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*** START OF THE PROJECT GUTENBERG EBOOK 76470 ***





                            AN INTRODUCTION
                                TO THE
                            THEORY OF VALUE

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                             AN INTRODUCTION
                                 TO THE
                             THEORY OF VALUE

                             ON THE LINES OF
                     MENGER, WIESER, AND BÖHM-BAWERK

                                  BY
                  WILLIAM SMART, M.A., D.PHIL., LL.D.
              ADAM SMITH PROFESSOR OF POLITICAL ECONOMY,
                         UNIVERSITY OF GLASGOW

                       MACMILLAN AND CO., LIMITED
                       ST. MARTIN’S STREET, LONDON
                                  1920

                            _COPYRIGHT._

                           First Edition 1891.
                          Second Edition 1910.
                           Third Edition 1914.
                          Fourth Edition 1920.

                GLASGOW: PRINTED AT THE UNIVERSITY PRESS
                    BY ROBERT MACLEHOSE AND CO. LTD.

                                   To
                                W. S. H.




PREFACE TO THE SECOND EDITION,

1910


This little book was written in 1891, when I was fresh from my
translations of Böhm-Bawerk and somewhat overborne, perhaps, by the
ideas of his school. It has been out of print for many years, and,
although often pressed to republish it, I refrained, for the reason
that a busy life had prevented me returning to the later developments
of that school. But I still feel, as I did when I wrote it, that my
English-speaking colleagues have never given sufficient attention to
that side of the one Theory of Value (for there is only one, however
much individuals may emphasise the demand side or the supply side)
which Jevons first laid stress on. Having now mortgaged my life to
what seems to me the greater claim of writing the Economic Annals of
the Nineteenth Century, the most I can do is to reprint the edition of
1891, with a few verbal alterations, submitting it as no more than it
originally professed to be—an Introduction to the theory which lies
at the centre of Political Economy, and must occupy the mind of the
young economist for many years of his apprenticeship. The few who may
be interested to know what place I give, after many years of teaching,
to doctrines which had so great a part in forming my economic views,
will find it suggested, perhaps, in Appendix II., entitled “Theory of
Value: the Demand Side.” It is a summary of lectures, which I put into
the hands of my students to be studied along with Book III. of the
classic which has moulded modern economic thought, Professor Marshall’s
_Principles_.

                                                     WILLIAM SMART.
    UNIVERSITY OF GLASGOW,
         _November, 1910_.




PREFACE TO THE FIRST EDITION


This book has few pretensions to originality. The theory is that
enunciated by Menger and Jevons, and worked out by Wieser and
Böhm-Bawerk. I have done little more than take it out of its German
setting, and pass it through my own mind. As the translator of
Böhm-Bawerk’s _Capital and Interest_ and _The Positive Theory of
Capital_, I may claim to have more than a superficial acquaintance with
the work of the Austrian school, and this must form my credentials for
the present _Introduction_. At the same time I must emphasise that it
claims to be no more than an introduction. I do not consider that the
last word on Value has been said by the Austrian school, but that seems
to me no reason why the principles of the new theory should remain any
longer beyond the reach of the ordinary English student. And in case it
be said that I have stopped short of the most interesting part of the
_Natürlicher Werth_, the application of the Value theory to the theory
of Distribution, I may explain that, in justice to Professor Wieser,
I have preferred to put the translation of that most brilliant and
suggestive book into the capable hands of one of my students.

                                                      WILLIAM SMART.
    QUEEN MARGARET COLLEGE,
        GLASGOW.




CONTENTS


    CHAP.          PAGE
       I. INTRODUCTORY                                  1
      II. THE ANALYSIS OF VALUE                         9
     III. THE DIFFERENCE BETWEEN UTILITY AND VALUE     13
      IV. THE SCALE OF VALUE                           18
       V. THE MARGINAL UTILITY                         29
      VI. DIFFICULTIES AND EXPLANATIONS                35
     VII. COMPLEMENTARY GOODS                          42
    VIII. SUBJECTIVE EXCHANGE VALUE                    47
      IX. FROM SUBJECTIVE TO OBJECTIVE VALUE           52
       X. PRICE                                        55
      XI. SUBJECTIVE VALUATIONS THE BASIS OF PRICE     61
     XII. COST OF PRODUCTION                           67
    XIII. FROM MARGINAL PRODUCTS TO COST OF PRODUCTION 74
     XIV. FROM COST OF PRODUCTION TO PRODUCT           78
      XV. CONCLUSION                                   84
          APPENDIX I                                   87
          APPENDIX II                                  91
          INDEX                                       103




WRITERS AND BOOKS REFERRED TO

     CARL MENGER
    (Professor in the University of Vienna),
     _Grundsätze der Volkswirthschaftslehre_, Vienna, 1871.

     FRIEDRICH VON WIESER
    (Professor in the University of Prague),
     _Ueber den Ursprung und die Hauptgesetze des wirthschaftlichen
        Werthes_, Vienna, 1884.

     _Der natürliche Werth_, Vienna, 1889,
     translated as _Natural Value_, Macmillan & Co., 1893.

     EUGEN V. BÖHM-BAWERK
    (Honorary Professor in the University of Vienna),
     _Grundzüge der Theorie des wirthschaftlichen Güterwerths_,
     published in Conrad’s _Jahrbücher_, 1886.

     _Geschichte und Kritik der Kapitalzius-theoriem_,
     Innsbruck, 1884, translated as _Capital and Interest_,
     Macmillan & Co., 1890.

     _Positive Theorie des Kapitales_, Innsbruck, 1889,
     translated as _The Positive Theory of Capital_,
     Macmillan & Co., 1891.

     W. STANLEY JEVONS
     (Professor in University College, London),
      _The Theory of Political Economy_, 2d edition,
     Macmillan & Co., 1879.




CHAPTER I

INTRODUCTORY


There is an understanding among economists, dating at least as far
back as Adam Smith, that, in economic science and discussion, the
ordinary terms of the industrial world are to be used in the sense
generally attached to them in that industrial world. In many respects
this has been unfortunate: the science is bound for ever to a loose
nomenclature. It is particularly unfortunate for English political
economy, which has not the possibility, so enviable in German science,
of combining a new predicate with an old stem in such a way that the
combined word is exact and yet not unfamiliar. Hence very many terms in
economics have a long and chequered history attached to them, according
as economists, in writing their systems, have tried either to follow
the usage of the market and the street, or to free themselves from the
vexatious restraint.

No term affords a better illustration of this than the word Value. It
is deeply rooted in popular conception and in popular speech. Of all
words used in economic theory, it has most need of exact definition,
because there the theory of value occupies the chief place. Yet the
history of economic science is strewn with the wrecks of theories of
value.

Every one knows Thornton’s story of how Sydney Smith retired from the
Political Economy Club, because his chief motive for joining it had
been to discover what Value was, while all he had discovered was that
the rest of the Club knew as little about the matter as he did! Every
one, too, has smiled at Mill’s statement, made in 1848, that there was
nothing in the laws of value which remained for him or for any future
writer to clear up. And many felt sympathy with Jevons when he threw
the term overboard altogether, declaring that neither writers nor
readers could avoid the confusion so long as they used the word.

But although it might be possible, by a very strict attention to proof
sheets, to keep the word out of a book, it would not be possible to
keep it out of the economist’s mouth, any more than it would be to
banish it from ordinary speech. And—happily, as it seems to me—the
recent writings of the Austrian school have shown that we may retain
the old familiar word, and yet attain the exactitude of scientific
nomenclature.

There is a time-honoured classification to which is due much of the
present confusion. In the _Wealth of Nations_ (Book i. chap, iv.),
occurs the following passage:

“The word Value, it is to be observed, has two different meanings,
and sometimes expresses the utility of some particular object, and
sometimes the power of purchasing other goods which the possession of
that object conveys. The one may be called ‘Value in use,’ the other
‘Value in exchange.’ The things which have the greatest value in use
have frequently little or no value in exchange; and, on the contrary,
those which have the greatest value in exchange have frequently little
or no value in use. Nothing is more useful than water: but it will
purchase scarce anything; scarce anything can be had in exchange for
it. A diamond, on the contrary, has scarce any value in use, but a very
great quantity of goods may frequently be had in exchange for it.”[1]

[1] The division is as old as Aristotle. “Of everything which we
possess there are two uses both belonging to the thing as such, but not
in the same manner; for one is the proper and the other the improper or
secondary use of it. For example, the shoe is used for wear, and it is
used for exchange; both are uses of the shoe.”—_Politics_ (Jowett), § 9.

This passage, like much else in Adam Smith, does not bear all that
has been read into it by subsequent economists. It does not say that
Use Value and Exchange Value are two great branches of one universal
conception of Value. Nor does it say that they are entirely different
conceptions. It merely says that the word has two different meanings.
What concerns us, however, is the use that economists have generally
made of this passage. They have quoted it with approval; shown that the
two kinds of value do not by any means coincide; and have then gone on
to discuss the latter as “economic value,” or “what we mean by value in
political economy.” The best thing we can do, meantime, is to try to
forget this old classification, and begin anew.

It scarcely requires proving that Value, in whichever of its various
senses the word is used, does not express any inherent property of
things. Very often, indeed, we can scarcely help thinking of Value as a
quality of a material object,—particularly when the object is one of
universal desire, such as gold coin. But Walker’s monetary formula,
“Money is that money does,” may remind us that the value even of gold
coin is given it by the service it renders in a highly organised
community, and that, if to any substitute can be given the confidence
that gold commands, the same value will attach to it—“attach” but not
“inhere.” Sometimes, again, value is so strongly a personal experience
that we are tempted to think of it as purely a subjective matter, and
this is particularly the case among people who understand Ruskin’s
famous words, “There is no Wealth but Life.” The different value set
upon any work of art by different individuals, classes, or nations, is
sufficient proof of this.

But although it is almost impossible to use the term without
suggesting an inherent property,[2] Value in all its forms implies
a relation. The word seems to arise fundamentally in the relation of
Means to End, and will accordingly take various forms according to
the “end” conceived of. This end may be, directly, the Wellbeing of
man, whether conceived of as the ideal good of humanity, or the social
ideal current at the time, or the realisation of individual character,
or merely the gratification of individual desire. Or it may be some
mechanical or technical result, which has no direct reference to
personal wellbeing, or at least admits of being considered, for the
moment, as a merely objective or intermediate result. Corresponding to
these two classes of “ends,” we may divide the phenomena of value into
Subjective—or Personal—Value and Objective Value. The expressions are
not by any means perfect,[3] but they are the terms generally used by
the Austrian school, and they are perhaps the best we can get.

[2] “Value is the life-giving power of anything; cost, the quantity of
labour required to produce it; price, the quantity of labour which its
possessor will take in exchange for it. ‘Value’ signifies the strength,
or ‘availing’ of anything towards the sustaining of life, and is
always twofold; that is to say, primarily, intrinsic, and secondarily,
effectual. Intrinsic value is the absolute power of anything to
support life. A sheaf of wheat of given quality and weight has in it a
measurable power of sustaining the substance of the body; a cubic foot
of pure air, a fixed power of sustaining its warmth; and a cluster of
flowers of given beauty, a fixed power of enlivening or animating the
senses and heart. It does not in the least affect the intrinsic value
of the wheat, the air, or the flowers, that men refuse or despise
them. Used or not, their own power is in them, and that particular
power is in nothing else. But in order that this value of theirs may
become effectual, a certain state is necessary in the recipient of it.
The digesting, breathing, and perceiving functions must be perfect
in the human creature before the food, air, or flowers can become of
their full value to it. The production of effectual value, therefore,
always involves two needs: first, the production of a thing essentially
useful; then the production of the capacity to use it.”—_Munera
Pulveris_, i. § 12.

I quote this passage, partly on account of its suggestiveness, partly
to show how impossible it would be to reconcile any such definition of
value either with ordinary language or with economic science.

[3] For instance—to say nothing of the fact that all economic ends
must be subjective—of the four ways indicated above in which Wellbeing
may be conceived, the three first may be considered objective as
compared with the subjective fourth, while the wellbeing of man
generally—particularly the ideal good—may very well be called the
only objective end in contrast to the accident of a technical result.
But, as it is impossible to keep the economic vocabulary clear of the
philosophical, we may be satisfied if these names are definite enough
to keep before our minds the broad lines of the division indicated
above.

Value, in the subjective sense, we may call, generally, the importance
which a good is considered to possess with reference to the wellbeing
of a person. In this sense, a good is valuable to me when I consider
that my wellbeing is associated with or dependent on the possession of
it—that it “avails” towards my wellbeing.

Value, in the objective sense, is a relation of power or capacity
between a good and an objective result. In this sense, a good has value
when it has the power of producing—or “avails” towards—some objective
effect. There are, consequently, as many objective values as there are
objective effects. Thus while the subjective value of coal to me is
the amount of “good” I get from the fire, its objective value is the
temperature which it maintains in the room, or the amount of steam
it can raise in the boiler, or the money it brings me if I sell it.
This kind of value is very much synonymous with the word “power” or
“capacity”; it is as common to speak of “heating power” as of “heating
value.”

There is no doubt that “Value” is generally used, in ordinary language
and thought, in both these senses. But there is also no doubt that
powers or values of the latter sort _in general_ do not enter into
economic study at all. We have nothing to do with the heating value
of coal, or the resisting power of iron, or the fattening properties
of oil-cake; these are purely physical or technical matters. But,
inside this class of Objective Values, there is one species which has
a peculiarly economic interest, and that is, the “power of exchange”
or “purchasing power.” By this is meant the capacity or power of a
good to obtain other goods in exchange. Of course, the word “power”
here is also misleading. No good has this power in itself. It is,
at best, a power conferred on goods by the complex machinery of an
organised economic community, and it does not exist outside of a system
of exchange. It is a power that lies in the connection or relation of
two things, and not in either of the things. Jevons very well called
it a Ratio of Exchange. But it is purely an “objective” relation as
we have defined it; as objective, for instance, as heating power.
When the quarter of wheat in the market exchanges for 25s., we say,
indifferently, that the “exchange value of the wheat is 25s.,” or that
“the purchasing power is 25s.,” or that “the ratio of exchange between
the wheat and the shillings is as 25 to 1.”

It has been the ambition of economists to explain all kinds of value
from a single universal conception, but so far the result has only
been to group heterogeneous elements under a common name. It might be
possible, perhaps, to connect them all under the general conception of
“that which avails,” or under the relation of Means to End; but whether
much is gained by this for economic science is doubtful.[4]

[4] Böhm-Bawerk, like Neumann, while acknowledging that the two
conceptions have many internal and external relations, and that both
spring undoubtedly from one common root, thinks that any more universal
conception, which should embrace them both, would be _ganz leer und
schattenhaft_.

Here, at any rate, we shall follow the line which has led to good
results among the Austrian economists, and consider Subjective and
Objective Value in general as two independent conceptions accidentally
associated in common usage.

But, while this seems true, as regards Subjective and Objective value
_in general_, we shall find that there is a close and necessary
connection between subjective value and that one branch of objective
value just referred to, namely, Objective _Exchange_ Value. In what
follows it will be shown that this latter Value, while, in itself, an
objective, and, as it were, a mechanical power, is a superstructure on
the subjective or personal estimates of value put upon goods by buyers
and sellers within a market. In short, we shall have to vindicate, or
at least defend, Jevons’ assertion, now become a text of the Austrian
School, that “Value depends entirely on Utility.”

From what has been said the reader will be prepared for the claim of
this school, in opposition to Adam Smith and many of his successors,
that, when the word Value is used without qualification, it should
mean Subjective—or Personal—Value, and not Purchasing Power. The first
and the main work of the theory of value, then, is to inquire into the
nature, causes, and standard of Subjective Value.




CHAPTER II

THE ANALYSIS OF VALUE


Political Economy is based on the analysis of economic conduct. As
has been said, we are not at liberty to lay down new categories or
even to give new names to economic phenomena. We have to take our
categories and our vocabulary alike from the industrial and commercial
world, and our most original work in this department is no more than
the interpretation of a life which is, for the most part, unconscious
of its own laws: a category of “the useful” or “the valuable” which
practical people did not recognise as containing useful and valuable
things and no other, would be quite unscientific. True, the economist
has sometimes to show that the practical world is unfaithful to its own
principles, but he can do so only after extended study of the economic
organism has yielded these principles. The theory of value, therefore,
must begin with a careful analysis of what the word means in the mouths
of ordinary people.

A man values food, clothing, shelter, and the like, because they
minister to his physical life, and he values music and books because
they minister to what he calls his “higher life.” As a nation, we
value our service rifle because it can kill at so many hundred yards,
and many forms of art and literature are highly valued because they
minister to corrupt desires and moral decay. A collector values a piece
of ugly china because it is old and rare, just as most women value
their diamonds because everybody cannot wear diamonds.

Taking these instances as fairly typical, and collating the common
ideas out of them, we seem to learn three things about value.

_First_, that, in probably the great majority of cases, the word has
some direct or indirect reference to human life. On the whole, one
would be inclined to say that the root idea of the valuable is that
which _avails towards life_.

_Second_, that men, as not only imperfect in nature but erring in
judgment, have made an easy extension of the term “human life” to cover
“human desire,” and count things valuable because they satisfy some
want or other. The economic “want” is not necessarily a rational or a
healthy want—and political economy, as primarily analytic, must not
be censured for the statement, nor condemned as if it approved of the
fact—but simply a want, and the things which satisfy such wants we call
“goods.” The _desirable_ is interpreted in economics by the _desired_.

_Third_, that the element of scarcity somehow plays a large part in
many, and seems to have a share in all, estimates of value.

Were it not for this element of scarcity one might conclude that the
“valuable” and the “useful” were synonymous terms. Few writers have
been careful to keep the two conceptions sufficiently separate, and
the distinction which we have now to draw, while contained in Ricardo,
was not scientifically formulated till the appearance of Menger’s
_Grundsätze_ in 1871.

The economically Useful is that which is capable of satisfying the want
of man—always meaning by “want” no more than “desire.”[5] Corresponding
with this conception, economically, is that of the “Good.”[6] To
constitute a good, four things, according to Menger, are required: (1)
a human want, (2) certain properties in an object which make it capable
of satisfying a human want, (3) the knowledge of this capability, (4)
power to dispose of this object in the satisfaction of want.

In these two conceptions, the Useful and the Good, there is no
reference to scarcity.

[5] “Anything which an individual is found to desire and to labour for
must be assumed to possess for him utility. In the science of Economics
we treat men, not as they ought to be, but as they are.”—Jevons,
_Theory_, 2d Edition, p. 41.

[6] It is one of the difficulties of our economic vocabulary that,
where we wish to express the singular of “goods,” we have to use
“commodity” or some such word. In my translations, I have made no
scruple of rendering the honest German _Gut_ by its literal equivalent,
and it is in this sense that the word is used above and throughout
this book. It will be noted in what follows that there is a difference
between simple goods and “economic goods.”

We shall find the Valuable separating itself naturally from the Useful
if we look at what are called the free gifts of nature. Air, water,
light, are recognised by every one as useful. But are they valuable?
Most people—economists without knowing it—would answer in the negative,
although certainly there is reason to suspect that they base this
answer on the fact that they “could not get anything for them.” Again,
those scarce things which we seem to value just because they are
scarce (as rare statues, pictures, books, coins, wines made from grapes
of one limited locality, etc., to use Ricardo’s examples), have always
a background of usefulness, as satisfying some social, or class, or
individual desire.

Evidently Usefulness or Utility is the larger conception of the
two, and embraces Value. But if all valuable things are useful,
while all useful things are not valuable, value must emerge at some
particular limiting point of utility. Value, then, will be based on
utility—utility limited in some particular way, but still utility.[7]

[7] It is perhaps a pity on two grounds that the word “utility”
should have been adopted by economic science:—(1) that the word seems
to suggest things really useful, when it means no more than things
desired, bought, and sold; (2) that it has so often suggested to
shallow thinkers that Political Economy is a “sordid science” whose
investigations do not go beyond mere material considerations.




CHAPTER III

THE DIFFERENCE BETWEEN UTILITY AND VALUE


Utility and not Value, says Wieser, is “the supreme principle of
all economy; where value and utility come into conflict, utility
must conquer.” The statement is suggestive. The economic goal of
civilisation is to turn the whole natural environment of man from a
relation of hostility or indifference into a relation of utility.
Certain goods we have from nature without money and without price, and
the incessant effort of the industrial world is _in the direction_
of bringing all goods nearer to that category. Indeed, some of the
necessaries of life have already been brought so nearly to that
condition that states and municipalities occasionally pay the small
remaining price, and distribute them as heaven does the rain. The
effort to improve production generally is nothing else than the effort
to multiply utilities and, as consequence, to reduce their price. For,
while value reflects utility, the mirror is too small to hold all the
picture. To use Wieser’s words again, “Value is the calculation-form
of utility”—an expression which will be appreciated if we realise how
impossible it is to estimate the utility of a harvest, how easy to
calculate its amount and its price.

Value, then, is a much less comprehensive conception, and does not
emerge till a certain limitation is put upon this utility. But the
limitation in question is not an arbitrary one. To drain a river of a
few hundred gallons, or even to drain it all but a few hundred gallons,
will not necessarily give the remainder any value. To change utility
into value there must be, not only a capability of satisfying want, but
a felt dependence of some want on the particular good containing the
utility. The relation of value to utility, in fact, may be described
as the relation of a positive condition to a capability. As capable
of quenching thirst, all water is useful, but it does not obtain any
value till some limitation of the available quantity makes it the
indispensable _condition_ of a satisfaction. The water led into a city
may come from a stream which, as a whole, flows to the sea unvalued,
but, in the city, it conditions the wellbeing of thousands of people,
and obtains a value from the satisfaction of wants that are conditioned
by it.

If, then, the distinction between Value and Utility, which seems
essential to clearness of thinking, is to be maintained, it will be by
attaching the former to an indispensable and felt condition, the latter
to a general capability of ministering to human wellbeing.

Thus we may say that, while utility is the importance which a good
possesses as generally _capable_ of ministering to the wellbeing of
a subject, Value is the importance which a good possesses as the
_indispensable condition_ of the wellbeing of a subject. Or more
fully: Value is the importance which a good acquires as the recognised
condition of something that makes for the wellbeing of a subject,
and would not be obtainable without the good.[8] It cannot be too
firmly grasped then, that the relation between utility and value is
_quantitative_, and that the same thing may or may not have value
according to change of circumstances, or difference in points of view
and comparison.

[8] Menger’s definition is “Die Bedeutung, welche concrete Güter oder
Güterquantitäten für uns dadurch erlangen, das wir in der Befriedigung
unserer Bedürfnisse von der Verfügung über dieselben abhängig zu sein
uns bewusst sind.”—_Grundzüge_, p. 78.

To put this in another way. The first thing the economist sees in
man is, that he stands in a relation of want to the world outside
him. Economically, man is a complex of wants, some physical, some
intellectual, some æsthetic, and so on. And, the higher man rises in
the scale of spiritual being, the more numerous and varied are his
wants. But want is in itself, if not a painful feeling, at least, a
feeling of incompleteness. As an animal, man knows instinctively,
and, as an intellectual being, he learns by experience, that certain
things or arrangements in the outside world are the objects which such
a feeling craves: as they are supplied to the organism in which the
wants inhere, the feelings of want, gradually or immediately, fade
away, and feelings of satisfaction or pleasure supervene. In time the
satisfaction fades, the wants reappear, and the process begins over
again. Thus the wants of man’s life, whether these wants are wise or
unwise, natural or acquired, constitute a demand for satisfaction.
Each individual has his quota of wants, and the sum total of all wants
makes the community’s demand for satisfaction. To meet this demand the
working portion of the community is set producing. The whole end and
aim of the industrial organisation of society is to put the matter and
forces of nature into shapes capable of satisfying this demand, and
these shapes, now recognised as “good,” society significantly calls
“Goods.”

If, in any class of goods, the supply is not sufficient to meet this
demand for satisfaction (whether the demand be that of the individual
or of the community), some want goes unsatisfied; the painful feeling
of emptiness points to some good or other as the condition of a certain
wellbeing; the relation of dependence between person and thing is
established, and value emerges. If, on the other hand, the supply
of any class of goods is so great that every demand is met, and yet
there is such a surplus that no ordinary waste will cause scarcity,
then no want goes unsatisfied, and value does not emerge. Suppose
that a housewife is in the habit of using ten gallons of water a day
for various domestic purposes. If the well, from which she draws her
supply, holds just ten gallons and no more, then every gallon is the
condition of a definite use or satisfaction, and every gallon has a
value—the test being that, if one gallon is lost, some domestic purpose
is not served. But if the well yields twenty gallons, the loss of even
ten gallons involves no loss of wellbeing to the housewife; no want
goes unsatisfied; no value emerges. And, again, if the wants increase
to eleven, or the supply sinks to nine gallons, certain wants go
unsatisfied, and value emerges.

One begins to see that the centre of value is within us. It is only by
association that we transfer to goods the “value” which we get through
the consumption of them. We attach importance to goods only as we find
that our life is incomplete or impossible without them. Thus water,
air, etc., being, in their totality, conditions of our life, we attach
value to them _as a whole_, and, indeed, speak of them as “infinitely
valuable.” But we do not attach value to any individual portion of
them, because, where there is enough to allow of waste, our lives are
not _dependent_ on any individual portion.

Thus it is that the theory of value lies at the basis of all economic
theory. The only goods we “economise”—the goods which alone are objects
of economic attention—are the goods which are insufficient, or just
sufficient, to meet our wants. Contrasted with these are the “free
gifts of nature,” meaning by the expression such things, adapted to
man’s use, as are given us by nature in superfluous abundance. As goods
which we economise, therefore, are the only goods which we recognise as
_conditioning_ our satisfaction, we may say that, while all goods, by
definition, have utility, only economic goods have value.[9]

[9] In view of the loose way in which we use “economic” and
“economise,” Menger’s definitions are worth remembering. When men
recognise that their wellbeing is bound up with the command over
certain goods within certain periods of time, and that such goods
are likely to be insufficient for their demand, their impulse is (1)
to get such goods into their possession or disposal; (2) to preserve
the useful properties of the same; (3) to decide which are their more
important and which their less important wants, and to satisfy the
former only; and (4) to so dispose of the goods as to get the greatest
possible result or satisfaction on the whole, and to obtain every
individual result with the smallest possible expenditure. “The activity
men direct to those ends, in its totality, we call their ‘economy,’ and
the goods which stand in these quantitative relations, as the exclusive
objects of that economy, we call ‘economic goods.’”—_Grundsätze_, chap.
ii. § 3.




CHAPTER IV

THE SCALE OF VALUE


If the cause of any good having value is that the satisfaction of some
want is dependent upon it, the degree or amount of value must, one
would imagine, be measured by the importance of the dependent want;
that is to say, by the amount of wellbeing its satisfaction conditions.
But here most people will hesitate. They would, probably, be willing to
admit that utility is, in a general way, the cause of value, or, like
Ricardo, that utility is “absolutely essential to exchangeable value.”
But they are shaken in this belief when they remember that things which
seem to be of great utility, like salt, are little valued, while things
of little utility, like diamonds, are very highly valued, and are told
that it is this contradiction which led to the distinction between
“value in use” and “value in exchange”—practically to the abandonment
of the former.

We have here a heritage from our earlier economic science. Old
classifications are more easily dismissed than got rid of; and it
may not be wasted time to point out in this chapter how Adam Smith
hopelessly confused utility and value by the introduction of the
hermaphrodite “use-value.”

We have already defined the economically Useful as that which is
capable of satisfying the want of man. If utility, then, is relative to
human want, it would seem that, before pronouncing on what has great
and what has little utility, we must classify the various wants, and
arrange them on some sort of scale. The familiar expression, however,
“One man’s meat is another man’s poison,” might be taken as a text
to show the difficulty of classifying wants. There are certain wants
which require periodical or continuous satisfaction, such as the needs
of food and warmth. These wants seem to tie us to the earth, and they
keep us perpetually in mind of our physical limitations. However
high we soar into the regions of spirit, hunger and cold bring us to
earth again; and, if these wants are not satisfied, the animal nature
asserts itself, and we are ready to sell our birthright for a mess of
pottage. Such wants, then, are fundamental and universal—instinctively
we call them “needs.” But there are two very notable circumstances
connected with them. One is that they are limited. More meat than the
body requires clogs the wheels of life; more than a certain amount of
clothes is a burden. The other is that these fundamental and limited
wants are precisely the ones for which nature makes the most abundant
provision. There must be many millions of people who have never known
what hunger is except by hearsay, nor imagined the torturing cold of a
night on the street.

But, on this simple and, to a certain extent, measurable basis of
necessary, universal, and limited wants, we rear a superstructure of
other kinds of want. Of the distinctively human wants, there are many
that become “necessary” from the individual or social development of
intellectual and spiritual beings. Beyond these, again, there are
innumerable desires, caprices, and follies. These, however, are not
in the least limited in their demands: here “the appetite grows by
what it feeds on.” As civilisation and as wealth progress, not only
does the old circle of want expand, but new wants awaken. This makes
classification of such wants all but impossible. Between the wants of
the savage or the child and those of the educated man or delicately
nurtured woman, there is a long gradation of almost infinite fineness.
How are we to put in one category the hunger and thirst which are
satisfied, among members of one class, by bacon and beer, and, among
members of another class, by stately dinners and rare vintages; or
the “love of dress,” which in one sphere demands “a black silk and a
gold brooch,” in another, diamonds and old lace? Yet the fact that
goods may be purchased at prices from a farthing upwards, proves that
the community _has_ classified its wants in some sort of way. We find
exchange existing in all communities, even the simplest, and exchange
presupposes that we have already arranged our wants on a scale, and
said that the satisfaction of such and such wants confers a high value
on the goods which satisfy them, and the satisfaction of such and such
a low value. What is the principle of this scale?

Adam Smith, and all who have followed him in paraphrasing his text “a
diamond has scarce any value in use,” certainly referred to a scale
of wants, and considered this scale so important, and so universally
recognised, that they had to separate off the value measured by it
(use value) from the value measured by money or barter (exchange
value). But they did so instinctively, and, if we inquire what this
scale is, we have some difficulty in translating the instinctive
expression.

There is a rough, but sometimes convenient, division of goods
into Necessaries, Comforts, and Luxuries. Corresponding with this
classification of goods, we might consider the physical needs satisfied
by “necessaries” as the most important; and in the first rank of
utilities, therefore, we should put goods necessary to sustain life,
such as food, clothes, shelter. Next would come health and fulness of
life, and in the second rank of utilities we should put good food,
good clothes, good shelter. Last we should put the refinements or
the artificial appetites of life, and, corresponding with these, we
should have music and pictures, liquor, tobacco, and so on. It is easy
to see that the sanction or principle of this scale is a negative
one. It is not based on the satisfaction we get from goods, but on
the consequences which will ensue to our lives if these wants go
unsatisfied. Food is in the first rank of goods, because here death
follows unsatisfied need. Tobacco is in a subordinate place, because
the want of it causes, at worst, discomfort. And diamonds come in the
lowest rank of useful goods because the loss of them involves a quite
trifling loss of wellbeing. Here is a scale of wants with a definite
enough principle.

But it is a scale adapted to circumstances so simple as to have no
resemblance to any known form of society. Possibly the economists’
favourite classic, Robinson Crusoe, has had something to do with the
making of it. Certainly there never was a people who divided out
their labour to satisfy successively the wants of such a scale, not
producing anything for fulness of life till all had the necessaries,
nor anything for pleasure till all had the necessaries of efficiency.
Such a division of labour would evidence a higher level of reason and
self-restraint than our communities have reached, since it would be
founded on a deliberate theory of social life. The very suggestion that
the loss of diamonds is “trifling” would justify the reproach one has
sometimes to bear, that “it is well seen political economy was written
by men!” The fact remains that this is nobody’s scale: the poorest
savage, the worst paid mill-girl, the most refined woman, will put
ornament only second to bare necessaries.

Yet it seems that it must have been a scale something like this by
which the older economists measured utility. In the interpretation
they gave to “use value,” they assumed that utility is relative to
mere physical life. Those who speak of diamonds having no use-value,
and of food as having infinite use-value, must be drawing their ideas,
not from the life of men but from the life of cattle. It is possible
to draw out a scientific catalogue of what things and amounts and
conditions will put a sheep or bullock into the best condition for
the market, just as it is possible to consider the human labourer as
a force of so many foot-pounds. But the economic end of the sheep
is—mutton, while the economic end of labour is—the labourer. That is to
say, the “life” by which economists, as distinguished from butchers,
must measure utility, is the life of a spiritual being for whom and
towards whom all economic effort exists. To such a being, it is
inconceivable that bread should have the highest use-value and diamonds
none at all.

Compared with this purely theoretical scale, let us inquire of facts as
to the scale which men in ordinary life adopt as regards goods.

Consciously or unconsciously, every man whose means or wealth or
resources are more limited than his wants—and this is, practically, the
case with human beings generally—has a scale of wants in his mind when
he arranges his expenditure. On the basis of this scale, he satisfies
what are his more urgent wants, and leaves the less urgent unsatisfied.
But which are the more urgent wants on his scale? Are they determined
by anything like the classification just mentioned? If so, how is it
that a tramp with sixpence in his pocket will spend threepence on a bed
in a lodging house, a penny on bread, and twopence on tobacco?

This by itself is sufficient to show that Adam Smith’s graduation of
wants is quite misleading in the present connection. When we ask about
the “degree” or “urgency” of any individual want, we get no information
by determining to what class or kind it belongs—whether, for instance,
it is the need for a necessary or the desire for a luxury. The craving
for food, as has been suggested, belongs so conspicuously to the
first class of wants, that we do not so often speak of “wants” of
subsistence, as of “needs” of subsistence. The desire for liquor,
again, some people would scarcely dignify by the name of “want” at
all. Yet many people will attach as much importance to the one as to
the other. If we are to judge by his expenditure, the working man may
graduate his wants thus: bread, house room, liquor, tea, tobacco,
clothes, meat; while a rich man may spend more on his horses than
he does on his house, and his grocer’s bill may be less than his
florist’s. The fact seems to be that, with the scale of wants which
each man makes for himself, the graduation by classes or kinds has very
little to do. From the consideration already pointed out, that certain
wants are fundamental, necessary, and universal, the class must,
indeed, have something to do with it, but the other two considerations,
the limited nature of these wants and the abundance of provision for
them in most communities, throw the consideration of necessity quite
into the background.

There is one case, however, where Adam Smith’s scale comes nearly
true;—where the income is just sufficient, and no more, to cover the
barest wants of man as a living being. If a seamstress has to sustain
life on a shilling a day, she will take care to dispose of the shilling
in such a way that she spends on food just enough to keep life in, on
clothes, enough to keep her warm, while the meanest roof that will keep
out the rain will satisfy her “want of shelter.” And, in proportion as
we approximate to this direst poverty, will the class have more to do
with the scale. Even the seamstress, however, will probably “jump” the
class of comforts, and spend her last penny on the highest concrete
want among the luxuries of the poor, tea.

This was the first mistake made by the older economists in the matter:
it based “use-value” on a false or, at least, an unduly limited,
conception of utility. The second—and more subtle—was in keeping no
clear distinction between this utility and the so-called “use-value.”
For want of this distinction, it was overlooked that, in the relation
between wants and goods in which value emerges, the _supply_ of goods
plays a part. Value emerges when a good becomes the condition of a
satisfaction; it is conferred by the dependence of a _felt_ want,
not of a _possible_ one. Hunger, for instance,—understanding by that
the overmastering craving which puts all other feelings into the
background—is not a felt want if food lies around like the manna on
the Israelites’ plain. The nearer we get to making any object of want
similar to a gift of nature, the less value has that object—not that
its capability of use is any less, but that the abundance of supply has
abolished the relation of _dependence_. A want never felt, would, of
course, not be a want at all. But a trifling want unsupplied attains an
importance for wellbeing which elevates it into a cause of value. Now,
in the case of goods adapted to satisfy the necessary and universal
wants of mankind, as no man can escape from these wants, there is
always a large and steady market for these goods, and we call them
“necessaries.” Wherever we have such a market in economic life, we may
be sure that the brains of men and the resources of nature have been
taxed to the utmost to make the supply abundant and cheap. Hence the
tendency of economic progress is to assure the satisfaction of these
fundamental and limited wants; in proportion as this is done, do men
escape from that dependence which gives value: and thus many goods
tend to come nearer to the free gifts of nature—their value falls and
falls. The old theory, then, in taking hunger as the type of the most
urgent want, was not dealing with wants, but with _possibilities_
of want. Want is, at bottom, a feeling of incompleteness. It may
indicate something wanting to our physical organism which, if entirely
unsupplied, will cause death. But if a few mouthfuls be sufficient to
make this want disappear for the moment, and if there be no probability
of these mouthfuls ever being absent, we have been too hasty in giving
it the highest rank among human wants. To consider food as having
the highest use value because the want of food means death, is like
estimating the greatness of a danger by the loss of life which it
might cause, without considering the precautions taken to prevent it:
it reminds one of the schoolboy’s proposition, “Pins have saved many
thousands of lives—By people not swallowing them.”

To sum up. In assuming that bread and water had a higher “use-value”
than iron, iron than gold, gold than diamonds, the earlier economists
evidently referred to a theoretical scale of wants which is not
recognised by any man as _his_ scale; and, as they could not ignore
the fact that practical men, in making their valuations, seemed to
put diamonds above gold, gold above iron, and iron above bread, they
had to divide off their so-called “use-value” sharply from the value
which ruled the economical transactions of the world, and to call the
latter “exchange value.” The modern economist says that the phenomenon
of bread possessing little value and diamonds much value, is not in
contradiction with the theory that value depends entirely on utility.
Bread is little thought of, and diamonds much thought of, because,
when all the circumstances are taken into account—the circumstance
of limitation of want and the circumstance of provision for want—the
importance to concrete human want of the one is little, and of the
other is much.


NOTE

The Austrian writers, whose economics are strongly coloured by the
utilitarian psychology, usually put the matter in the following way.
The course of the satisfaction of a want may be represented by a
diminishing scale. Of most wants, material and intellectual alike, it
is true that the pleasure got from the first draught of satisfaction
is the keenest. The complete satisfaction, then, of any want might be
represented by a graduated scale diminishing to zero—beyond zero, the
satisfaction turning into satiety and disgust.

If we combine this scale with the other alluded to in the text—that
which has the negative sanction of loss of wellbeing—we get a scheme
like the following:

     I    II   III  IV   V    VI   VII  VIII IX   X
    10
     9    9
     8    8    8
     7    7    7    7
     6    6    6    —    6
     5    5    5    —    5    5
     4    4    4    4    4    4    4
     3    3    3    —    3    3    —    3
     2    2    2    —    2    2    —    2    2
     1    1    1    1    1    1    —    1    1    1
     0    0    0    0    0    0    0    0    0    0

Here the Roman figures indicate classes or kinds of wants, the Arabic,
the concrete wants, or part wants, in each class. We thus see at a
glance that, the more important the class, the more important are
the concrete wants that stand highest in the class: that, even in
the highest class, there are concrete wants which are outweighed by
concrete wants of almost every other lower class: and that there are
classes of want, like IV and VII, which are not satisfied gradually, as
in the assuaging of hunger, but where want breaks off at a high level
and does not emerge again till wants of much inferior classes have been
met.

As an illustration, this scheme has a certain value, but it suggests
more objections perhaps than it settles. The division of wants into
kinds or classes, whether the principle of that division be determined
by the nature of the sensations or by the objects which satisfy them,
requires a better psychological basis than has yet been demonstrated.
For instance, a generic want like that called Needs of Subsistence, is
about as vague a conception as could well be imagined. And, again, on
the “calculus of pleasure and pain,” the satisfaction of want generally
involves degrees and levels of physical, intellectual, and æsthetic
feeling which cannot be represented by any such simple diagram. For
these reasons—and also because the theory of value is not accredited
by seeming to rest so much on a utilitarian psychology—I have not
included the _Sättigungscala_ in the text. There are some ingenious and
interesting calculations on the subject in Wieser (_Natürlicher Werth_,
p. 27), which I have added in the Appendix.




CHAPTER V

THE MARGINAL UTILITY


Thus far we have seen that, utility being the general relation in which
all goods, by their very definition, stand to human wellbeing, value
is that higher, more intimate, more limited relation in which some
particular importance to human wellbeing is conditioned by the having
or losing of some particular good, and a relation of actual dependence
is established between the want and the good. We pass now to the
positive consideration of the measurement of value.

If one good stands over against one want—that is to say, if the
satisfaction of a single want is dependent on the possession of or
power over a single good—there is no difficulty: the value is the
entire utility which the good affords in the given case.

But the estimates of value which practically concern us are not so
simple. We must face the fact that most goods which we have to value
are not single articles, but many goods of the same kind—stocks of
goods—and that, at the same time, most goods are capable of satisfying
several wants. Water, for instance, may be used for drinking, for
washing, for cooling, for ornamental fountains, etc., as books may be
used for reading, for lending, for ornament, for packing, for waste
paper, and so on. But these are uses of very different importance, and
the question is: Which of these utilities is it that determines the
value? This important point cannot be too plainly put, and it will be
wise to follow the Austrian writers generally in taking the risk of
being tedious rather than of being obscure.

A sailor and his dog, the sole survivors from a wreck, have been
tossing on a raft for many days. Land is in sight, but still far away,
and the food is reduced to a couple of biscuits. Both man and dog
are equally famished, and it becomes evident that, unless each gets
a biscuit, one of them will not live to reach the shore. Here we are
confronted with the opposing claims of two wants, that of the sailor
and that of his dog; and, as the sailor is, presumably, the valuer, the
two wants are of very different importance to him. The question is,
What measures the value of the biscuits? According to our formula, the
answer will be found by ascertaining which is the dependent want—which
is the satisfaction that the biscuits condition.

At first sight, one would say that the actual destination of the
biscuits determined this; but that would be to say that two exactly
similar biscuits, both available to the one man, and available under
exactly similar conditions, were of different value. In this dilemma,
one little consideration easily determines the point. If one of the
biscuits were lost, which want would go unsatisfied? For the want which
is satisfied if the good is present, and unsatisfied if it is not, is
evidently the dependent want.[10]

[10] There are two typical cases where valuations are made:—where a
man values something he _has_, with the view of parting with it (in
selling, giving, lending, etc.), and where he values something he _has
not_, with the view of acquiring it. As will be seen from above, the
two methods of valuation come practically to the same result.

The dependent want, in this case, is that of the dog; that is, it is
the _less important_ of the two wants.

To put it now in more general terms. As we saw, the (necessarily)
limited resources at each man’s disposal, he, consciously or
unconsciously, apportions out among his various wants according to his
particular scale, taking care that the more urgent ones are provided
for before the less urgent. It is obvious that, in these circumstances,
there is a _least_ want that is satisfied, although ordinarily we are
not conscious what it is. But it immediately comes to the front when,
from any cause, our resources are diminished. If a working man’s wage
is reduced from twenty shillings to nineteen shillings a week, he
becomes painfully conscious that some want, hitherto satisfied, must go
bare, and the particular want on which he economises immediately points
out which was his least, or least urgent, or final want. In this case,
all the wants previously satisfied are still satisfied except the last
one, and it is proved that none of them depended on having or losing
the shilling. Again, all wants under this, just as before, remain
unsatisfied whether the shilling is there or not. Only this marginal
want is satisfied if the shilling is present and unsatisfied if absent:
it alone, then, is the dependent want.

To recur to our illustration. So long as the sailor had the two
biscuits, one of them would go to satisfying the higher want (his
own), and the other to satisfying the lower want (the dog’s), and
either biscuit was capable of satisfying either want. But, when one
biscuit was lost, the one that remained was instantly elevated to
satisfying the higher want only: it rose, literally, in value because
then it was not a man’s _or_ a dog’s life that depended upon it but
a man’s only: what was lost was the means of satisfying the _dog’s_
want: the less important of the two wants was the dependent one;
and it is the relation of dependence, as we said, that determines
value. We may formulate the proposition thus. The value of a good
is measured by the importance of that concrete want which is least
urgent among the wants satisfied. And we find that what determines
the value of a good is, not its greatest utility, nor its average
utility, nor yet its least conceivable utility, but its marginal
utility in the given circumstances. Jevons called this the Last or
Final Utility. We shall follow Wieser literally in calling it the
Marginal Utility. Simple as this proposition is, experience in teaching
tells me that it is not easily retained so as to be used. For this
reason, it may not be superfluous to confirm its truth by testing it
in various circumstances. I cannot improve on Böhm-Bawerk’s admirable
illustration, and only modify it in non-essential particulars.

A modern Robinson Crusoe has just harvested five sacks of corn. These
must be his principal maintenance till next autumn. He disposes of the
sacks, according to the scale of his wants, in the following way. One
sack he destines for his daily allowance of bread. Another he devotes
to cakes, puddings, and the like. He cannot use more than these in
eating, so he devotes a third to feeding poultry, and a fourth to the
making of a coarse spirit. With these four sacks, we shall say, he is
able to satisfy all the wants that occur to him as capable of being
directly satisfied by corn, and, having no more pressing use for the
fifth sack, he employs it in feeding dogs and cats and other domestic
animals, the companions of his lonely life. The question is: What to
him is the value of a sack of corn? As before, we ask: What utility
will fail him if he lose one sack? It is inconceivable that Crusoe
should have any doubt as to his answer: he will, of course, apportion
out the sacks that remain as before;—two to food, one to poultry, one
to spirits, and he will give up only the feeding of dogs and cats. This
is seen to have been the Marginal Utility—the utility on the margin of
economic employment or use. What he loses, then, by losing one sack
is his former Marginal Utility; and this marginal utility undoubtedly
determines the value of a single one of the five sacks. But here we
come upon another feature of this valuation. If the marginal utility
determines the value of one, it must determine the value of all, as, by
hypothesis, all sacks were alike, and therefore all interchangeable.
Thus we obtain the universal formula for the valuation of goods in
quantity. The value of a quantity of similar goods is the value of the
marginal good multiplied by the number of the goods.

To follow the illustration out. If another sack gets lost, the marginal
utility is found to have been that of the making of spirits; if still
another, the feeding of poultry. Finally, suppose Crusoe to be reduced
to the one sack. Then the satisfying of all lesser wants is out of the
question; the losing of it means death to him; the marginal utility and
the highest utility are one.

Again, suppose Crusoe as merchant bargaining, say, with the Spaniards.
If he have five sacks, he will sell one at a low rate; if he have four,
he will ask a higher price; if he have only one, he will not part
with it for any money. Extend this to the phenomena of an industrial
community. The five sacks represent a larger supply than the four,
the four than the three, and so on; and, as the supply decreases, the
value of the single sack rises. Now one of the commonest phenomena of
a market is that, _ceteris paribus_, increase of supply brings down
value and decrease of supply sends it up. To put it in terms of our
theory: When the quantity of any good produced is increased, the good
is put to lower levels of use; the last want supplied determines the
last satisfaction; and this last satisfaction determines the value
of all the stock. Here we have the explanation of the old Paradox of
Value. If any commodity is available in such quantity that all possible
wants for that commodity are supplied, and yet there is a surplus of
the commodity, the marginal utility is zero, and the value of the
entire stock is nil. And it is also explained how diamonds have a high
value compared with bread. The quantity of diamonds available is never
sufficient to satisfy more than a fraction of the desire for them: the
marginal utility, then, is high. Bread again is, happily, to be had
everywhere at a comparatively small expenditure of labour, and the
immense supply as compared with the limited wants, puts the marginal
utility low.




CHAPTER VI

DIFFICULTIES AND EXPLANATIONS


A chapter may be devoted to answering certain doubts which naturally
arise in the reader’s mind, and to disentangling some complications
which hide the working of our fundamental law.

I. Some goods are perishable, some durable; some are single goods,
some are groups of separable elements; and, of these groups again,
some are composed of homogeneous, some of very heterogeneous elements.
Consequently there is a difference in the way in which goods give off
their use, and the marginal utility is not always perfectly obvious.

Thus the first warning we require to take to ourselves is that we must
make sure what really is the good we are valuing. In the illustration
of last chapter, it was the sack of corn, not the individual grains
of corn; it was, that is to say, a group of homogeneous elements
considered and valued as a whole. Obviously this is a very different
kind of good from, say, a horse or a piano. As durable goods, the
latter are, economically, a complex of all the services which they
are capable of rendering during their lifetime as goods: their value,
therefore, is to be determined by the least use to which their
services, one year with another, are put, and not by the least use to
which, exceptionally, they are put. Otherwise we should conclude that
the utility which a hunting horse may sometimes put forth in drawing a
plough, or that which a piano may render at the hands of a schoolgirl,
are the marginal utilities determining the value of these goods.

Neglect of this consideration led Schäffle to make the objection that,
in desert journeys, the traveller’s skin of water, according to our
theory, would be measured by the least use to which the water was put:
that is to say, the quantity of water employed, say, in washing, would
measure the value of the whole skin, while, practically, everybody
can see that a good, the possession or non-possession of which meant
life or death to the traveller, could not be measured by its washing
value. The answer is that here the good which is being valued is the
whole water-skin, not the individual drops of water: what measures
its value is the amount of wellbeing that would be lost if the _skin_
were lost. If, on the other hand, we were valuing _individual_ cubic
inches of water in the skin, or if we were valuing _one_ skin among
many, then Schäffle’s calculation would be quite right: that the least
use to which the good being valued—the cubic inch or the skin—was put,
determined the value of that particular good, the cubic inches or the
skin.

Similarly, if we ask what is the value of a water-supply to a city,
we are putting a different question from “What is the value of
the individual gallon of water?” The supply, _as a whole_, is the
indispensable condition of a collective human want; the unit of
valuation here is not the gallon, but the whole supply. So with the
value of a mill stream. We must not confound it with the valuelessness
of water as drinking water. What the miller values and pays for is
the head of water, and on this the individual cups or gallons used
for drinking make no difference. Indeed, we have here one of the
exceptional cases mentioned in the beginning of last chapter, the
valuation of a single good. The water-supply in the above illustrations
cannot usually be put alongside of similar supplies and considered as a
member of a stock. Its value is measured by the entire utility which it
affords.

A more difficult case is presented by the phenomenon of “capitalised
value.” A quarry or mine which will be worked out in fifty years is
valued at a sum much less than the sum of its fifty annual outputs.
These annual outputs are seen in a perspective of value diminishing
according to their remoteness in time. Say that the first year’s output
is £100, the second (at an interest rate of 5%) will _now_ be worth
only £95.23, the third, £90.70, and so on. Adding these together, we
obtain a sum which is very much less than £100 × 50, and we express
it—conveniently if somewhat misleadingly—by saying that the capital
value is so many years’ purchase of the annual rent. In other words, to
determine the marginal utility of a durable good involves a calculation
of the agio on present goods as against future.[11]

[11] The difficult subjects of capital value and of interest on durable
goods are fully treated in Böhm-Bawerk’s _Positive Theory of Capital_.
See particularly p. 339.

II. One must guard against an easy misunderstanding of the expression
Lowest Use. Most goods permit of two or more entirely distinct kinds
of use: a book, for instance, may be read, or it may be used to light
a fire. On the principles just laid down, one might think that it
is the latter which determines the value of the book. There are two
mistakes here. The first will be seen on referring to the terms of our
cardinal proposition. It is the least use to which a good is put, and
is, of course, _economically_ put, that decides—not the possible uses
to which it may be put. If we were valuing two exactly similar copies
of one book, and if the _only_ uses to which these copies could be
put were, to be read or to be burned, then the value of each would be
waste-paper value.[12] But this is an almost inconceivable supposition.
Books are made to be read, and to enumerate lighting of fires among the
possible _uses_ of a book is to make the mistake already alluded to—of
not being clear as to what is the good that is being valued.

[12] Just as the nutritive value of the horse competed with its draught
value during the siege of Paris.

The second and more important mistake is that here we are presenting
a case which is essentially different from the typical one given in
last chapter. In the case of the peasant we are valuing one of a stock
of five similar goods, and concluded that the use to which the fifth
sack was put determined the value of the five. In other words, we had
a _stock_ of goods competing for employment. Now we have employments
competing for one good, and, where a good or stock of goods is not
sufficient for all possible employments, of course the only economical
possibility is that the highest use, and so the highest marginal
utility, should decide the value.

III. It follows from what has been said that the value of a good is
almost never measured by the utility it actually affords,—its utility
to _me_,—but by a foreign utility. In our first illustration of the two
biscuits, the utilities actually afforded by the biscuits were, the
satisfaction of a man’s hunger and the satisfaction of a dog’s hunger;
but the value of the particular biscuit which actually satisfied the
man’s hunger was measured by the use of the biscuit to the dog. In
modern circumstances, where the existence of money and the presence of
stock permit of goods being instantly exchanged for other goods, we
can—and do almost unconsciously—change the disposition of our resources
so as to shift the loss (which will define our marginal utility) to the
least sensitive part.

Suppose that a thrifty housewife has laid in her winter stock of
butter, and that by some accident it gets spoiled. Will she be likely
to do without butter for the rest of the winter? She will, of course,
replace the butter, and do without some comfort or luxury which she
would otherwise have allowed herself. That is to say, she will shift
the loss to the least sensitive part of her total expenditure. Some
part of the total satisfaction must be given up, and this will always
be the least in her particular scale. In the circumstances, the
satisfaction she now denies herself indicates her least urgent want.
Not—be it remembered—her last conceivable want, or her last actually
felt want, but the last want that was satisfied when she had the means,
or the first that was deprived of its satisfaction when she had to
curtail her expenses; in short, the last want satisfied.

Similarly, if I am calculating the loss of value which I suffer from a
horse going hopelessly lame, I do not estimate it by the satisfactions
of riding and driving I am likely to lose. I replace the horse by
economising in other things—perhaps by doing without my summer
holiday—and the value of the horse is measured by the “foreign” utility
of the summer holiday.

IV. There is a question which naturally rises out of all that has
preceded. The value of goods is measured by the lowest, or least, or
last use economically made of them:—What determines that this or that
particular use is the last? In other words: What determines the _level_
of the marginal utility? The answer is;—the relation existing between
a man’s wants and the resources or provision he has to meet them. If
his wants are few and his resources abundant, the marginal utility will
be low, for here all the more urgent wants will be satisfied, and the
only wants left to satisfy will be insignificant ones. The value of
an additional sovereign to a rich man, for instance, is very small,
simply because he has few wants that remain unsatisfied. The same is
the case if wants are what we might call “weak”; to the plain liver,
the value of the additional sovereign is perhaps as small as to the
rich man. If, conversely, a man’s wants are many and strong, and his
means scanty, the marginal utility will be high, and the sovereign will
find wants, and urgent wants, waiting to welcome it. “It comes nearly
to the same thing,” to quote Böhm-Bawerk, “to say that Usefulness and
Scarcity are the ultimate determinants of the value of goods. In so far
as the degree of usefulness indicates whether, in its way, the good is
capable of more or less important services to human wellbeing, so far
does it indicate the height to which the marginal utility, in the most
extreme case, _may_ rise. But it is the scarcity that decides to what
point the marginal utility actually does rise in the concrete case.”




CHAPTER VII

COMPLEMENTARY GOODS


As the ultimate goal of economic effort is not the obtaining of goods
but the satisfaction of human want, we are not finished with our
subject till we have traced the finished good to its end and _raison
d’être_ in affording this satisfaction. In the present chapter, we have
to consider cases where several goods contribute to one satisfaction,
and to find what influence this satisfaction has upon their separate
values. In such cases the “good” we have to value is, properly
speaking, a group, and in the various forms taken by these groups, we
meet with some puzzling and far-reaching peculiarities.

The class of Complementary goods, to use Menger’s term, is much
wider than we are apt to suppose. In consumption goods, it tends to
increase with the variety of modern wealth and the development of new
tastes. Many of our enjoyments depend on the co-operation of a great
many factors, of which usually one is prominent, and the others only
assert themselves on rare occasions. Thus the part played by that
insignificant commodity, salt, in most of the pleasures of the table,
is never appreciated till the want of it—say, at a pic-nic—suggests how
indispensable a complement it is. Among productive goods, again, where
the division of labour is constantly adding to the number of factors
which work together in the making of any good, the complementary
character becomes even more apparent. The first thing to be noticed
here is that the value of a group, _as a group_, is determined by the
marginal utility of the group, not of the separate members. But, as
each group may on occasion be broken up, the interesting question is as
to the distribution of value among the members, the difference in value
between goods as complements and goods as isolated articles.

The simplest case is where the single members of a group are all
useless in any other form but that of the group, and are at the same
time economically irreplaceable. In valuing boots, for instance, the
“good” is the pair; if I lose one, I lose the entire utility. In such
cases—which are, of course, comparatively rare—if I have had the pair
and lose one, I lose the entire value of the pair: if I have one and
obtain another, I gain the entire value of the pair. Here, then, the
value of one single member of the group is the same as the value of the
whole group.

This case, however, is really of importance only as introducing the
others which follow; under the assumed conditions we are dealing with
a good similar, say, to a pair of compasses or a pair of spectacles,
which we can divide into two only at the cost of the whole; that is to
say, it is only externally a group.

A more common form is where the group can afford one utility, and the
individual members of it in isolation can afford another but a less
utility. Thus the utility of a well-matched pair of roans will be
valued at a figure much higher than would be realised by selling the
horses separately. Suppose that the utility of the pair is represented
by 100, and that of A roan and B roan separately by 50 and 40: what
is the value of A? To calculate it from the side of the owner: if he
has A and B, he has a value of 100; if he lose A, he has only B, and B
separately has a value of only 40. What he has lost is the difference
between 40 and 100. Or, from the side of the buyer: if he gets B he
obtains 40; if he gets A in addition he obtains 100; the value of A,
as before, is the difference between 40 and 100. Here, then, A has a
different value as complement and as isolated good: in the one case it
is worth 60, in the other 50. If we take the case of a well-matched
four-in-hand team, we have a more complicated instance of the same; the
whole team makes the most highly valued group, but each pair within
that again has a higher group value than the sum of the isolated values
which would be attached to each single horse. This case of valuation
holds in the very numerous cases where goods are in sets: if we “break
the set,” the separate members have a less value than they had as
complements.

A third case is, where, as before, the group can afford one utility,
and the individual members of it separately can afford a less utility,
but where some members are replaceable and some are not. In this case,
the replaceable members can never obtain any other than the one value:
however indispensable they may be to the making of the group, goods
that can be easily replaced cannot rise higher than the competition
of all other uses allows. Although a load of bricks, for example,
were absolutely indispensable to finish the building of a house, the
load could never obtain any higher value than that determined by the
marginal utility of bricks generally: that is, as determined by all the
uses to which bricks generally are put. To the irreplaceable member,
on the other hand, falls the remainder of the value of the group. Thus
suppose a group A, B, and C, with a group value of 100, and isolated
values of 10, 20, 30. If A and B are articles of large manufacture and
great demand, while C is a monopoly good, A and B will get 30% of the
value, and C the other 70%, although, if the other members were not
present in the group, the only value C could realise would be 30.[13]

[13] How far the theory of Complementary Goods admits of being applied
directly to the problem of distribution of product among the various
factors is matter of controversy. Böhm-Bawerk considers that it is
the key which will lead to its solution. The line which this suggests
would be something like the following. Labour and Capital enter into
the composition of all productive groups: in proportion as they are
abundant and mobile do they enter into competition with _all_ labour
and _all_ capital, and become perfectly replaceable. In entering
into products, then, they can never secure more than their outside
value—that fixed by all their employments or uses. The surplus in the
price of each product goes to the monopolist factor, whether that
monopoly be caused by natural and site advantages of land, mental and
technical qualities of undertakers and workers, peculiar conditions of
process, or the like. And in proportion as these factors lose their
monopoly, does the value of the group shrink; if all the members were
to become replaceable, as when first-class land in other countries
becomes available through rapid and cheap carriage, or when education
makes unskilled labour the exception, the group value, as distinct from
the combined isolated values, would disappear.

Wieser, again, considers that this is no more than a valuable
suggestion. What guidance, he asks, will this law give where there
are several irreplaceable members, and how is the outside value of
replaceable members given if not in other combinations of complementary
goods which in turn require to be split up into their factors?
He points out acutely, in reply to Menger, that, to estimate the
proportion contributed by any factor by the loss which would accrue if
that factor were absent, is to reckon too much to it, as the loss of
a factor from a co-operation will generally disorganise the group and
cause more damage than its presence would cause gain. Instead of using
the doctrine of Complementary Goods in this way, he proposes to find,
by a series of equations, what each factor positively contributes; not,
of course, the physical share, but the proportion of value which may be
economically “imputed” to it. A great part of the _Natürlicher Werth_
is taken up with this doctrine of the “Zurechnung,” which is treated in
Wieser’s usual strong and graphic manner.




CHAPTER VIII

SUBJECTIVE EXCHANGE VALUE


Before passing from subjective or personal value, there remains
for consideration one point, which is at once important in itself,
and decisive against the old division of the total phenomena under
discussion into value in use and value in exchange. To the subtle
analysis of Böhm-Bawerk and Wieser we owe the recognition of
_subjective_ exchange value, as distinct from the purely _objective_
exchange value which we have to consider in following chapters.
Aristotle said that every good had two uses, “both belonging to the
thing as such”: similarly we say that every good has two subjective
importances, that which it can directly afford, and that which the
things got in exchange for it can afford. A little reflection will
convince us that subjective value contains these two distinct branches,
use value and exchange value.

It may occasionally suit the economist, for purposes of illustration,
to discuss the economy of a Crusoe—particularly in problems of
production where the essential features of society, as at once a
producing and consuming body, are obscured by the division of
labour—but, in the simplest form of society known to experience, there
is always some barter or exchange of goods. But, wherever this is the
case, every good acquires a second possible value as an exchange form
of other goods, or a potentiality of obtaining other goods. In the
organism called society, each man becomes—at least potentially—richer
or poorer with the increase or decrease of its wealth. Some part of our
neighbour’s goods becomes available for the satisfaction of our want
whenever exchange becomes possible between us, inasmuch as the actual
existence of his surplus—not to mention his enjoyment of it—depends
on our co-operation. Thus the goods which were first valuable to us
personally, as possible satisfaction of our want, get a secondary
value. Every good becomes potentially a number of other goods, and the
range of our possible satisfactions becomes by so much widened. The
presence of exchange, in short, gives us a choice of values.

These two kinds of value are possessed in varying degree by different
goods. In some, the exchange value may be greater than the use
value—as, for instance, when a change in productiveness in the
community increases the quantity or improves the quality of things
I can get in exchange, while the use value of things I can give in
exchange remains unaltered: in others it may be less, as in all cases
where habit and association root the goods in our affection. What has
to be emphasised is, that the position which every man occupies as a
member of society gives to all goods of personal use this other value,
and that, as we saw on p. 37, whichever of the two valuations we place
higher determines the total subjective value. In other words; there
is, as we shall see later, a direct and an indirect satisfaction of
wants, corresponding to the division of goods into consumption goods
and production goods. Just as grain may be used for bread or for seed,
and just as the value of the grain is determined by calculations
of marginal utility which take both bread and seed into account as
possible uses, so has every good, subjectively considered, a use value
and an exchange value, and the total subjective value is calculated on
the consideration of both of these as possible uses of the good.

On the other side, there is no doubt that the analysis of exchange
value into subjective and objective is subtle, and that it is difficult
to keep the two distinct. The real difference may be most easily seen
by an illustration. Say that the first edition of _Modern Painters_,
which cost me £18 some years ago, now stands in the booksellers’
catalogues at £30. It may be assumed that my pleasure, as a cultured
man, in the possession of this first edition is measured by something
like £30. But suppose I now suffer a reverse of fortune. The subjective
use value of the book remains as before: the objective exchange value
also remains as before: but the _subjective exchange_ value has
immensely risen. In my former circumstances the price of £30 was a
bagatelle: now it may perhaps pay my insurance premium: this second
subjective value is distinct alike from subjective use value and
objective exchange value.

In former chapters, we have seen that the value of a good is determined
by the marginal utility which depends on it: in the same way this
secondary value will be determined by the marginal utility which
depends on the things obtained in exchange for the good. This being
so, the _amount_ of this exchange value will depend on two things:
(1) on the objective value, or price, of the goods—which determines
what or how many things can be got for them: (2) on the existing state
of the owner’s want and provision—which determines what place the
satisfactions, obtainable from the goods got in exchange, have in his
scale of living. For instance: the use to me of the one riding horse
which I can just afford may be quite definite, as giving me a pleasant
form of exercise. But its subjective _exchange_ value depends (1) on
the sum of money I could get for him, and (2) what part this sum of
money plays in my scale of living.

And here we come in sight of the decisive distinction between
subjective and objective exchange value. The objective exchange value
of the horse is the same to every one; the subjective exchange value
varies from person to person according to the previous state of his
wants and resources. An article in a poor man’s house which he can, in
case of need, sell for 20/ has a very different importance to him from
what a similar article has to a rich man—20/ is a large part of a £50
wage, but a very small proportion of a £1000 income.

The necessity of drawing this distinction lies in the fact that Money
has _no_ subjective value other than its exchange value. As the tool of
exchange the only use to which we can put it is to part with it. It is
one of the virtues of a good money that it is never “used,” say, as a
metal, but passes from hand to hand without question in satisfaction of
debt. And yet, as a pound note in a man’s pocket is the temporary form
of so much bread, meat, lodging, clothes, etc., it is clear that the
pound note to the working man has just the marginal utility which these
things have. To use Wieser’s terse expression: The exchange value of
money is the anticipated use value of the things it buys.




CHAPTER IX

FROM SUBJECTIVE TO OBJECTIVE VALUE


Thus far we have considered each man’s wants as ranged on a scale;
in correspondence with these wants, each man attaches degrees of
importance to the goods that come within his knowledge and control,
and ranges _goods_ also on a similar scale. We have seen that, owing
to the infinite subjective differences in men on the one hand, and
the effect of provision on the dependence of want on the other, every
man’s scale is different from every other man’s. That is to say, every
man, subjectively, attaches his own valuation to goods. As no man,
however, liveth to himself, these valuations come together and are
compared in every act of barter and exchange. The reflex influence of
the valuations that each man meets in any market, however simple, is
very great; constant contact of man with man in exchange assimilates
the valuations of all, till, unconsciously, we come very much to regard
the average valuation made by the people we meet as our own valuation.
For instance, in buying an article, if we looked solely and entirely
to what that article represented in life, pleasure, satisfaction,
self-realisation—however we name our subjective centre—we should,
perhaps, value it at 100. But if we meet everywhere with people who
value that article, say, from 50 to 60, it is inevitable that our
estimate should be strongly affected thereby. And this explains how
that, notwithstanding the enormous differences in temperament, culture,
and conditions, the valuations which meet on a market do not diverge
so widely as one would expect. If we consider that, of three men who
bid for a horse, the value of it to A may depend on his being a country
doctor, to B, on his being a hunting man, and to C, on his having a
sluggish liver, we could scarcely understand how these different values
come to be assessed within a few pounds or shillings of each other, if
it were not for this kind of arbitrage.

When we say, then, that men who meet as exchangers of different goods
put their own subjective valuations on the articles they bring to
market, we must be understood to mean valuations that are not more
subjective than man himself is. A man’s valuations can no more escape
being to a great extent the valuations of other men, than he himself
can escape being what other people “make” him.

How it comes that each man can compare the importance he attaches
to a commodity, as conditioning the satisfaction of want, with the
importance of a piece of metal or paper whose only “use” is to pass
on, belongs to a department of our science on which, happily, we do
not require to enter. It is sufficient for us to say that, in the
modern community, we measure “goods in general” by one good, and we
grow up so familiarised with the current money scale that no one sees
anything strange in valuing, say, a Bible, at thirty pence, or even
its author at thirty pieces! In other words, if I enter the market
as a buyer for a horse, with the figure of £50 in my mind as the
limit of my bid, it is not from a judgment that the horse to me is
equal to the satisfaction I could get from fifty gold sovereigns, but
from a judgment that the enjoyment or use to be got from the horse is
equal to the other personal satisfactions that fifty gold sovereigns
represent—to all the current wants of my life which I measure, in my
own mind, by that same scale, and count worth £50. The money value
is only the universal language in which we express our valuations
generally. Thus, through habit and education, it comes that it is more
definite and intelligible, either as regards ourselves or others, for
us to say that a horse is worth fifty sovereigns, than to say that it
is worth so many quarters of corn or hundredweights of iron.




CHAPTER X

PRICE


In an early chapter, it was said that the one class of objective values
which had an interest for economic science was the (purely objective)
value in exchange or purchasing power. We escape using this cumbrous
expression if we substitute the word Price. The two terms are of course
not equivalent: power in exchange is a different thing from the quantum
of goods obtained by that power and measuring it: but obviously the two
are inseparable, and the laws of the one are the laws of the other. Our
present task, then, is the theory of price.[14]

[14] As might be expected of a reaction against the old position
claimed for value in exchange as the sole economic value, the Austrian
economists have devoted their energies mainly to the neglected branch,
Subjective Value. Böhm-Bawerk alone has followed out the marginal
theory of value in detail into the theory of price.

It would, perhaps, not be very difficult to argue that a universal
theory of price is impossible. The attempt to base an _entire_ economy
on the motive of Self-Interest has not been so successful, that many
of us are willing to risk the credit of the whole science any longer
on an assumption that was never quite true, and is becoming less so as
wealth increases and is increasingly spent with a directly moral aim.
But, in certain great departments of exchange, if anywhere, the old
competitive laws do hold. In stock exchange dealings, in banking, in
international transactions, in great organised markets, as iron, wool,
cotton, grain, and so on, the egoistic motive is so strongly marked
that it is possible to found on it a law which comes, perhaps, as near
a scientific law of exchange as we can expect. It may be described as
the law of price under perfect competition. It disregards all motives
but those of _advantage from the exchange_—always, of course, within
the recognised limits of law and respectability. In such markets the
“strong” exchanger (buyer or seller) is the one who attaches most
importance to the good he wishes to get, and the least importance
to the good he gives in exchange—as we can see from the simple
consideration that the bidder most likely to carry away a picture from
a studio is the one who thinks most of the picture and least of his
money, while the artist most likely to clear his stock is the one who
thinks least of his pictures and most of the money he will get for them.

The assumptions on which the law is based are the following: that
the market is an open and organic one; that buyers and sellers are
ordinarily conversant with the conditions of supply and competition;
that each party will make an exchange whenever he sees a gain in it;
and that he will prefer a greater gain to a less.

They are the assumptions of any ordinary commercial “market.”[15] For
simplicity’s sake, we shall begin with the simplest possible case, and
gradually come to the more complicated.

[15] In justice to that large class of economists who strive to suit
the stubborn fingers of the economic man to the lute of social life,
it may be said that their dislike of the egoistic motive is due simply
to its being egoistic. If struggle and fight is the necessary and
healthy condition of industry and commerce, then the utmost demand of
the reformer must be a fair field for every one and no favour; if the
ethics of commerce are necessarily the ethics of war, we may weep over
the fallen but we shall not waste our time crying mercy. But a great
many people—and these not the worst economists—think that the economic
field may justly be regarded, not as a battle, but as a harvest field,
where the greatest results are to be had, not by fighting against, but
by working with each other. For the last hundred years, they would say,
men have been dazzled by the new possibilities of life which the great
increase of wealth has opened up, and the solidarity of mankind has
been broken up by the eagerness of each to get hold of an advantage
which, obviously, could only be had by the few. Now that the world
is passably rich, should we not draw breath, and try to organise the
industrial life with an end to the _character_ and _conduct_ of the
workers? Ideas like these have a way of making the egoistic motive
seem a little contemptible. But, in justice also to the practical man,
it must be said that he ridicules all this mainly because he does not
understand that it is a new point of view—the subordination of the
economic to the higher life—and because his spiritual advisers have
long allowed him to think that the business life has canons of its own,
with which “theoretic” morality may not intermeddle.

_1st Case._ (Isolated Exchange.) A peasant B wishes to buy a horse,
and his circumstances are such that he puts the same estimate upon
£60 as he does on the possession of a horse. His neighbour S has a
horse which he values as worth £20. Here there will certainly be an
exchange, as, at a price, say of £40 both make a gain of £20 over the
amount at which, in the worst case, they are willing to exchange. But
if the exchangers act on the principle “better a small profit than no
exchange,” the price may be anything above £20 or under £60, and the
actual figure is determined by the “higgling of the market.” Here,
then, the price will lie between a minimum of the seller’s subjective
valuation and a maximum of the buyer’s subjective valuation.

_2d Case._ (One-sided competition of Buyers or Sellers.) First, of
Buyers. Suppose, instead of one peasant, there are three, B₁ B₂ and
B₃ bidding for one horse. B₁ values it at £60: B₂ considers it worth
£50: B₃ thinks it worth only £40. Only one can get the horse; but, as
S values his horse at £20 only, any of the three buyers may get it.
Accordingly they will bid against each other till the figure goes above
£40, when B₃ retires from the competition: above £50 B₂ is excluded,
and B₁ is left the sole competitor. Then, as in the former case, the
price will be fixed somewhere between £60, the subjective valuation
of the purchaser, and £50, that of the most capable of the excluded
competitors, or, as we should say, between the subjective valuation of
the successful and that of the first unsuccessful buyer.

The case of one-sided competition of Sellers is the exact converse of
the above.

_3d Case._ This is the ordinary case of what may be called complete
competition—where there are several buyers and several sellers of
similar articles. Suppose the case of six buyers each wishing to
purchase a barrel of apples, and five sellers each wishing to dispose
of one barrel. We assume that the barrels are all of equal quality and
offered simultaneously, and that the competitors on both sides know
their own interests and follow them.

    Buyer 1 values the barrel        Seller 1 values the barrel
                  at 18/6                     at 13/
    and will pay any price under     and will accept any price above
    ----------------------------------------------------------------
    Buyer 2           ”         18/    Seller 2          ”       14/
    Buyer 3           ”         17/6   Seller 3          ”       15/
    Buyer 4           ”         17/    Seller 4          ”       16/
    Buyer 5           ”         16/    Seller 5          ”       17/
    Buyer 6           ”         15/

Here the subjective valuation which the first three buyers put upon the
apples is so high that they are, economically, “capable” of purchasing
from any of the sellers. But, naturally, they will not pay more than
necessary, and the transaction begins by low offers on the side of the
buyers, and holding back on the side of the sellers. Let us follow the
course of the bids methodically.

    At 13/6 there are 6 Buyers and 1 Seller
       14/      ”     6      ”     1   ”
       14/6     ”     6      ”     2   ”
       15/      ”     5      ”     2   ”
       15/6     ”     5      ”     3   ”
       16/      ”     4      ”     3   ”
       16/1     ”     4      ”     4   ”
       16/6     ”     4      ”     4   ”
       16/11    ”     4      ”     4   ”
       17/      ”     3      ”     4   ”

Thus we see that, at any price from 16/1 to 16/11, there will be as
many buyers as sellers, and the conditions will have emerged at which
exchanges take place and price is determined. For, at that price, four
buyers and four sellers will make a gain by exchanging. The fourth
buyer was willing to pay anything under 17/ and the fourth seller
willing to clear anything over 16/; thus both gain by a price which
falls between 16/ and 17/, while the three more capable pairs gain
proportionally more. And at that price the valuations of the remaining
competitors, be they few or many, are unable to have any effect on the
exchange. 16/1 will not suit buyers 5 and 6, who are not willing to
give more than a maximum of 15/11 and 14/11, and 16/11 will not suit
sellers who demand at least 17/1.

Again, any price above 16/11 would cause the fourth buyer to withdraw,
and any price under 16/1 would cause the fourth seller to withdraw.
The price, then, will be determined somewhere between the subjective
valuations of the last buyer and the last seller—what we may call the
Marginal Pair.[16] And the most capable exchangers are proved to have
been those who put the highest valuation on the commodity they wished
(apples or money), and the lowest valuation on the commodity they had
(money or apples).

[16] To be exact, this limit may be more closely drawn. Böhm-Bawerk’s
law is that the price is determined between the valuation of the last
buyer and that of the first excluded seller as Higher Limit, and the
valuations of the last seller and first excluded buyer as Lower Limit,
viz. between the valuations of the Marginal _Pairs_. But, for reasons
which will shortly be evident, it is scarcely worth while adding to the
difficulty of the subject by too great exactness.




CHAPTER XI

SUBJECTIVE VALUATIONS THE BASIS OF PRICE


It was said in the introductory chapter that we should find Objective
Exchange Value to be a superstructure on Subjective Value. The
typical scheme in last chapter will abundantly prove this. It is the
valuations with which the parties on both sides enter the market that
decide;—first, what parties will take part in the competition; second,
what is the degree of each party’s “capability of exchange”; third, who
are the parties that actually come to terms; fourth, who is the last
buyer and who the last seller; and fifth, the price. Thus we arrive at
Böhm-Bawerk’s formal proposition: Price is the resultant of subjective
valuations put upon commodity and price-equivalent within a market.

Unless, however, we remember what has been said of the essential nature
of value, we shall be apt to stumble over this word “valuation.” The
price with which a buyer comes to market as the maximum which he is
willing to give, does not indicate anything of the absolute amount of
wellbeing which the goods he proposes to purchase represent to him. We
saw that the subjective value of anything is given by the dependence of
a want upon it, and that this dependence is measured by two factors:
the want which the good is capable of satisfying and the state of
provision already existing to meet that want—in ordinary circumstances,
the income or wealth of the valuer. To put it concretely: the
valuation of 16/6, which the buyer puts on the barrel of apples in our
illustration, is determined by a calculation, first, of the position
the fruit takes in his household economy as compared with other forms
of food, and, second, of the money figures in which the amount of his
income or available wealth enables him to express that position. This,
among other things, will explain how two very different classes of
competitors may be the “capable” ones; those whose needs are urgent
and those whose resources are plentiful. The valuation of 16/6 may
be either the expression of a poor man’s necessity, interpreted and
limited by the few shillings he can spare from his wages, or the
expression of a rich man’s whim, measured by the loose money in his
pocket.[17]

[17] In connection with this, the following passage is worth attention.
“Goods which can only be obtained in very small quantities and which
only the rich are likely to demand, will obtain the highest prices.
Goods, again, of common quality, suited to the wants of the poor,
obtain very low prices, along with those goods of better quality which
are so numerous that the poorer classes are able, to a considerable
extent, to purchase them. Medium prices, lastly, will rule in the case
of goods of which the middle classes are the principal buyers, while
poorer people either do not compete or compete only so far as compelled
by their most urgent feelings of want. It will readily be understood
that changes in the economical provision and power of great classes
must be followed by changes in the prices of goods. The greater the
inequalities of wealth, the greater will be the differences in price.
Luxuries will rise in price as great fortunes increase and fall as they
diminish.... Thus it is that diamonds and gold stand so very high; they
are luxuries of the rich and richest, and are valued and paid for in
the measure of the purchasing power of these classes. Food and iron are
at the other end of the scale because they are goods for the people,
their value being decided by the valuation and purchasing power of poor
men.”—Wieser, _Der Natürlicher Werth_, pp. 44, 45.

If, then, the subjective valuations on either side do not necessarily
say anything of what we might call the absolute worth of things to
the valuers, much less does the price which is the resultant of these
valuations. It is not even an average of the valuations. However high
the valuations of buyers, and however low the valuations of sellers, in
an organised market the goods will exchange at the marginal price. And
however many be the excluded competitors—the buyers whose subjective
valuations do not allow them to buy, and the sellers whose valuations
do not allow them to sell, at the marginal price—they are unable to
affect the price one way or other.

It should not be necessary to point out that the determination of
price in actual life is not the _conscious_ resultant of all these
valuations. The analysis of price into its factors is as different from
the practical synthesis of price as a statue is from an anatomist’s
plates. The practical man no more knows the machinery set in motion to
determine each day’s market quotations than the child knows the rules
of grammar by which he speaks. It is the same in most economic matters.
The theory of money, for instance, is one of the most difficult and
complicated parts of economical science, and yet we all grow up with
a perfectly definite idea of the relation which a shilling bears
to English commodities in general—so definite, indeed, that, when
travelling in a country where there is an inconvertible paper currency
and where prices are turned upside down by a protective tariff, we do
not notice the leap we take when we turn the quarter-dollar note, in
our mind, into a silver shilling, and calculate prices on the English
basis. In the same way, a business man applies unthinkingly and
unerringly all those canons of marginal value and price which we find
so puzzling.

But in the business world itself, there is one great simplification
of the law of the Marginal Pair. In modern industry, producers do not
make for themselves but for the market, and the amount of their own
product which they could use in their own consumption is insignificant.
Consequently it may almost be said that such goods have no subjective
value for the sellers,[18] and we lose one whole side of our
valuations. But, on the other hand, this very fact enormously increases
the numbers of buyers, and brings their subjective valuations all the
closer. Practically, then, our law takes this form: Price is determined
by the valuation of the Marginal Buyer.

[18] This is not quite true. They have subjective _exchange_ value just
as money has. The product of labour which has been paid by 20/ of wage
has the same sort of subjective value to the wage-payer as the 20/ had.
But as the professional producer anticipates demand the subjective
value is not so calculable.

It will probably be thought that only in the last paragraph have we
come to the normal state of things, and so to the only state of things
which has any practical interest for us. All the tedious discussion
about peasants selling horses, or buyers and sellers wishing to
trade for just one barrel of apples each, is beside the mark, it
will be said, when we consider that the questions of value which are
of importance to us are questions between the innumerable persons
who compete with each other in the business of making and buying
and selling, and the innumerable persons who buy goods for their
own consumption at fixed prices from the shops. The answer to this
has already been suggested. As well might we expect to understand
the organisation of industry by taking our stand on an omnibus in
Cheapside, and watching the surging life below, as begin our study of
the phenomena of value with the smooth-running machinery of exchange
which is the growth of generations. The only way to understand the
completed theory of value is to go back to the simplest cases of
exchange—perhaps even barter; find what principles are involved in all
exchange; and then work out the complications and simplifications which
come with developed trade. It is impossible to explain the “short cuts”
till we know the roundabout road.

It will not have escaped the notice of the critical reader that there
are many resemblances between the law now formulated and that known as
the law of Supply and Demand. It would be strange if there were not. As
in ethics, all theories lead very much to one practical code of morals,
so theories of price must all be more or less accurate analyses of the
actual transactions of the market. For instance, the zone within the
limits of which price is determined is, as we have seen, that lying
between the valuations of the Marginal Pair. But every one will have
noticed that in this zone supply and demand come, quantitatively, to
equilibrium, and hence it is quite correct to say that the market price
is found in that zone where supply and demand balance each other.

The resemblance will become clearer if we look at our individual
determinants of price. There is—

_1st_, The Extent of Demand,—that is, the number of people who wish to
buy goods because they attach a certain value to them.

_2d_, The Intensity of Demand,—that is the subjective valuation which
these buyers attach to the commodity they wish to obtain, and the
subjective valuation of the money they part with.

_3d_, The Extent of Supply,—that is, the number of people who wish to
sell goods because they attach a certain value to the money they expect
to get in exchange.

_4th_, The Intensity of Supply,—that is, the valuation which these
sellers attach to the money they wish to obtain, and which they attach
to the commodity they part with.

We shall cease to wonder at resemblances, however, if we remember that
our law of value cannot be a rival of any other law which has been
recognised as giving, within its sphere, a satisfactory explanation
of actual phenomena of value, except in the qualities of breadth
of basis or accuracy of details. The impression which most of us,
I imagine, have had in relation to the law of Supply and Demand as
usually formulated, is that what it says is undeniable, but that
it does not say enough. It devotes ample space to the phenomena of
supply, but it leaves demand almost entirely without analysis. While
it pays lip-service to value as a relative between the two, it gives
the impression that the side of supply is so overwhelmingly important
that demand may be taken for granted. What the theory which has
been developed in the preceding pages does is indeed to make price
a resultant of Supply and Demand, but at the same time carefully to
analyse these ambiguous expressions, and make price rest finally on
subjective valuations of commodities and of price-equivalents made by
buyers on the one side and sellers on the other.




CHAPTER XII

COST OF PRODUCTION


We have, now to compare the law of Value at which we have arrived with
that most dwelt on by English economists. It is a matter of common
experience that, in the case of articles manufactured on a large
scale—“freely produced,” or reproducible at will—the price always
tends towards equality with the cost of their production. On this
experience is founded the familiar statement that the value of a good
is determined by its cost. Speaking generally, Costs of Production
are all the productive goods consumed in the making of a product,—raw
and auxiliary materials, machinery, power, and labour. To speak more
accurately, we should substitute the term Expenses of Production, thus
indicating that the naturally incommensurable “efforts and abstinences”
are measured by the money paid for them. On this theory, the value of a
good comes from its _past_.

Now, on the theory above explained, we have to show that the causal
connection runs the other way, from Product to Cost. Human want, as
was shown, is the very first consideration in the Theory of Value. The
relation of each man’s resources to his varied wants determines what
is the last want satisfied in each class of want, and so the Marginal
Utility and subjective value of goods. The figures which buyers and
sellers respectively put on their goods determine the competitors,
determine the marginal pair or the last buyer, and so determine price.
Through price, the subjective valuations are carried back to means of
production. As the typical labourer, the peasant, measures the value
of his labour by the produce he raises, or the value of his implements
by the additional crop they procure, so is all value reflected back
from goods to that which makes them. Thus value comes, not from the
past of goods but from their future; that is to say, from the side of
consumption in satisfying want. Goods stand midway between production
and consumption. In the old reading it was the former term that gave
value: in the new, it is the latter.

Before going further, it is necessary more exactly to define the
connection between production and consumption goods.

All goods find their goal in satisfying the want of man. As Roscher
finely says, _Ausgangspunkt, wie Zielpunkt unserer Wissenschaft ist
der Mensch_. The consumption-good then—the good which is to find its
destiny, and its life-work, in ministering to human want—is that
for which and towards which we set in motion the whole machinery
of industry. From the soil or the mine downward, every productive
instrument is, economically, a consumption-good _in the making_. This
Menger has put in terms which are now classical. He calls consumption
goods, goods of the first or lowest rank. The goods which co-operate
in immediately producing these—the group of productive instruments
used in the last stage of production—he calls goods of second rank.
The factors of this second group, again, are goods of third rank, and
so on. Thus, if a loaf is the consumption-good or the good of first
rank, the flour, the oven, and the baker’s labour form the group of
second rank; the wheat, the mill, the labour, and the material that
makes the oven, the group of third rank; the land, the agricultural
implements, the materials of the mill, etc., the group of fourth rank,
and so on. Now, as we have seen, consumption goods receive their
value from the dependence of some want upon them—from their being the
condition of some satisfaction. Take, then, the good, a loaf of bread.
The value of the loaf in the baker’s shop is determined subjectively
by its marginal utility to the consumers, and the valuations (based
on this marginal utility) of buyers and sellers decide the market
price at which the bread is put on the market. Looking back now at the
continuity of production and consumption goods, we see that the last
group of productive goods which issues in the bread is really the _loaf
in the making_. If the baker had not that group he would not have the
bread, and we should lose our marginal utility—the satisfaction of the
want. What, then, depends on the having or losing the group of second
rank? Simply the marginal utility of the finished good. Tracing back
the loaf to more and more remote groups, we find, similarly, that what
depends upon them all is, at different points of time, the marginal
utility of the finished consumption-good: that is to say, they are
all, economically, the loaf in the making. In short, value depends
on a relation to human wellbeing as indicated by the satisfaction of
want; and productive goods only come into contact with human wellbeing
through the final member of the chain, the consumption-good. No one
values the iron ore, or the ragged “pig,” for what it is in itself.
Ingenious and delicate as may be the machine, no one puts together
these cunning arrangements of wheels and pulleys and rollers for the
sake of showing the machinist’s skill, or the working of mechanical
powers. Even the smooth and gossamer yarn is not a thing which can
satisfy any human want. All these goods are only “good” because they
are cloth, or some other consumption-good, in the making. We “value”
them, not because we see the iron fabrics passing, by wear and tear
of the machine, into the warp, or the threads of human life being
woven into the weft, but because, with prophetic eyes, we see the web
covering the otherwise bare backs of men and women, and giving up its
life in ministering to theirs.

The conduction of value, then, would seem to be, from product[19] to
means of production; and this would, probably, be generally recognised
if every product were connected immediately with only one group of
means of production. In the case of a wine grower it is easy enough
to see that the value of the grapes is derived from the wine, and the
value of the vineyard from the grapes; that the price, for instance,
at which he would let his land to a third party, or the number of
labourers he could, economically, hire to assist him, is determined
by average productiveness. Or suppose we value a good subjectively,
say, at £100, there seems a very good reason why we should be willing
to pay, say, £50 for the labour of raising raw material, £40 for
manufacturing it, and £10 for delivering it. But in modern divided
industry it is, of course, impossible for most of the intermediate
producers to know anything about the marginal utility, or the price
which the goods will obtain when finished. The labourer paid 20/ a
week for lumbering will scarcely connect his wage with the price of
the delicately carved cabinet which, among other final products,
is the ultimate goal of his labour. Even the timber merchant, as a
rule, will not make his calculations of the price he can pay for wood
with any better knowledge of its final destiny. But each branch of
production has an immediate product as well as an ultimate one, and,
in the marginal utility and price of this intermediate product, it
finds its value and price. Thus though the conduction of value from
anticipated final product back to intermediate product, and from that
back to the very first product of all, may remain hidden from each
and every producer, the organisation of industry practically carries
the information from stage to stage. The weaver finds a market value
already attached to yarn, and, measuring by that, he puts a value upon
his labour and the raw material for which he offers. But the cloth he
weaves is the means of production for the next intermediate product,
and gets its value from it again. And so the line of communication goes
on down the ranks till it comes to the final consumption-good.

[19] It need scarcely be said that it is _anticipated_ product; in
modern circumstances it is of course impossible for the fore producers
to wait on final sales, even if makers and merchants did not regularly
anticipate demand; but this does not affect the logical connection.

The proof of this conduction is not far to seek: it is found in the
common phenomenon of Dead Stock. However great the cost expended on an
article, if the public will not have it, all the costs in Christendom
will not give it a value; and, if the good continues “dead,” all the
machinery and buildings by which it would have been made lose their
value, except in as far as they can be turned to other uses, and get
another value from another product. Even labour suffers. Whatever the
expense of his special training, the labourer can give no value to his
work, and loses his wage to the extent that he cannot adapt his skill
to other employments. Suppose that an article of which there is a
stock, goes out of fashion, the value and the price of it fall at once.
The first thing the immediate manufacturer does is to ask himself if he
can reduce his costs to suit the new price: if he cannot, he abandons
the manufacture, and it passes probably to some man who is able to
produce more cheaply, it may be by reducing wages and salaries, by new
processes and more complicated machinery, or, perhaps, by employing
women instead of men. In any case the cost must conform to the value.

A striking proof of this is given in the case of silver. Most people
have a dim idea that silver, as one of the precious metals, has a value
almost innate. Yet after 1873 mine after mine was abandoned although
the ores were as rich and the reefs as plentiful as ever. What was
the cause?—Simply that silver was discarded as currency in certain
countries: that is to say, silver fell in the estimation of great
communities, and the loss of value was carried back till the price
realised by the virgin silver was not enough to pay for the mining of
it.

Of course the identity of value between final product and groups of
higher and higher rank is not absolute. It would be strange if it were;
for where all the groups get their value from the last product, and
this gets its value from a thing so inconstant as human want and so
elastic as human provision, it is to be expected that the calculation
which conducts value back and back, will, often enough, be mistaken.
Builders tempted, by high freights at a time of sudden demand, to lay
down a ship, must reckon with the possibility that, ere it be finished,
the tide of prosperity may have ebbed, and that the price realised for
the ship may scarce repay the wages and prices paid in anticipation.
And, besides these fluctuations which cannot be reduced to law, and
are often the chances on which the employer (as distinguished from the
capitalist) makes his great profits—and losses—there is one constant
difference between the value of the productive groups and that of
the final product; that is, Interest. With this, however, we have no
concern here.




CHAPTER XIII

FROM MARGINAL PRODUCTS TO COST OF PRODUCTION


Thus far the matter has been comparatively simple. We have looked
at a concatenation of successive groups with one final product, and
with, of course, one marginal utility and one value. But we have now
to face the fact that productive groups may pass into a great number
of final products, each with a different marginal utility and value.
The more industry is divided, the more is this the case. Productive
goods, such as coal, oil, labour, go more or less to the making of
millions of products. It is this that gives the Supply side its almost
overwhelming weight in modern economic science. And it is here that we
find the _raison d’être_ of the law of cost as a convenient abbreviated
expression of a deeper law. Let us follow the matter out methodically.

A stock of productive goods, which we shall call X, is capable of
producing finished products A, B, and C. The value of these products
for the time is, respectively, 100, 110, and 120. Which product will
determine the value of the productive unit of X?—It will be the least
of the three. For, suppose so many units of the stock X get lost that
it is impossible to make A, B, _and_ C, the one given up will, of
course, be A,—the employment of X which produces the least valuable
product. Any other choice would be contrary to economic conduct. When
we say, then, that means of production get their value from their
product, we must be understood as meaning the value of their final or
Marginal Product.

But, again, if B and C are articles of large common manufacture, they
cannot long retain their value of 110 and 120; it is merely a question
of time till their value falls to 100. Here we begin to see the
plausibility of the idea that cost of production determines value.

To put this concretely. A man has a farm of 90 acres divided among
three crops, which, in the circumstances of the market, give him
three different returns. On 30 acres, he grows wheat, which, we shall
suppose, yields him a value represented by 100; on another 30 acres,
he grows potatoes, which yield him, say, 110; on another 30 acres, he
grows barley, which yields him 120. What is the value of the productive
group made up of his labour and one third of his land? (We leave out
of account, for simplicity’s sake, the other co-operating factors.) If
the value were given to land and labour by the _actual_ returns there
would be three different values, and this really is the case where
competition has not its full play. But, if there is no monopolist
factor, these three values cannot be maintained. The value of the
first product, 100, determines the value of the means of production,
the labour and land, and it is only a question of time and competition
till this value of the means of production has imposed itself on
the potatoes and the barley, and reduced their price to the same
comparative level as that of wheat.

Here, then, we have the explanation of the law of cost of production.
It is quite true that, in the case of goods reproducible at will, or,
in our vocabulary, in cases where substitutes are immediately available
either by exchange or from production, the costs of production
determine the value, and the formula is both true and convenient. All
the same, it is merely a particular instance of the universal law
of Marginal Utility. In all cases, the marginal utility of the last
product economically produced determines the value of the means of
production; these means of production then become the intermediate
standard; and the value of goods produced from them cannot, in the long
run, be higher than the value got from the marginal product.

The practical working of the law may be seen from a personal experience
of the writer. In the cotton thread trade, there was for years a
demand for a thread which should be a fair substitute for the much
more expensive article, sewing silk. The prices of cotton thread and
of silk thread respectively gave housewives and shopkeepers a rough
guide to a subjective valuation, and the figure put upon this demand
was something like 20/. (It could not be more for the reason that no
cotton substitute was able to take the place of silk in any but a few
of its least important uses.) This price, offered by shopkeepers to
travellers, told the cotton thread manufacturers what they could offer
to cotton spinners for superior yarns, and what they could afford for
more expensive chemicals and polishing machinery. As consequence, after
many experiments the silk substitute was produced, and sent into the
market at a price of 20/. But once those superior yarns were made,
the cotton spinners, increasing the production of them, found other
outlets. Before long the thread makers saw that this silk substitute
was not the _marginal_ product of those particular yarns: that, in
fact, other cotton threads of lower price were being made from the same
yarns. These yarns then entered into the cost of silk substitute with
the predetermined lower value given them by the other finished goods,
and, in a short time, the price of the silk substitute fell from 20/
to 18/, in conformity with the value put upon the yarns by the new
marginal product. The same phenomenon occurs whenever a demand for a
new article or a modification of an old one arises, and is interpreted
by the enterprise of manufacturers.




CHAPTER XIV

FROM COST OF PRODUCTION TO PRODUCT


If, finally, we take the case of those most many-sided productive
goods, Iron and Labour, the proof of our theory may be considered fully
tested.

Leaving out complementary factors, which do not disturb the action of
the law and would complicate our statement, suppose that iron is the
sole productive good in the making of those various iron wares we find
selling at different prices in the ironmongers’ shops. The general
opinion is that it is the price of iron—disregarding other factors—that
determines the price of iron wares, from nails to kitchen ranges. And
what we have to prove is that the conduction of value really runs in
the opposite direction—from nails and ranges to raw iron.

Suppose for the moment that the prices obtainable for these products
range from 40/ to 48/ for a given unit. That is to say: the ton of
iron, when manufactured into, say, nails fetches 40/, when manufactured
into other articles, it fetches respectively 42/, 44/, 46/, 48/. These
prices are the result of the condition of the market at the moment. The
manufacturers of these products—we shall call them respectively A, B,
C, D, and E—represent the demand for iron, and the price they will be
able to offer for iron depends on the prices obtained by these articles.

On the other hand, the supply of raw iron held in store will naturally
pass to the most capable buyers—the most capable manufacturers of iron
wares—at the valuation of the last buyer. Suppose the stocks of iron
are sufficient to meet the demand of E, D, and C, the valuation of C,
the last buyer, will determine the price of iron at 44/ per ton. So far
all has gone to show that it is the iron wares—through the marginal
product—which determine the price of the productive good, iron.

But now we come to a feature which gives countenance to the old theory.
So long as the prices of iron wares—always assuming that iron is the
sole productive group employed in the manufacture—range from 40/ to
48/, while the market price of iron stands at 44/, it is a proof that
competition has not done its work. What naturally follows? Producers D
and E who are getting respectively 2/ and 4/ advantage over costs will
increase the output of their particular iron wares till over-supply
brings down the price to 44/. On the other hand, producers A and B,
who get respectively 4/ and 2/ less than cost, will curtail their
production, till decrease of supply raises their prices to 44/. Thus,
from above and from below, competition is always levelling prices to
the cost of production. Here it is quite true that cost of production
imposes itself on product. What is forgotten is that the cost of
production is itself first determined by the marginal product.

There is, however, a stronger argument for the old theory. Stocks of
iron are not a fixed quantity. If new and productive mines are opened,
or new processes discovered, the supply of iron increases, and prices
of all iron products will certainly fall. Does this not prove that the
value of iron wares is regulated by the cost of producing iron?

Here we have a difficult subject to disentangle, and it will be as well
to simplify it. Suppose a farmer is supplying a small village with
potatoes, and by a new method of cultivation manages to double his
crop for the former expenses of labour. What will happen as regards
the price of potatoes? From our knowledge of what competition does
in large production we are apt to say: “prices of potatoes will fall
50%.” This may be the final result, but not necessarily so, and at any
rate the movement of price is instructive. The farmer is now able to
sell at half the price if he wishes, but it is his interest to keep
up the price as long as he can. What, however, will certainly happen,
in normal circumstances, is that he will increase his production of
potatoes. But it is not the case that, whatever nature and man produce,
men will desire: it is, rather, that what man desires he usually sets
nature and men to produce. To take off the extra supply of potatoes,
then, the farmer must find a wider circle of demand than before; but
there is nothing to lead us to suppose that there is any wider circle
of demand at the old price. What we may safely suppose is that a great
many housewives will buy extra potatoes if they can get them cheaper,
but, in any case, the decision lies absolutely with them whether they
will take more or not. It is easy to fall into the mistake of thinking
that there will be a demand for everything produced if it is sold at
a reasonable price, but this idea simply arises from the fact that
producers anticipate desire and tempt demand. In the present case,
demand must come from some level of want which was not satisfied at the
former price, and is ready waiting to take up the extra supply if the
price is brought down.

If, however, as may very well happen—not in the case of potatoes
probably, but in large articles of limited consumption—there is no
such circle of demand at lower levels, what will happen is that the
farmer will dismiss half the hired labour, produce the same quantity of
potatoes as before, and maintain the former high price. For farmers,
like other business men, do not put themselves on “salaries,” and
give the public the benefit of all cheapening of production. It is
characteristic of the capitalist employer in all departments that he
speculates on having a profit, and thinks no profit too high, just
because, as a speculative gain, it may be balanced any year by as great
a loss. It is contrary, then, to all experience to think that employers
will voluntarily reduce prices—any more than they will voluntarily
raise wage or pay higher interest—because costs have decreased. They
only do so under the compulsion of fear that their rivals will cut
the feet from under them. Where competition is active, it will often
seem as if reduction of costs were almost immediately followed by
fall in prices of products; but, in the last resort—and that is what
concerns us in seeking for a universal law of value—the new prices are
determined by the lower and wider levels of want which are ready to
take up increased supply of the majority of ordinary commodities.

Transfer the argument now to the production of iron. If new mines are
opened, the first phenomenon is not a fall in the price of iron, but
an increase of supply. If the demand from the side of iron wares
has hitherto been met at the price—as we must assume—the new extra
supply will not be taken off at the price, and there is, for the
moment, over-supply. At this point, the lower level of demand for iron
wares hitherto unsatisfied asserts itself, and offers its subjective
valuation. This is accepted: a new marginal employment is found for
iron. The price of this marginal product now determines the price of
the productive good iron; and in time it is possible for competition to
impose this marginal value on all iron products, and the price of iron
wares generally falls.

Lastly, take the case of Labour. Here we have a productive good of
the same nature as iron in that it is capable of employment in an
infinite number of ways. The labouring power of a nation, like all
its other productive goods, goes steadily into the most remunerative
employments one after another. But, of all productive goods, labour
shows most evidently that it has no predetermined value, but gets its
value entirely from what it produces. Consequently, the price of labour
is, naturally, as variable as the price of its products. Some products
of labour will for the time fetch a price equal to 10/ a day of wage;
others, prices equal to 9/; and so on down the scale, perhaps, to 3/
per day. If the available labour as a whole is taken up at that wage,
those products of labour which pay 3/ per day of price to labour will
assert themselves as the marginal products, and that wage will seem in
its turn to determine the value of other products. But if population
goes on increasing, other things remaining the same, and a new supply
of labour comes forward, this labour will inevitably seek lower levels
of demand—for, of all goods, labour is the one that will not “keep.”
On the other hand, there are at any time endless wants waiting on
satisfaction, but not able to pay the marginal cost of satisfaction,
the 3/ per day. Consequently, as buyers with a lower valuation than the
marginal one, they do not affect price. But now the new surplus supply
of labour and the unsatisfied layer of wants come together. Labour is
set to satisfy wants that offer, say, 2/6 per day of wage for their
satisfaction, and the products thus resulting become the marginal
products. Happily for the labourer, competition cannot do its perfect
work where the commodity bought and sold is human life: but, if labour
were entirely mobile, it would only be a question of time till the
marginal product fixed the wage of labour generally, and wages fell in
harmony with the new marginal costs—the low wage for what the labourers
produced being, let us hope, more than recouped by the universal fall
in prices of what the labourers consumed.




CHAPTER XV

CONCLUSION


Thus we have found that what determines the value of productive goods
where the product is one single good directly connected with them, and
what determines it in the most complicated cases, where the conduction
of value is, first, to means of production, and, then, back again to
product, is always the marginal utility, the utility of the marginal
product. As the vineyards of Tokay get their value from the wine of
their grapes, and as cotton gets its value from the bare backs it
covers, so do iron, coal, and labour get their value in the last
resort—far as may be the course from post to finish—from the last
employment into which they enter.

It has already been said that the law developed in the previous
chapters is not a rival to that which makes value determined by the
relations of Supply and Demand, but a more adequate expression of it.
So, in the last three chapters, the emphasis necessary to prove a
difficult proposition may have given the impression that the present
law is put forward in contradiction of the determination of price, in
the great majority of cases, by costs of production. It may, then, be
as well to remember that the work of the Austrian school is a quest
for the _fundamental_ law of value. In the complicated circumstances
of modern industry, it is not easy to see the real nexus of cause
and effect. In a developed market, where production speculates on
demand, value naturally assumes the appearance of being determined
beforehand. Human wants are tempted, as it were, instead of giving the
initiative. Thus the impression is easily got, and with difficulty got
rid of, that human want will pay the price which production dictates,
the fact being that production must, in the long run, conform to the
nature and measure of human want. And thus also, I am afraid, comes
the idea, certainly common among the employing classes, that wages
are dictated by them from above, instead of being produced by the
labourers themselves—an idea degenerating in many cases into the belief
that combinations of workers to secure their share in the product are
illegitimate interferences with capital.

What is contended is that the Law of Cost is a good working secondary
law as regards articles reproducible at will under large and organised
production; that is, of course, as regards the vast majority of goods
produced. But it has always been taught by economists that it did
not hold outside these cases. On the other hand, the Law of Marginal
Utility is claimed as the universal and fundamental law of value. It
has not been difficult to prove its validity in the simpler cases; and
if now, in the later chapters, our law has been shown to be the real
background of the empirical Law of Cost, the contention is justified.

And thus, as representing, however humbly, the modern Austrian school,
I may close with the words written by our own Jevons twenty years
ago. “Repeated reflection and inquiry have led me to the somewhat
novel opinion, that _value depends entirely upon utility_. Prevailing
opinions make labour rather than utility the origin of value; and
there are even those who distinctly assert that labour is the _cause_
of value. I show, on the contrary, that we have only to trace out
carefully the natural laws of the variation of utility, as depending
upon the quantity of commodity in our possession, in order to arrive at
a satisfactory theory of exchange, of which the ordinary laws of supply
and demand are a necessary consequence. This theory is in harmony with
facts; and, whenever there is any apparent reason for the belief that
labour is the cause of value, we obtain an explanation of the reason.
Labour is found often to determine value, but only in an indirect
manner, by varying the degree of utility of the commodity through an
increase or limitation of the supply.”




APPENDIX I


Wieser’s chapter on the paradox of value (_Natürlicher Werth_, i. §§
7 and 10) deserves more space than could appropriately be given it
in the text. I therefore give the substance of it here. Suppose, he
says, that I have a certain good the employment of which yields me
a utility represented by 10, and that I add successively 10 similar
goods to my stock, the marginal utility, at each addition diminishing
by 1. The value of the stock will stand successively at 10, 18 (9 ×
2), 24 (8 × 3), 28 (7 × 4), 30 (6 × 5), 30 (5 × 6), 28 (4 × 7), 24 (3
× 8), 18 (2 × 9), 10 (1 × 10), 0 (0 × 11). Here, obviously, each added
good brings a smaller utility than the last, and at each addition the
marginal utility, and with it the value, of the unit of goods falls.
But while the value of the single good thus steadily falls, the value
of the whole stock describes a peculiar course: it rises from 10
to 30, pauses there a moment, and then falls from 30 to zero. This
phenomenon of increasing wealth accompanied by decreasing value is a
paradox from which we shall not escape so long as we consider value
a simple and positive amount. Value arises in the combination of two
elements, a positive and a negative. It is a combined amount, or, more
accurately, a residual amount. The positive element in value is the
gratification from the use of goods. This gratification is subject to
a natural law of “diminishing returns”: as the first draught of any
pleasure is the most grateful, and as the gratification weakens at
every repetition, so a single good stands highest in our estimation,
and each addition to the stock occupies a lower place. The value of the
stock successively may be represented thus—

    When the stock consists of  1  2  3  4  5  6  7  8  9 10 11 goods,
                               —— —— —— —— —— —— —— —— —— —— ——
    the total gratification is 10 19 27 34 40 45 49 52 54 55 55 units.

This would be the movement of value if value were simply positive:
beyond a certain point, additions to the stock would _add_ no value,
but they would not cause any _loss_ of value, and the highest point
would come last in the series. But there is another, and a negative
element in value.

It arises from the indifference which we naturally feel towards goods.
To man only the human is really important: by nature his thought, his
sympathy is for himself; for _things_ he only cares, in the first
instance, as he finds in them any relation to human interests. This
interest may take the form of sympathy with pain or pleasure in the
animal world; or that of religious and poetic feeling suggesting the
unity of all life; or, lastly, that of economic valuation finding in
things the auxiliaries and conditions of human wellbeing. This natural
indifference is so great that it requires a peculiar compulsion before
we look at anything outside us as having importance or value. Simple
utility is not enough: if useful things are present in superfluity,
we think no more of them than we do of the sand on the sea shore. It
is only when our wellbeing is not assured that an interest awakens in
the things on which it is seen to depend, and that we exert ourselves
to acquire these things. The overcoming of this natural resistance,
then, is something with which we have to reckon. The greater our need,
the less the resistance: in cases of extreme need, it disappears
altogether, and we identify our fate with the fate of the goods which
“are life or death to us.” The resistance is at its height when we
have everything in excess, and feel no thanks due to goods which
cannot help ministering to our enjoyment—for there is no reason why we
should value additional goods unless they give us additional wellbeing.
Between these two extremes, the interest we transfer to goods is
proportioned to the interest we take in what they do for us. But we
do not attach to them the whole of the interest they really have for
us: we do not require to do so, for goods of a stock are not estimated
according to their actual importance, but according to the marginal
utility they afford. All utility over the marginal utility is kept
back from the value of the goods, and this gives us the figures for
the strength of the resistance: the negative element is equal to the
surplus value deducted. Thus, when the stock consists of two goods,
the actual gratification is 10 + 9 = 19, while the calculation of the
value is 9 × 2 = 18, leaving a surplus of 1: when the stock consists of
4 the actual gratification is 10 + 9 + 8 + 7 = 34, but the value is 7
× 4 = 28, leaving a surplus of 6, and so on. Putting these two scales
together we have the following—

                  1    2    3    4    5    6    7    8    9     10   11
                 -------------------------------------------------------
    Positive (+)  10   19   27   34   40   45   49   52   54    55   55

    Negative (-)   0    1    3    6   10   15   21   28   36    45   55
                --------------------------------------------------------
    Residual (+)  10   18   24   28   30   30   28   24   18    10    0

That is to say, combining the positive and the negative elements, we
get Residual Amounts corresponding to the marginal scale. Thus we see
that the value of a stock increases with the increase of its units so
long as the positive element is in the ascendant: _i.e._ so long as the
increment of value obtained from the newly-acquired good is greater
than the decrement of value which its addition causes to every good
already in the stock. We may call this the “Up-Grade” of the movement
of value. On the other hand, the value of a stock falls in the converse
circumstances, and this marks the “Down-Grade” of value. Twice, then,
in the development of value is zero touched—when we have nothing and
when we have all: in the former case, because value has no object to
which to attach; in the latter, because there is no subjective motive
to attach it to anything. In practical life, we have mostly to do with
the up-grade of value. In most of our possessions, we are so far from
superfluity that increase of quantity involves increase of value;
while the individual value of the single good sinks, that of the stock
rises. And this is the reason why we usually measure wealth and riches
by the sum of the values of their elements, and count it hard if the
value of our property and our returns goes down. And this, again, is
why it seems paradoxical when we find that the amount of goods and
enjoyment of wealth and welfare has increased while their “value” has
gone down. It does on rare occasions happen that individual branches of
economy are for the moment forced on to the down-grade—as in the case
of phenomenal weather producing a miraculous crop, or the discovery of
new mineral strata of unsuspected richness, or great discoveries in
machinery and processes, or, perhaps, the fact of producers extending
too fast from overreaching greed or foolish overestimate of demand.
But it is probable that the conditions of industry, as a whole, will
never be favourable enough to bring production so near excess that
the down-grade of value will be permanently entered on. All the same,
the existence of what we call the “free gifts of nature” allows us no
room to doubt that value disappears whenever superfluity is reached,
and this gives us the best confirmation of the statement that it must
decrease as we come near it.




APPENDIX II

THEORY OF VALUE: THE DEMAND SIDE


Many of the difficulties in the Theory of Value arise from not keeping
clearly before us that it is a Theory of Human Valuation; of the
values which men do—not of what they should—put on things. The idea of
“intrinsic value” dies hard.

=Connection with Wealth.=—“Wealth consists of useful things.” “Wealth
consists of valuable things.” Both statements reflect current views,
and both are true, the one suggesting an Inventory, the other a
Calculation of the same things.

=The Problem stated.=—Twenty goods, different in substance, size,
shape, quality, use, are equal in this, that a twenty-first good, say
a shilling, will purchase any of them. What is it that puts them in a
balance, and pronounces all the twenty-one goods equal in value?

=An Indication.=—It has been suggested that Value is the order of our
Preferences. But can one thing, strictly speaking, be “preferred” to
another unless the two are at equal price? At any rate, it cannot
be said _simpliciter_ that the ordinary man “prefers” diamonds to
his dinner. The suggestion, however, reminds us that we never value
anything by itself; we always value it by reference to something else.
Thus, in the last resort, Value expresses an order—a more or less.

=Comparison with other Measures.=—Measures do not hang in the air;
they are based on something—a unit proclaimed by Governments, either
quite arbitrarily or as corresponding to some presumably fixed natural
phenomenon, _e.g._, the yard and the metre. So, in ancient times, the
gold talent _weighed_ 120 to 140 food-grains, and was equated, by
convention, to the ox, which was the primitive unit of value. But this
throws no light on the _value_ measurement which equated the ox to
the talent. (It is submitted, in passing, that the equation was only
an ideal one—a convenient point of departure; that the ox generally
exchanged for the talent with a plus or a minus, just as the point
of departure for a lawyer’s fee is “six and eightpence,” or as the
30 acres presumed necessary for the support of a manorial family was
the point of departure for a “virgate.”) The grain basis of the gold
talent, however, suggests that the value measurement also has a natural
basis;—that Value is the comparison and expression of things in a
Common Third. What is this Common Third?

=Labour as the Common Third.=—A famous theory says that value expresses
and measures the more or less of labour “embodied” in goods—the labour
involved in the getting or making of goods. This, however, involves
the idea of a Unit of Labour, _i.e._, it assumes the possibility
of bringing all labour to a common expression—a previous equation.
This difficulty seems insuperable, even when we look only at one
side of the primitive equation: can any labour be more different in
amount, intensity, and quality than that which gets gold? Suppose
this overcome, and suppose the similar difficulty of equating the
various labours involved in getting oxen overcome, what common quality
measures these two sets of labours? When, finally, one tries to weigh
head labour against hand labour, _except by the price paid for their
results_, the full impossibility stands revealed. But, of course, to
bring different labours to an equality by referring to the price paid
for their results, is to beg the whole question. Assume that things
are valuable and variously valuable, and one may pronounce that the
labour spent on them will be correspondingly valuable; but the previous
question is—Why are the products so variously valued? The hold which
the Labour Theory took in last century can be explained only by its
introduction of a moral idea making results (prices) depend on that
which makes and elevates man, namely, Labour. But it certainly would
make Value something very different from Human Valuation. (Note in
passing that this theory is not to be confounded with the Cost of
Production theory, which, indeed, is the other—the Supply—side of the
true theory.)

=Life as the Common Third.=—When Adam Smith said that water had great
value in use, and diamonds scarcely any, he suggested life as the
common third. It might, indeed, be possible to draw out a “natural
order” of values—a hierarchy of things according to their power of
sustaining an average human life. An animal or a Crusoe might value
things in this way. It is evident that in prehistoric times the ox was
adopted as the standard because of its measurable potentiality in this
respect. But, in any community that we know, “life” is too complex to
afford a basis; not only does “living” become intellectual, moral,
æsthetic, but goods naturally availing to life, becoming plentiful,
notoriously lose their value. This, however, suggests the true answer.

=Utility as the Common Third.=—The common third is Utility. Jevons’
words, in his introduction to the _Theory of Political Economy_ (1871)
put this succinctly. “Repeated reflection and inquiry have led me to
the somewhat novel opinion that _Value depends entirely upon Utility_.
Prevailing opinions make Labour rather than Utility the origin of
value; and there are even those who distinctly assert that Labour
is the _cause_ of Value. I show, on the contrary, that we have only
to trace out carefully the natural laws of the variation of Utility,
as depending upon the quantity of commodity in our possession, to
arrive at a satisfactory theory of exchange, of which the ordinary
laws of supply and demand are a necessary consequence. This theory is
in harmony with facts; and, whenever there is any apparent reason for
the belief that Labour is the cause of Value, we obtain an explanation
of the reason. Labour is found often to determine Value, but only in
an indirect manner, by varying the degree of Utility of the commodity
through an increase or limitation of the supply.” Here, however, we
must hark back to first principles, and see what we mean by Utility.
The question is pertinent, not only because of the misleading meaning
given to the word by current opinion, but because of its association
with the supposed materialist tendencies of Utilitarianism—an
association, indeed, from which economic science still suffers.

=The Boundary Line in Economics.=—Every science, as expressing the
division of labour which rules in thought as in industry, must limit
itself and specialise. Granting in the fullest way that men never
escape the obligation to ethical conduct in the industrial as in the
political life, there can be nothing but confusion if we do not draw a
line, however arbitrary, between ethical science and economic science,
just as we draw a line between ethical science and political science.
Let us drop, so far as possible, the word Wellbeing, which is generally
taken as explaining “Wealth,” and has, in current language and in
cruder economics, become confused with it. Take it from Aristotle that
Happiness is the “end in itself”—the Good for which we desire all other
things. Men, blindly seeking Happiness, aim, not indeed at Money,
but at the things which Money can buy, and these they call Wealth. It
is true that many of these things are as aptly called Illth (Ruskin’s
word), still the “Illth” is not in themselves, but in the uses men
make of them. They are, at any rate, “goods,” and they often prove
themselves “good” by finding their other uses. What remains beyond
doubt is that men buy goods—that is, express and measure the value they
attach to them in a money price—because they _want_ them. Why do they
want them? We may avoid the ethical connotation of the word Happiness
by taking a word which has been hypothecated by economics, and saying
that they seek Satisfaction. Here “Wealth” becomes marked out, both
currently and scientifically, as the “collection of instruments” which
aims, rightly or wrongly, at this Satisfaction. We take Satisfaction,
then, as the boundary line of Economics—although a limit always
suggests something on the further side. But what is Satisfaction?

=Satisfaction.=—Satisfaction is found in men and animals alike, in
the filling of physical wants and the forth-putting of activities. To
these man adds infinite desires—less urgent, perhaps, but hungrier
and more far-reaching than physical wants. Mark, however, that wants,
desires, and activities merge into one another—human hunger, _e.g._, is
appetite; the best life is one long purposed activity, subordinating,
but necessitating, the satisfaction of wants and desires incidental to
it.

=Goods.=—This satisfaction gives us the meaning of Goods. The
reason—and the sole reason—why we want goods is that by our
constitution we cannot get satisfaction without them. Wealth, then, is
the complex of goods on which satisfaction is presumed to be dependent.

=Law of Satiable Wants.=—All wants and desires weaken with
satisfaction, and, if satisfaction is carried far enough, they, for
the moment, disappear. Generally, however, as our wants and desires
are many and various, and as one satisfaction limits another, we leave
off in the satisfaction of any want at a margin far short of satiation.
This is purely a physiological and psychological phenomenon, not an
economic law.

=Law of Diminishing Utility.=—Satisfactions being dependent on Goods,
we easily reflect the satisfaction on to the goods, and use the
relative word Utility as if it were a quality of goods. Transferring,
by the same process, the weakening satisfactions to goods successively
presented to a want (or to similar goods in our possession), we get
a statement of a fundamental tendency of human nature, the Law of
Diminishing Utility; namely, that the additional utility which a person
attaches to a given increase of his stock of anything diminishes as
the stock increases. This is purely an Economic Law; for, physically
considered, the goods themselves retain their material content
unchanged, and are not in the abstract less capable of satisfying want,
_if there be want_. Thus is explained Jevons’ “variation of Utility,
depending on the quantity of commodity in our possession,” which, in
developed exchange, gives us the law that Demand, _ceteris paribus_,
decreases as Supply increases, and _vice versa_.

=A Caveat.=—The above analysis corresponds with, and would be
recognised by, current ways of thinking and speaking; and, since
Jevons, it seems to be accepted by economists. But it may be granted
that Utility might be, and has been, defined differently—as the
potentiality of satisfying human want; in which case we might speak
of Intrinsic Utility. Here Utility would not rise and fall, but be
measured by the properties useful to man which things contain; it
would correspond, then, with certain fixed physical elements. But such
nomenclature leads us into the same difficulties as “intrinsic value”
does; and we should in any case require another word to designate
Utility in Jevons’ sense. It might be advisable, however, where
clearness is required, to speak of Economic Utility.

=Total Utility.=—On these lines there is suggested one way of measuring
Utility. Taking ten successive increments of a similar good, the whole
stock may be figured as a sum in addition of Diminishing Utilities,
say, 10, 9, 8, 7, 6, 5, 4, 3, 2, 1—a total of 55 units of Utility.

=Total Value.=—Though it may be suspected that Value is somehow
connected with Utility, it is clear that the Total Value of such
a stock is not the same as its Total Utility, but something much
less. Water, _e.g._, in spite of the fact that successive increments
generally give utilities (though diminishing utilities), is valued at
nothing. Supposing the units in the above sum were gallons of water,
and an 11th gallon were to be added—representing superfluity as regards
wants—the Total Utility would still be 55, as the final utility of 0
does not alter the sum in addition. And yet the Total Value, as men
call value or as measured by any canon of purchase or exchange, would
be 0. This suggests the solution.

=Final Utility and Value.=—The value of a stock of goods is measured by
the Least or Final Utility—the utility of the last increment. The value
of the single good is the Final Utility, and the Total Value is the sum
of the Final Utilities. In the above illustrations, the value of each
of the ten goods is 1, and the Total Value is 10; the value of each of
the eleven goods, on the other hand, is 0, and the Total Value likewise
is 0. The test always is: If you lose one item, how much value do you
lose? You lose only the least utility, and, seeing that value cannot be
greater than utility, and that all the items are equal, the utility you
lose expresses the value.

=Two Objections.=—(1) It may be objected that there is an assumption
here, namely, that Value is not differential like Utility. We need to
be reminded that we are dealing with human valuations, and that, in
such valuation, Value is not differential. When men speak of things
having “different values but one price,” what they mean is “different
utilities but one value”; things of the one objective value or price
have different subjective utilities. We certainly find differential
values in this sense, that sometimes one man is charged more than
another if his pocket can be forced by necessity or his ability to pay
is known. But this is exceptional, and, in any case, it does not apply
to one and the same man buying successive items of the same goods. (2)
It may be objected, in the case of the eleven gallons of water, that it
would not generally be acknowledged that the total value was nothing
although the loss of one gallon involved no loss of utility, the proof
being that, if the total stock is lost, a considerable value is lost.
But this is to value the eleven gallons together, considering them as a
_single_ good, whereas we are considering them as eleven separate goods
with diminishing utilities attached to each. The absence of value in
the eleven gallons, in short, depends on them being considered not as
one stock of water, but as eleven separate gallons.

=The Paradox of Value.=—From this measurement of value by Final
Utility, comes the paradox that the addition of items of goods is an
addition of value only up to a certain point: if carried beyond, the
Total Value falls; and, if superfluity is reached, it disappears.
Taking the former figures; as the items successively increase from 1 to
11, the Total Value describes this course—10, 18, 24, 28, 30, 30, 28,
24, 18, 10, 0; that is to say, an up-grade till the stock consists of
five goods, equality between a stock of five and a stock of six, then a
down-grade to zero. Thus one may have less Total Value with many goods
than with few. The explanation is, as before, that, as goods increase,
wants diminish; the satisfaction dependent on the last added increment
is always less than that dependent on the earlier increments—that is,
the Final Utility falls; till, in superfluity, no satisfaction is
dependent on one item, and the Value of the single item has disappeared
because its Utility has disappeared.

=Illustration.=—Take the wheat crop in France in 1817, 1818, 1819.
The harvest was successively 48, 53, and 64 millions of hectolitres
(and presumably the Total Utility increased), while the Total Value
was successively 2,046,000,000, 1,442,000,000, and 1,117,000,000
francs. This should remind us that the effort of the industrial world,
as distinguished from that of the individual, is always towards the
increase of Utility, not necessarily of Value. The total disappearance
of Value, however, is almost never seen, because, at the worst,
articles however useless subjectively, have always the use of exchange.

=The Course of Total Value.=—As a rule, Total Value increases with
Total Utility, though not in the same proportion: the reason being that
there are very few things of which the community, as distinguished from
the individual, ever has more than enough to satisfy its most urgent
wants. As goods increase, the dependence of the richer classes on them
indeed diminishes, but they then come within reach of poorer people,
whose want has hitherto been entirely unsatisfied. Thus an abundant
crop, although the Final Utility may be low, is _generally_ of much
greater Total Value than a short one.

=Marginal Utility.=—As there are many closely related wants, and as
the satiation of one would prevent the emergence of others, it is
seldom that we completely satisfy any single want. As one want is
being satisfied, it diminishes in urgency till there comes a point
when another want, not originally so urgent, becomes more urgent; and
having satisfied one want partially, we pass on to the satisfaction
of another, and so on successively from want to want, describing a
marginal line in the satisfaction of each. This is generally—though
perhaps doubtfully—described by saying that, on this line, the marginal
utilities are equal. For this reason we replace the expression Final
or Least Utility—which is apt to suggest satiation or zero—by the
expression, Marginal Utility—the margin at which we stop in the
circumstances.

=Exchange.=—Hitherto Value has been presented as a relation between
Satisfactions and Goods. It remains to say that this subjective
valuation becomes objective and explicit in exchange; we have, in fact,
a definite expression of this valuation in the thing surrendered in
exchange. In other words, we need not measure Value by the subjective
satisfaction we should lose in losing the marginal item—we actually
do lose the utility we part with in purchasing, and this—generally
money—names the value. If exchange were by barter, it would be clear
that the exchanger surrendered a utility as well as gained one. Take a
shepherd and goatherd bartering successive items of their flocks; the
gain and loss of sheep-utility and goat-utility are quite evident—as
is also the diminishing marginal utility of the items successively
acquired and the increasing marginal utility of the items successively
parted with. When money forms the one side of the exchange, it is not
essentially different; the motive always is that the thing purchased
is considered of greater utility than the money parted with: that is
to say, of greater utility than all the things that might, in the
circumstances, have been purchased with the money. But, in this case,
the money parted with expresses universally the value of the goods
bought, and gets the name of Price. Thus Price, in this point of view,
is the money expression of Marginal Utility.

=Marginal Utility of Money.=—Money, like all other goods, diminishes in
utility with increase in the amount of it possessed. But the diminution
is much less marked, and never comes near zero, because money is not
one commodity, satisfying one want, but is potentially, everything that
money can buy, _i.e._, a complex of things satisfying almost the whole
complex of wants. Till we have no need for anything which money can
buy, the marginal utility of money will not sink to zero.

=Demand Price.=—What we have in actual life is not, of course,
individual bargains between two persons, where the exchange would be
determined by the marginal utility on each side, and Demand Price and
Supply Price would be convertible terms. Still what we have, on the
one side, is multitudes of people—each with different valuations based
on different subjective marginal utilities depending on different
circumstances of want and provision—offering Demand Prices. That they
are confronted, in the market, with another distinct set of prices
brings us to the other side of the total theory of value.

=Summing Up.=—We have, then, passed from Happiness to Satisfaction of
Wants and Desires, and from Satisfaction to the Goods which condition
it. From this emerges Utility, and the analysis of Utility yields up
Total Utility and Marginal Utility. With Marginal Utility we identify
Value. Then we found Value naming itself in something given up; that
something, in developed civilisations, is Money, and Price becomes the
universal expression of Value. When we conceive of Price as the sum of
money seeking after goods, it is Demand or Demand Price.

=Demand and Supply.=—The above is the Theory of Value from one side,
that of Demand, _i.e._, of Utility expressed and measured in money
figures, and offering itself as demand for other utilities. It accounts
for our willingness to pay certain prices. But although the tap root
of value is Utility—for there can be no value in the absence of
Utility—there is another side. The sum we are willing to offer—our
Demand Price—is confronted with, and at all times affected by, another
sum, which seems independent—Supply Price, and this latter sum seems
determined by Cost of Production. These two sides and their mutual
relations are necessary for any complete Theory of Value. Hence
Marshall’s words: “There has been a long controversy as to whether
Cost of Production or Utility governs Value. It might as reasonably
be disputed whether it is the upper or the lower blade of a pair of
scissors that cuts a piece of paper.”




INDEX


    Adam Smith, 1, 8, 18, 20.
    Aristotle, 3, 47.
    Austrian School, 5, 27, 30, 55, 85.

    Böhm-Bawerk, 7, 32, 37, 40, 45, 47, 55, 60, 61.

    Complementary goods, 42.
    Consumption goods, 68.
    Cost of production, 67;
      conduction of value from marginal products to, 74;
      from, to products, 78.

    Demand Side of the Theory of Value, Appendix II., 91.
    Desirable and desired, 10, 11.

    Exchange, 56;
      motives of, 56;
      isolated, 57;
      no one-sided competition, 58;
      ordinary, 58.

    Goods, 11, 16;
      economic, 17;
      classification of, 21;
      complementary, 42;
      stand midway between production and consumption, 68.

    Illustrations: sailor and his dog, 30;
      Crusoe and his sacks, 32;
      housewife and her butter, 39;
      silk substitute, 76.

    Jevons, 6, 8, 11, 32, 85.

    Life, 4, 10.

    Marginal buyer, 64;
      marginal pair, 60, 64.
    Marginal products, conduction of value to productive goods, 74.
    Marginal utility, 29;
      level of, 40.
    Menger, 11, 15, 17, 42, 45, 68.
    Mill, 2.

    Neumann, 7.

    Political Economy, based on economic conduct, 9.
    Price, 55;
      assumptions of the law, 56;
      based on subjective valuations, 61;
      determined by the marginal buyer, 64.

    Ricardo, 12, 18.
    Roscher, 68.
    Ruskin, 4.

    Satisfaction, the diminishing scale (_Sättigungscala_), 27;
      Appendix I., 87.
    Scarcity, 10, 11, 16, 40.
    Schäffle’s objection, 36.
    Subjective exchange value, 47;
      money the typical example, 50.
    Supply and Demand, relation of the Austrian law to the law of, 65, 84.
    Sydney Smith, 2, 3.

    Useful and valuable, the distinction emerging, 11.
    Utility, 8, 12;
      the supreme principle, 13, 14, 24;
      marginal, 29;
      the foreign, 39.

    Value, looseness of the term, 1;
      in use and in exchange, 2;
      not an inherent property, 3;
      always a relation, 5;
      subjective and objective, 5;
      depends entirely on utility, 8;
      analysis of common usage, 9;
      the common element, 10;
      difference from utility, 11, 12;
      attaches to a felt condition, 14;
      the centre within us, 16;
      a relation of dependence, 17;
      scale of, 18;
      Adam Smith’s scale, 20;
      where nearly true, 24;
      the true scale, 26;
      determined by marginal utility, 32;
      paradox of, 34;
      necessity of defining what one is valuing, 35;
      capitalised, 37;
      the lowest use, 37;
      the foreign utility, 39;
      of complementary goods, 42;
      subjective exchange, 47;
      transition to objective, 52;
      and price, 55;
      price based on subjective valuations, 61;
      supply and demand, 65;
      cost of production, 67;
      from the past or the future of goods, 67;
      the conduction of, 70;
      shown by silver, 72;
      conducted from marginal products to cost, 74;
      and from cost to product, 78, 84;
      the fundamental law, 84.

    Walker, 4.
    Wants, a demand for satisfaction, 15;
      classification of, 19;
      scale of, 20.
    Wieser, 13, 28, 32, 45, 46, 47, 51, 62, 87.

GLASGOW: PRINTED AT THE UNIVERSITY PRESS BY ROBERT MACLEHOSE AND CO.
LTD.



*** END OF THE PROJECT GUTENBERG EBOOK 76470 ***