This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 5. Usance-value determining utilization. Both the quantity and the quality of products thus unite to determine the usance-value of an agent. A smaller crop of apples of better flavor on one tree may equal or exceed in value the larger crop of another tree. In this case usance-values of similar things are compared. But through the value of the products they afford, very dissimilar classes of goods may be compared: the apple orchard and the peach orchard, the corn field and the field of potatoes. The constant comparison of usance-values leads to the applying of each agent to the particular use in which it proves itself to have products of the highest value, and to the shifting of the use when a sufficient change of value takes place in the product. For example, a field used for corn becomes, as population grows, worth more for market gardening than for residence sites, and later becomes worth still more as a business location at the center of trade. The land has various possible alternative uses at any moment, but that one is to be chosen which secures the highest net yield.
§ 6. Time as a factor in usance-value. Each instant that an agent is in use may, if we choose, be counted a separate use, and usance consists of the sum, or succession, of net uses yielded in some limited period of time, as a day, a week, or a single season. It takes time for the separate uses to be realized. The series of uses bound up in an agent can not be secured at any single moment. If a fruit-tree were permanent, and the owner could wait through eternity for its yield, he would get an infinite yield of fruit. But in any finite period, there can be only a limited yield. When uses of different periods are compared, as this year's use and the next year's use, or the use during some year in the more distant future, another problem is involved, that of time-value. Moreover, time is an element in the comparison of the present values of products that are of various degrees of ripeness or readiness. A wagon can be used in June for hauling a family to the circus or for hauling a load of wood to the home to cook a meal the next December; or a horse may be used for an afternoon's drive, or for dragging timbers to build a cottage to be used for a life-time. Here the usance is in the present, whereas one of the alternative uses is present and direct, and the other is indirect, resulting in future income. Inevitably the element of time enters in most cases into the estimate of usance-value. We must, however, postpone for a few chapters the fuller analysis of this factor.
§ 7. Usance-value and the margin of utilization. Usance-value, let us here recall, is a summation of the values of the separable uses contained in a good treated as durable (that is, kept in perfect repair). Its amount depends therefore on the values of the various, and perhaps numerous, separable uses, or products, some of them direct and others indirect. In this summation are the values both of actual and of expected uses. Merely potential uses that, in the existing conditions, are free do not increase the usance-value. Direct goods that were free may, however, become valuable. The poorer qualities of fruit that have been allowed to decay on the ground may now be carefully gathered, while the better qualities are used for special purposes. The total usance-value of the dura-tive agent (the orchard), the value-summation of all the separable uses, would then be greater than it was before.
In the same way when the agents and their uses are indirect there is a point in the gradation from the better to the poorer agents where the materials and forces are left unused. Beyond or below that point the uses of machines, tools, and fields have no value, except for some prospective use. Outworn goods in manifold forms, old pictures, old clothing, having no longer charms even for a rummage sale, a great multitude of things unused and worthless, differing by only a shade from things that still are used and valued, form a valueless margin of wealth. Every rubbish-heap, rag-bag, junk-shop, and garret contains things once prized, now lingering on the margin of use or already become definitely useless.
Recall that there is an intensive margin of utilization, beyond which are certain potential uses in the things that we already have, which, however, in the existing conditions, lie outside the margin of utilization and of value. They may become valuable through any one of many changes in the economic situation. Their use now would involve an expenditure of other agents (labor, materials, etc.) that have a greater value than the product would have. Economic choice should go just far enough and not too far, either extensively or intensively, in the use of goods, if the maximum of usance-value is to be attained.
§ 8. Usance-value of complementary agents. In the foregoing discussion we have, for the sake of simplicity, spoken as if a single product were attributable to a single agent. In reality a situation as simple as this is rare, tho it may occur. Almost all products are the result of the uses of two or more complementary agents.1 "When two or more agents are each indispensable to the existence of a valuable product, the lack of one agent makes the other agents valueless for that one purpose. The product cannot in any case be physically divided into fractions and the parts ascribed to the various agents respectively. But the valuation imputable to each under the existing conditions results from the demand and supply for each in all its uses together. This process of comparison is found even in the individual economy. Robinson Crusoe had to choose how he would apportion his labor (one good) and his limited stock of iron (another good) to make tools (the products). He would not apply all his agents to any one product (as hatchets), but he would, by the principle of substitution, apportion the agents among a number of products, hammers, knives, etc. There are thus, in this simple case, several series of evaluations. First, the successive units of the products from this process, as for example the hatchets, have a decreasing importance. Secondly, the successive units of labor applied to this one product would be limited by their value for other uses. Thirdly, the successive units of iron would have less value applied to this use and relatively greater value applied to different products. Each use is chosen in relation to all the alternative uses presented to choice at the moment, and a scale of values results that represents the equilibrium of choice. The choices may be made in a very imperfect way, but somehow they must be made by every individual working by himself, at whatever simple task. A large part of these choices are made easy through habit, custom, and imitation, by which the general scale of living and the industrial process are largely ruled.
When men come together to trade in markets, the problem of evaluating complementary agents becomes in some respects more complex, because of the variety of labor and of uses; but in some respects it is easier, because of the existence of current prices for all things, serving to give more exact expression to the value of alternative uses. Flour and water are needed to make bread.2 Assume that a loaf of bread has a value of 10. If the water is a free good, the flour has imputed to it the whole value of 10; but if the water needed is valued at 1 for some other purpose, as for sale at a price, then some readjustment of other values must take place. Either the value of the flour falls to 9, or that of the bread increases to 11, or an adjustment midway between these values is made. In this way occurs the adjustment of the value of complementary agents, each being valued in relation to all the other uses to which it could be applied. The total price of the products evidently must closely conform to the total price (actual, or estimated) of all the agents entering into the products. This measurement of money-costs and their adjustment to prices we shall have to study more fully later under "cost of production."
1 See above on complementary goods, ch. 4, sec. 5.
2 Ignoring here for the moment, labor, yeast, salt, fuel, etc.