A Further Application

A Further Applic'ation The same reasoning could be applied to the produc tion of cotton, wheat, beef cattle, and hogs on New York farms. Tariffs could be raised at New York's borders to permit "free" competition-as Romanet thought of it with other areas in the United States which have a com parative advantage in the production of these things. If the reasoning applies between nations, it surely applies between states, between counties, and even between neighboring farms. If followed to its logical conclusion, this reasoning would demand a completely self-sufficient economy for each family or for each person. Many of the economic fallacies which abound today stem from a failure to see that consumption is the sole purpose of production. The "labor theory of value" is one such fallacy. This theory, which states that the value of a thing depends upon the amount of work required to produce it, was modified somewhat by Karl Marx in his "surplus value" theory. Under the labor theory of value, the plank hewed from a log by Crusoe would be of much greater value than the plank washed up by the waves.

The labor theory of value is now known to be incon sistent with the basic principles of an exchange economy. Voluntary exchange depends upon the acceptance of the "market theory of value." According to this theory, the value of an article depends upon what the consumer will 31 pay for it voluntarily. The highest bidder, of course, may be the producer himself, in which case there will be no exchange; but that is one of the desirable alternatives which freedom of choice affords. The Consumer Is King The market theory of value recognizes the consumer as king-as the guide for all production. By this test, the two equally good planks which Crusoe was consider ing would have been worth the same to him; he would have chosen the one which cost him the least in time and effort. In a free market, the consumer has no direct concern with the cost of production. He merely looks over the alternatives presented in the market and bids what he is willing to give for what he wants. No matter how com plex the market appears to be, it is simply the place where the available supply and the current demand are equated through price.