Part II: Value and cost
Part III: The plow
In our village, some genius invents the plow. The plow has the following characteristics:
- It takes 90 hours to make a plow
- If a family uses a plow, they can produce 1.1 pounds of food in 1 hour
- A plow will last for 9,000 hours of use (900-1,000 days or about 3 years)
Assuming that it's less efficient for each family to make its own plow (for reasons I'll describe later), both the Nash equilibrium and the Pareto optimum is for one family, Alice's family, to make plows and sell them to families for 99 pounds of food each. It's irrational for Alice to sell plows for less than 99 pounds; she could just make her own plow and then produce 99* pounds in the same time as it takes to make a second plow. If she tries to sell plows for more than 99 pounds, then Bob or Carol will realize its more rewarding to make plows than to grow food, and they'll undercut her price.
*The cost of making the first plow, amortized over its lifetime, is negligible.
In a free market — i.e. a market lacking both physical "gun-to-the-head" coercion as well as economic "work-for-me-or-starve" coercion — the price falls to the opportunity-adjusted cost, and the excess value is spread out pretty much equally across the community. In this case, the opportunity-adjusted cost (the value of that which Alice herself does not make) is a little different than I described earlier (the value of the thing that nobody makes) because in our village labor itself is not (yet) a commodity.
In the next post, I'll describe how bottlenecks affect the price of plows.