The Intellectual Foundations of Political Economy
The Austrian School
The Ultimate Standard of Value
by Eugen Bohm-Bawerk
There are certain unsettled questions in economic theory that have been handed down as a sort of legacy from one generation to another. The discussion of these questions is revived twenty or it may be a hundred times in the course of a decade, and each time the disputants exhaust their intellectual resources in the endeavor to impress their views upon their contemporaries. Not unfrequently the discussion is carried far beyond the limits of weariness and satiety, so that it may well be regarded as an offence against good taste to again recur to so well-worn a theme. And yet these questions return again and again, like troubled spirits doomed restlessly to wander until the hour of their deliverance shall appear. It may be that since the last discussion of the question we have made some real or fancied discoveries in the science, and some may think that these throw new light upon the old question. Instantly the old strife breaks forth anew, with the same liveliness as if it possessed the charm of entire novelty, and so it continues year after year, and will continue, until the troubled spirit is at last set free. In this class we find the question -- What is the "ultimate standard of value," (dem letzten Bestimmgrunde des Wertes der Guter)? The content over this question began as early as the days of Say and Ricardo. More recently the German, Austrian, Danish and American, English and Italian Economists have taken it up, so that the contest has assumed an international character.
The present generation has indeed some justification for again renewing the discussion. It cannot be denied that of late we have made some important additions to the sum of our knowledge in regard to the theory of value. This at first resulted in an increase in the number of conflicting opinions, but if we are not greatly mistaken, the present phase of this difference in opinion is due to a positive misunderstanding, which stands as a rock of offence in the path of explanation.
I believe that this fatal misunderstanding may now be definitely and finally removed, by an investigation which need possess no other merits than those of care and exactness, and that this will result in permanently advancing the controversy by several pace. In this belief I venture upon a step which otherwise it would be difficult to justify, and propose to add yet another victim to the hecatombs already offered upon the altar of economic theory, though, owing to the necessity of pedantic thoroughness in such an investigation, it is a sacrifice which may not commend itself to some of our readers. I. THE PROGRESS AND PRESENT POSITION OF OPINION.
Since the time when Economics first became a science, there have been two rivals for the honor of being considered the "ultimate standard of value", the utility that the goods afford, and the cost of their attainment. Any tyro who take up this question of the "value of goods" will invariably start out with the idea that we value goods because, and in the measure that, they are useful to us. He will, therefore, incline to the opinion that the ultimate cause of the value of goods is to be found in their utility. But this naive opinion is soon disturbed by a thousand practical experiences. It is not the most useful things, as air and water, but the most costly things that show the highest value. Again, in innumerable instance, it is undoubtedly true that value and price do accommodate themselves to cost of attainment, and so at the very outset the spirit of dissent was introduced into the theory of value, and has remained there until the present day. There was either this divergence of opinion, or a division of the field of value phenomena into two sections, that of utility and that of cost; or, finally, both domain and opinions were divided.
The classical theory of value, as is well known, divided the domain of the phenomena of value. A distinction was drawn between "value in use" and "value in exchange." The "value in use" of goods was thought to rest entirely upon utility, but beyond this passing reference to the domain of utility the classical theory did not trouble itself about value in use. In "value in exchange," a distinction was made between monopoly or scarcity goods on the one hand, and freely reproducible goods on the other. The value of goods of the first class, e.g., wines of rare vintage, statue or picture by leading artists, rare old coins, patented inventions, was thought to depend upon the demand for them, and this in turn depended upon their utility. The value of goods of the second class was thought to depend upon their cost of production, or, as it has been more accurately stated, since the time of Carey, upon their cost of reproduction. To this, as we know from experience, the value and price of all freely reproducible goods tends, in the long run, to conform.
As we have said, the classical theory does not enter into any discussion of "value in use." It also practically ignore the value of scarcity goods, holding, that instance of such value are few in number and of little importance. The stress was thus thrown upon the value of freely reproducible goods. In this way it came about that "cost" was held to be the "ultimate standard of value." This view did not escape frequent and serious, though for the most part, unsuccessful attacks. Say, MacLeod and many other celebrated or little known writers have, at one time or another, attacked this cost theory of value.
It was urged that things that are not useful do not have value, no matter how high their cost of production or of reproduction may be, and therefore that high cost can only result in high value, when associated with a correspondingly high utility. From this the further conclusion was eagerly drawn, that the correspondence between value and cost, which is not to be denied, does not result from value regulating itself according to cost, but rather from cost regulating itself according to value, since higher costs are only undergone when, from the outset, correspondingly higher value are anticipated.
This line of argument, however, is itself open to serious and very manifest objections. It might be urged that just as there can be no value without utility, no matter how great the cost may be, so there can be no value without cost, no matter how great the utility may be. This is manifest in the familiar instances of air and water. The adherents of the cost theory had so much of direct experience in their favor, confirmed as this was by the undeniable interdependence of cost and value, that they for a long time had the advantage in this constantly recurring strife.
A remarkable shifting of the scene was brought about by the appearance of the theory of marginal utility. The main points in this theory I may safely assume to be well known. Its corner-stone is the distinction between usefulness in general, and that very definite and concrete utility, which, under given economic conditions, is dependent upon the control over the particular good whose value is to be determined. According to this theory, value arises as a rule -- that there are exceptions is expressly emphasized from the utility of goods, not however from some abstract and ever-varying usefulness which cannot be definitely measured, but from that use or useful employment (Nutz Verwendung), which in a definite concrete case is dependent upon the control over the particular good.
Since of all the possible useful employments to which the good may be put, it is not the most important, but the least important, that a rational being would dispense with first, the determining utility is the smartest.