Part II: Price and competition
See the Proviso.
(I'm being quite cavalier about precisely what I mean by a "dollar", and precisely what sort of quantity dollars are measuring. This omission is by design. At present, these quantities can be taken just as expressions of strict less-than comparability between the various commodities:
- the "worth" of a gizmo is less than that of a widget
- the effort involved to make a gizmo (the cost) is the same as that to make a widget
- the effort to make each of the products is less than its "worth"
In the previous posts, I talked about various abstract products (commodities): Everything costs $1.00 to make, but the abstract products have different inherent values:
- widgets: $2.00
- gizmos: $1.60
- doodads: $1.50
- geegaws: $1.40
We've seen that opportunity-adjusted cost to make any product tends towards its true cost, and the competition-adjusted price also tends towards its true cost. Thus the excess value of a product, under the simplifying assumptions so far, accrues to its consumer, not its producer.
There is, however, an exception (albeit temporary) to the above tendency: If there is a labor bottleneck, then competition is impossible, and the price will tend towards the inherent value, not it's true cost. (Note that we need to consider only labor bottlenecks; a bottleneck in the supply chain (i.e. a limited physical amount of iron) just moves the problem to a different area of endeavor.
If, for example, there is only one person who knows how to make a gizmo, then the doodad and (potential) geegaw producers cannot offer to compete with him, and drive down the price. Therefore, the one gizmo-guy can now charge $1.60 for a gizmo (and pay the other 9 people the usual $1.41 / 10 to keep them from making gizmos).
In this case, a gizmo ($1.60) would be more expensive than a higher-value widget ($1.40), and the gizmo-guy will benefit more than the widget producer.
This is the law of supply and demand: where the demand for labor is high relative to supply, the price tends toward the value, not the cost.
This creates an obvious incentive for other people to learn how to create gizmos. Assuming that one does not have to be a super-genius to create a gizmo (and we can look at the modern computer to see an enormously complicated device reduced to near its cost to understand that only the most esoteric products cannot generate competition) then sooner or later enough people will learn how to produce gizmos that the bottleneck will be relieved, and the price of gizmos will drop to its cost.
What pays in a truly free market (but only for a finite time) is not the production of the most value, but rather control of a bottleneck.
A bottleneck can delay the tendency of the price to go to the cost, but it cannot prevent this tendency.
This is about all we can say about theoretic economics at the lower level. If people were not intelligent, economics would reduce to a kind of thermodynamics, with an analog of the second law: "The price of a product will tend to reach equilibrium with its true cost over time." (And rather quickly in a large enough economy.)
But human beings are intelligent; unlike atoms, we can "change the game" and make economics move away from equilibrium.