few will want more than three (hence the phenomenon of the "bottomless cup"). The value may or may not increase with quantity: if you urgently need to make a 25-cent telephone call, one dime is worth very little, two dimes are worth no more, three dimes are worth much more than two, but four dimes are worth no more than three.

If one individual will buy so many goods at $x each, then many individuals will buy some larger quantity: there must exist, at any moment, a curve relating the number which would be purchased with the price, i.e. a demand curve.

Correspondingly, there must be a supply curve, showing how many goods will be offered at any price. If the number offered increases with price, and the number wanted decreases, then the two curves will intersect at the "market price." (See Fig. 10.1.)

The curves here show a stable market. Suppose the market opens above the market price; then those who have goods to sell will find that they have failed to meet buyers, and those who wish to buy will find that they cannot afford as many as they want. Sellers and buyers will agree that the price is too high. If the market opens too low, sellers will find themselves with nothing to sell, some of the buyers will find nothing to buy . . . sellers and buyers will agree that the price is too low.

Because values are subjective, there is no reason why the curves must have the opposing slopes that result in a stable market. If people have committed themselves to deliver something in the future, they may be determined to buy regardless of the price; the demand curve may be vertical (technically, inelastic).

The market may even be unstable. Normally, people buy more as the price falls, i.e. demand increases. During the prolonged boom of the 1920s, many investors bought stock on margin, i.e. using the stock itself as collateral; thus, if the stock fell in price, their collateral was worth less, and they (or their creditors) would sell stock. Thus, when the price fell, more, instead of less, stock was offered for sale (Fig. 10.2.) The result was that, when the price had dropped to P₁, supply was in excess of demand until the price fell to P₂: the market crashed downward. If buyers believe that, "If it costs that much today, it will cost more tomorrow," and sellers that, "If it’s worth that to you, it’s worth that to me," (Fig. 10.3), the price is unstable upward; no matter how high the price, there are still not enough goods ¾ i.e. there is inflation, or what is today called hyper-inflation.

The reason that the market is normally stable is that it contains not only producers and consumers, but also speculators. Investors may buy when they see the price going up ("momentum investing") and sell when the price goes down. But when prices are low, the speculators will buy goods that they cannot use, expecting to sell them again when the price rises. And when prices are high, the speculators will sell goods, or at least promises to deliver goods, in the expectation that the price will fall again. Their gambling that the price will rise must cause it to rise, or soften its fall, and their gambling that it will fall must drive it down, or slow its rise.

The normal state of affairs is that each person buys very many different things, but produces relatively few different things; the market price of each good is more important to producers than to consumers. Let us consider how producers respond to the market price.

The simplest case is that of the capitalist producer, one who has invested capital in an expensive plant. He has two kinds of costs: fixed costs such as interest and insurance, variable costs such as materials and labor. His total expenditures start at F, in Fig. 10.4, and increase as output increases. The average cost of one unit of product is the total cost divided by the number produced, i.e. the slope of the line from the point P to the origin. Thus there is one volume of production, N, which gives the lowest cost; beyond this level, less efficient machines must be started up, or overtime be paid.

The gradient [slope] of the total cost curve, at any volume of output, is the cost of the last item of production, the marginal cost. Simply because the producer starts by using the most efficient men and machines, the marginal cost increases with output. The producer goes on selling more and more until his marginal cost equals the market price ¾ so that the profit on the last unit is zero.

The producer knows that the effect of offering more and more goods is to drive the price down; however, he would sooner take the vanishing profit on the last item sold than let someone else take it. This eagerness of capitalists with expensive plant to sell at the lowest possible price is memorialized in the aphorism, "What’s good for General Motors is good for the U. S. A."

This wisdom is attributed by hoi polloi to Secretary [of Defense] Charles Wilson: however, he in fact made the far less profound observation that what is good for the U. S. A. is good for General Motors.

Of course, if the market price is less than the lowest cost of production, the capitalist cannot make a profit at all; his plant is too large and costly, he must choose between carrying on and losing money on the labor and materials, or shutting down and losing money on the fixed costs.

Once the manufacturer can sell enough to cover his costs, he has a simple task with regard to price: he raises or lowers his output until his cost matches the price. But there is no such simple strategy for producers who have to

There is yet another case to consider. Suppose costs do not increase with output? Many typical capitalist ventures, such as buses and theaters, incur costs which are independent of the number of sales. If all the costs are fixed, then the cost per unit of output never reaches a minimum, but always falls with volume; the profits can be increased, by cutting prices, until the very last seat is sold.

Each producer has a break-even price at which it can just cover the cost of a batch; suppose this price is P₁ for a small producer and P₂ for a large producer. (Fig. 10.5.) Then if supply equals demand at P₁, the small producer is only breaking even but the large one is making a profit of (P₁ - P₂) on each item sold. Obviously, competition is unstable; the large producer can add capacity, or survive a down-turn, but the small one cannot.

In the ordinary way, one operator will have different costs from another; a price which will fill every seat for a small operator will leave a large operator with seats unfilled. The only circumstance in which the small operator will not mind turning customers away, and seeing them go to the large operator, will be if the two operators are sharing their profits ¾ viz. if they are "pooling", in the airline language. In this situation, where costs do not rise with volume ¾ so that prices could be reduced as sales increase ¾ only a monopoly is stable. This is what is called a natural monopoly, created by the nature of the product (that each unit contains little or no labor or material).

Thus we see that, where marginal cost does not vary with sales, a natural monopoly prevails. But a profit-seeking monopoly, even as any other profit-maker, sells as many units as it can. The monopoly sells, if anything, more aggressively than the classical text-book manufacturer: its profits are increased ¾ or its losses are diminished ¾ by the whole of the marginal-item price, as opposed to its profits reaching a maximum. An interesting special case is a highway: not only over-charging but also under-charging (i. e. over-loading) is expensive ¾ when once the minimum speed is reached, any additional load results in the traffic flow falling off precipitately.

An obvious illustration of this phenomenon is an airline, where very large capital investments are involved but the cost of carrying one additional passenger is negligible; when U. S. airlines were regulated, the Civil Aeronautics Board fixed the maximum and minimum fares on each route, and all the carriers on that route were seen to charge the minimum. When regulation† was removed, each airline cut its fares to fill more seats, and the loss of profits resulted in fewer flights and, in some cases, bankruptcy.

A quite different phenomenon is that called "monopoly prices." It is easy to imagine that some product (salt, perhaps) is indispensable, so that if the supply is reduced the price rises disproportionately. In such circumstances, a monopoly supplier, instead of selling as many units as he can produce at or below than the market price, may choose to hold goods off the market ¾ and make even more profit by selling less goods.

This is the theory behind, for instance, the Organization of Petroleum Exporting Countries. The success of the theory is, however, only apparent. The revenues of the O. P. E. C. members have indeed increased ¾ but this was because their competitors in, for instance, the U. S. did not have the opportunity to take the market away from them, due to high taxation (as is well known, the revenues from depleting oil and gas reserves, which are irreplaceable, are taxed like those from selling crops or labor, which are not irreplaceable) and price controls (no-one is likely to sell a good for less than it would cost him to replace it, or even for less than he expects to be able to obtain in the near future).

The oil users who could have found alternative sources of energy, such as electric power stations, were not free to substitute coal or nuclear power, if such were their best judgment, due to "regulation" of fossil-fired and atomic power stations. Thus O. P. E. C. is not an example of the phenomenon of monopoly prices (indeed, the actual price of oil, excluding taxes, is no greater than in decades past, when compared to something which can be stockpiled cheaply, such as gold ¾ see Fig. 10.6.) Economists are doubtful whether an example of monopoly prices has ever been demonstrated in a free market (i.e. with no tariff barriers, zoning statutes, licensing, etc.)

Thus it is reasonable to say that, whenever a good changes hands (on the free market), it does so at a price agreed between seller and buyer ¾ between all (equally) concerned. The buyer may feel the price is too high, but he knows that a producer who overprices his product forgoes profit that could have been his, and will regret it. The seller may feel that the price is too low, but he can always wait for a better price tomorrow (except in the case of the natural monopoly). No-one can know that the price was wrong , because the "right" price is given by the curves of supply and demand, which are composed of the values of the persons in the market and therefore ever-changing.

This means that the prices paid and received in the market are facts as much as any other facts, they are agreed by all (equally qualified) observers. And using these facts, and innumerable others like them, the persons in the market place can compare their receipts with their expenditures, and find that the one exceeds the other (or fails to do so.) The market has taken the differing opinions, or values, of innumerable parties and arrived at facts upon which all can agree . . . at prices and at profits (or losses). The merely