See the Proviso.
In the previous post, we talked about various abstract products: 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 know we have to pay the widget makers only $1.40 per widget to keep them from making lower-value geegaws, but how much should we charge for a widget?
If we make the inherent value the price, then we start off selling widgets for $2.00 each, gizmos for $1.60 each, etc.
But of course the gizmo makers are going to think, "Hey! We can make widgets instead of gizmos, and charge only $1.90 for them!" Of course, the original widget makers realize this, and they can drop the price as well. Eventually, competition will push the price of widgets to the inherent value of the next most valuable thing. So widgets will sell for $1.60, the same as gizmos.
Of course, the doodad makers have the same thoughts, which pushes the price of gizmos and widgets down to $1.50. Since everyone is busy making widgets, gizmos and doodads, there's no reason to pull the cost down to the level of the geegaw. But when we expand our labor pool and have the ability to make even lower-value products, eventually the actual cost will reduce to just above the true cost, and the actual profit will reduce to just above the actual cost.
Competition will reduce the price of all products to the inherent value of the lowest-value product actually made.
Which means the actual profit, the price minus the cost, will be the difference between the inherent value of the lowest-value product being made and the inherent value of the highest-value product not being made. Eventually, if I can buy a widget for $1.02, $0.01 of the excess value goes to the widget producers, $0.01 goes to the actual workers, and $0.98 of goes to the consumers.
In a truly free market economy (i.e. an economy where coercion is arbitrarily ignored) almost all of the excess value goes to the consumers, not the producers.
Free market economics tends towards Communism.