The Intellectual Foundations of Political Economy
The Austrian School
BOOK 1, The Elementary Theory of Value
by Friedrich Von Wieser
|Chapter I||Chapter VII|
|Chapter II||Chapter VIII|
|Chapter III||Chapter IX|
|Chapter IV||Chapter X|
|Chapter V||Chapter XI|
It has been said that one finds in Adam Smith nearly all the explanations of value which have ever been attempted. What is certain is that, in his explanation, Adam Smith has put together two views that contradict each other. To put it shortly: he gives two theories, one philosophical, the other empirical. In the first he tries to make clear what should be thought of as the characteristic attribute of value; what it is we ascribe to some things and deny to others that, to all appearance, are entirely the same; what it is of which we ascribe a great deal to certain things and very little to other things which, measured by outside standards, seem infinitely superior. In this view value is an attribute per se, coinciding with no other that we know, and, least of all, with the usefulness of things. In carrying out this attempt Adam Smith first of all abstracts from the complicated circumstances of ordinary economic life, and confines himself to the simple, primitive, natural state. In this state he finds that it is labour in which value originates. Goods are worth to us what they cost in labour, and what, therefore, their possession saves us in labour. The idea of value thus arrived at Adam Smith goes on to apply to the empirical instances of the phenomenon of value. Thereafter when he comes across value he sees nothing mysterious in it; he has a means of distinguishing it from the other attributes of things; he knows how to get to the heart of it; indeed, through its relation to the labour from which it receives its content, he can even measure it.
But, independently of this, Adam Smith describes -- and here we come to his empirical theory -- the causes of value and of the more or less of value, as he finds them in actual life. He sees clearly that labour which he has recognised as, philosophically, the sole cause of value, is not also, practically, its sole cause. As a rule three factors together, he thinks, make up the exchange value of products; besides the labour of production there is also interest on the capital required and rent of the land required. This is not to say that the "value" of observed experience is of another nature from the "value" of philosophy. That value which is created by land and capital is of the same nature as that created by labour. As regards it also, it is labour to which we must refer, if we are to grasp its content and measure it. The only sign of his being aware that there is any contradiction between his philosophical and his empirical explanation is where he passes from describing the primitive natural condition of economic life to describing a society based on private property in land and capital. Here he cannot resist a gibe at those who "love to reap where they never sowed," although, once within the kingdom of reality, he takes interest and rent into his system as self-intelligible facts.
Nearly half a century passed, and then Ricardo tried to clear his master's doctrines of their imperfections. Ricardo deeply felt the contradiction which Adam Smith had scarcely noticed. How did he seek to remove it? In a way that, more than Adam Smith's mistake, betrayed how young a science political economy was. To-day when, in virtue of the labours of these great pioneers of the science, we stand face to face with the problems which are to be solved, it is scarcely possible to put ourselves back into those conceptions in which they first gave shape to their observations and thoughts. In their effort to escape from absolute perplexity they took frank delight in explanations which, to us now, are more of a riddle than the phenomenon they were meant to explain. What, then, did Ricardo attempt? His whole endeavour exhausted itself in tying to show that the philosophical and the empirical theory of Adam Smith, -- both of which, indeed, in taking up this position he had to clear and carry further, -- did not contradict each other so much as at first sight would appear. If we limit ourselves to the general rule and the average, value as it is and value as we get it from labour, agree in their amounts -- not altogether, indeed, but almost so -- with one exception, which is so trifling that it may be quite properly neglected. Of the two empirical factors in the formation of value which Adam Smith named besides labour, the rent of land -- and this was the ultimate gain of Ricardo's famous theory -- is entirely eliminated. Rent does not determine the value of products but is determined by that value. Interest, of course, remains, but Ricardo thinks he has shown that it increases with the value of products in, approximately, the same ratio as the quantities of labour required for production, so that the quantities of labour do, in the long run, give a fairly true measure of the value relations of all products. Interest, as treated in this way, forms no hindrance to his system, and Ricardo consequently does not really try to explain it. He takes it as he finds it -- a fact that needs no explanation. This treatment, which has excited the astonishment of so many later writers, is perfectly intelligible if we remember the impulse which set Ricardo's mind to work. He had no intention of explaining the whole of economics. He wished to show only that the value which is, is very much the same as the value which can -- although only from a certain point of view -- be understood. Ricardo was the last man in the world to think of reforming economic life. He never opposed, to the value which is, the value which ought to be. It never came into his mind to condemn interest, and his system, understood in the sense of its author, does not in the least involve the condemnation of interest. In this there is nothing illogical, and when the socialists base their crusade against interest on his system, they do not complete it, as they imagine they are doing, but destroy it. Only if interest is undoubtedly a good thing can over pass over it as Ricardo does.
Since Ricardo's book appeared another half-century has fled, and, since the Wealth of Nations, more than a century. In that time the demands on the social sciences have grown apace. In Adam Smith's day people explained the existing condition of things by the "original" nature of man and the "original" state of things, and were content. We, on the other hand, like to explain reality by reality. Philosophy itself has become empirical. It allows no argument which is not drawn from well-founded experience. The historical state, positive law, the economy of every-day life, are the objects of research, and, at the same time, the ultimate sources of the instruments of research. If Adam Smith and Ricardo were writing to-day, they would be full of the spirit of to-day, and even if they had not command of the abundance of observation and knowledge which the genius of the one and the acuteness of the other have put at our service, their books would be ever so much more perfect than they could have been in their time. Certainly they would avoid the mistakes which the human spirit since their day has outgrown.
Their school, however, still pursues the path they trod, hesitating between uncomprehended empiricism and the purest speculation. And it is a great school. It is strange indeed to find that while, as regards questions of politics and of method, whole sides have renounced the English parent school, -- from the socialists to the adherents of the historical school in Germany, -- as regards the old economic problem of value many of the newer economists have remained true to its dogmas. As a man's judgment about value, so, in the last resort, must be his judgment about economics. Value is the essence of things in economics. Its laws are to political economy what the law of gravity is to mechanics. Every great system of political economy up till now has formulated its own peculiar view on value as the ultimate foundation in theory of its applications to practical life, and no new effort at reform can have laid an adequate foundation for these applications if it cannot support them on a new and more perfect theory of value.
Of course the ruling theories of value have, in many respects, put themselves in antagonism to the theory of Adam Smith and Ricardo, particularly in Germany -- although, indeed, in that country there as of late years been a widening acceptance of the labour theory. The advances which theory has made therefrom can scarcely be overestimated. More particularly may it be noted that Use Value has now been put by the side of Exchange Value, and that, besides the economic life of the individual, we now take cognisance of national and other more general economies. Here, again, the connection between the theory of value and practical politics is strikingly shown. Hostility to the individualist reading of the conception of value took sides with the struggle against the individualist tendency in economics. It seems, however, as if this branch of the ruling doctrine also has exhausted its force, and that this movement also hangs on the "dead centres." As economic research stands to-day, people, on the whole, are investigating, not the phenomenon of value, but the popular conception or conceptions of value. I have said in another place that, for the sciences which deal with human action in any of its departments, the peculiar danger is that of missing their mark. Passing by the act and its motive, they are too ready to investigate the meanings which men take out of their own actions. Thus we get "popular theories," particularly those which can be read out of the ordinary meaning of the terms in which phenomena they deal with are expressed. This remark seems to me peculiarly applicable to the value theories just spoken of.
That the theory of value needs reforming from the very foundation no one will, I think, deny. The imperfection of the prevailing views is confessed even by their own adherents. But while the great majority of economists are still at a loss where to turn, a new theory has come to the front. At first unnoticed, and then for long but little thought of, worked out by men who, for the most part, did not know of each other but yet agreed where so many had doubted and disagreed, came a new theory based on a new foundation -- an empirical theory on an empirical foundation.
The new theory starts from the old proposition, that the value of goods comes from the Utility of goods, or -- what is the same thing -- from the satisfactions of want which goods assure. To find the laws of value, then, one must first know the laws of want. Now, in this pursuit, we come upon the fact that the want for the same things -- even in the same person, and in given economic conditions -- is of quite different strengths, varying according to the degree in which the want has already been satisfied through the employment of goods. But since the employment of goods depends upon the amount of goods which one possesses, the quantity of goods obtains a decisive influence on the valuation of wants and so on the source of value itself. This observation is the starting-point of the wider investigation. In itself it is of great importance because it ultimately gives the solution of the paradoxical phenomenon that value falls as goods increase. But it is as important through its effects on economic method, because it guides the economist, from the false objects to which speculative methods and ordinary language point, to the empirical heart of the phenomenon of value.
As forerunners of the theory we may name generally all those who have derived value from utility; specially those who were persistent in basing even exchange value altogether on utility, particularly when they did not shrink from their principle in spite of the obvious influence of costs of production. Usually on this point the statement of the theory is either inconsequent or obscure, or retains its logic and its clearness, at the expense of renouncing completeness, by leaving out the question of costs. As forerunners of the new theory in the stricter sense of the term we may name those who take up the question of quantities of goods as well as their utility. Usually, of course, this goes only to the extent of showing the changes in the amount of value which follow from changes in supply and demand. But, in the case of a few writers, it has taken a much more exact form, where "scarcity," "limitation of supply" is recognised as condition under which utility creates value -- and that not only, as Ricardo says, as regards certain rare goods, but as regards goods generally. Among writers answering to this description, who may be held the immediate precursors of our theory, are Auguste Walras (De la Nature de la Richesse et de l'Origine de la Valeur, Evreux, 1831), and also Condillac, Genovesi, and Senior.(1*)
Passing by those numerous pioneer works, we meet with no less than four authors who had worked out the same theory independently of each other, Gossen,(2*) Jevons,(3*) Menger,(4*) and Leon Walras.(5*) Gossen's statement, in spite of many quite classical points of superiority, is, on the whole, the most imperfect. That of Walras, though admirable of its kind, suffers, to my mind, from the preponderance of the mathematical element. The laws which govern amounts of value undoubtedly allow of a mathematical expression; nay, the more complicated of these can be expressed exactly only by means of mathematics; and here certainly mathematics has a great task to fulfil. But in the value theory we have to do with something more than the expression of the laws of amounts. The obscure conception of value is to be made clear; all its manifold forms are to be described; the service of value in economic life is to be analysed; the connection of value with so many other economic phenomena is to be shown; in short, we have to give a philosophy of value which needs words, not numbers. And, besides all this, the empirical existence of the alleged facts is to be established.
Finally, Jevons's statement, in spite of its amazing wealth of observation and reflection, in spite of its finished expression, in spite of the catholic spirit which speaks from it, must be placed second to that of Menger. Menger goes more deeply into the subject, inasmuch as he starts from a more general conception of value. For this Menger is indebted to the German school of national economists with its patient untiring labour in formulating the general economic conceptions, and pressing forward from concrete phenomena to that height of abstraction from which the phenomena are to be logically arranged. It may be said that, in great part, the German school long ago formulated the conceptions, leaving for us only the task of filling them out by adequate observation. In this it has laid up a treasure from which all succeeding economic effort may draw indefinitely.
Of Jevons's system one part, the "theory of utility," as he calls it, has passed into English literature. Among the works of Continental economists who adopted the new theory, may be mentioned the fine statements of Pierson,(6*) and Charles Gide;(7*) and in Germany a work of Launhardt(8*) on the lines of Jevons and Walras. But it is in Austria, in the lineal succession to Menger, that the development of the new value theory is to be sought. I may be allowed to refer to my own Ursrpung und Hauptgesetze des wirthschaftlichen Werthes, Vienna, 1884, in which I applied Menger's theory to the phenomena of costs. On this followed a work by Bohm-Bawerk,(9*) which, independently of its extremely clear presentation and its careful and fruitful revision of many matters of detail, is particularly valuable from its treatment of the theory of objective value. Finally came a comprehensive work of E. Sax,(10*) extending the theory of value over entirely new material to which no previous writer had applied it -- to public imposts, and thus giving the theory one of its richest applications.
The ground-plan of the new theory is drawn, but much remains to be done; not only to widen its reach generally, but to complete it in itself. The following pages are an attempt to supplement what has already been done. In distinction from my earlier work I have not paused to discuss the assumptions of the value theory, but limited myself severely to the subject of value and its direct content. On the other hand I have attempted to exhaust the entire sphere of the phenomena of value without any exception, and, besides that, so far as my ability goes, to think out more exactly the subjects I had already treated of. The present work is on that account in no way a repetition of my former one, but an entirely new book, treating for the most part of entirely new matter, and having nothing more in common with it than the general fundamental propositions. I hope this time to have met the objection urged against the Ursprung des Werthes that I had omitted the connections -- the "bridges," as one critic called them -- between the principles laid down and the concrete phenomena of value with which we are familiar. Whatever may be thought of its truth or correctness, I think I may venture to say that no value theory has ever yet been put forward more complete and exhaustive in external form and treatment.
The very multitude of single matters which I had to touch on has compelled me to pass over almost every critical analysis that differed from mine, and indeed to leave out almost every appeal to economic authorities outside of those authors who belong to the same school, and from whom I directly took the propositions I had put forward. Similarly I have refrained from discussing any of the economic conceptions I had to employ outside of that of value. I shall very willingly put up with the reproach of being incomplete by reason of this if it should succeed in making any clearer the inner connection of the book. At the same time I should not like to be suspected of having done so from any undervaluing of the theoretical work of other economists -- least of all, of those of Germany.
I have just said how deeply indebted, in my opinion, every theoretical attempt of to-day is to the labours of German theory. And to it the new value theory stands most nearly related -- it is in truth the fulfilment of what German theory had long demanded.
1. Rau, too, with his "concrete Gebrauchswerth" may be included. There is a notable treatise of the mathematician Daniel Bernoulli: Specimen theoriae novae de mensura sortis (Commentarii Academiae Scientiarum imperialis Petropolitanae, tomus V. Ad annos 1730 et 1731. Petropoli, 1738). Bernoulli maintains that it is valde probabile, lucrulum quodvis semper emolumentum afferre summae bonorum reciproce proportionale. He is fully acquainted with the subjective character of value, as well as with the most important law of the change of value. His work is referred to by Jevons in an extract from another of his books. By the kindness of Professor Menger I have seen the original. Dupuit's De l'influence des Peages, 1849, mentioned by Jevons, I have not been able to consult.
2. Entwicklung der Gesetze des menschlichen Verkehrs und der daraus fliessenden Regein fur das menschliche Handeln. Braunschweig, 1854.
3. First in a paper before the British Association, 1862, then fully in the Theory of Political Economy, London, 1871; 2nd edit. 1879.
4. Grundsatze der Voikswirthschaftslehre, Vienna, 1871.
5. Elements d'economie politique pure ou Theorie de la richesse sociale. Lausanne, 1874-77. -- Theorie mathematique de la richesse sociale. Lausanne, 1883. -- Theorie de la Monnaie. Lausanne, 1886.
6. Leerboek der staathuishoudkunde. Haarlem, 1884.
7. Principes d'economie poiitique. Paris, 1884.
8. Mathematische Begrundung der Volkswirthschaftsiehre. Leipzig, 1885.
9. Grundzuge der Theorie des wirthschaftlichen Gulerwerths. Conrad's Jahrbucher, N.F. vol. xiii. Jena, 1886.
10. Grundlegung der theoretischen Staatswirthschaft. Vienna, 1887.
Book I: The Elementary Theory of Value
The Origin of Value
Whence do things get their value? If we put the question to any intelligent and trained man of business, who had no knowledge of the various attempts of theorists towards an explanation of value, whose mind was unbiassed by the forms of speech which echo learned theories and have passed into ordinary business use, and who was, therefore, capable of judging only through the medium of his own personal experience, he would undoubtedly answer, as the first theorists did, -- "from their Utility." He would be very much surprised to learn that several considerations made the truth of this answer improbable, and that many facts -- some of them to a certain extent generally known, and familiar even to himself -- seemed to prove, with almost absolute certainty, that utility could not be the source of value. These facts we may state as follows.
First: goods which are to be had in superfluity, and which any one may appropriate at will, no one will pay anything for, be they ever so useful. In many places water, although indispensable to man, is entirely without value. Of course this observation refers immediately only to value in money, the so-called "exchange value," and it might be thought that it was not true of value in the using of goods, the so-called "value-in-use." Closer examination shows, however, that it is true also of value-in-use. In the household, as in the market, the superfluous is regarded as the valueless, and is clearly separated from those things of which there is no superfluity. However frugally we may act with regard to other things, we should never think of economising in things which we are always sure of having in over-abundance. No one will ever try to secure possession of them: there is no property in them; no interest is taken in them. They are used, but we think no more about them.
Second: things which have a great deal of use have often a smaller value than those which have little use. Iron, for instance, has less value than gold. This is true equally of its money value, and of its value-in-use, in the market and in the household. Even in the socialist state -- supposing its citizens still to possess the aesthetic sense -- it will be considered of less moment to lose an ounce of iron than an ounce of gold.
Third: a large quantity has, under certain circumstances, less value than a smaller quantity of the same thing. It is well known that the Dutch East India Company destroyed a considerable part of their produce and of their plantations, in order to create a more lively demand, and so secure for the remainder a greater value than the whole property had originally possessed. The same thing is observed as regards the returns derived from good and from bad harvests, -- the bad harvests showing better than the good. This also, as I hope to show later, applies to value-in-use as well as to exchange value.
Fourth: while the measure of use is in such frequent and striking contradiction with that of value, it happens, as often and as strikingly, that value is in agreement with the exact antithesis of use -- namely, with costs. I say "antithesis" because, if goods, by their use, prove themselves the friends of man, they prove his enemy by the costs which they necessarily involve.
A great many of the writers who have occupied themselves in the investigation of value -- and, we may add, for a long time many of the best of them -- have for this reason refused to consider at all the idea that value may arise from utility; they assert that the value of goods comes from the difficulty of their attainment, and is proportionate to it. Those again who have based their theory upon utility, have, for the most part, done so in a manifestly unsatisfactory fashion. They have either placed themselves in contradiction to the facts already mentioned without explaining away the contradiction, or laid so much stress on these facts that, in the end, they can scarcely be distinguished from those writers who have rejected the principle of utility, except by their express avowal of that principle. Only a few authors, the more important of whom are mentioned in the preface, have struck the right road. These have conceived the idea of Use Value in such a way that it is neither confuted nor disturbed by the foregoing considerations, but on the contrary is entirely confirmed by them.
It is as these last-mentioned writers understand it that I mean to state the theory of value. Before beginning, I may be allowed to make a single introductory remark as to the manner in which I intend to carry out my task, and, particularly, as to the nature of the proofs which will be used. ------The economist who undertakes to explain value has to explain the procedure of those who value. He describes in plain language the meaning of transactions carried on, times without number, by all of us. He does, on a large scale and with a difficult subject, the same thing as one who accurately describes some trade or some mechanical operation, which every one can do, but which it is not easy, without the assistance of concrete instances, to present and follow up in all its complexity of conditions. As the poet gives expression to the thought which every one feels but cannot express, or the actor's genius shows the passion which perhaps he may not even feel, so does the man of science describe in words, and apart from their concrete realisation, the actions which every one is accustomed to perform. He does not require to have any actual case before him, or to accompany his description with any practical working out.
Any layman in economics knows the whole substance of the theory of value from his own experience, and is a layman only in so far as he does not grasp the matter theoretically, i.e. independently, and for and by itself, -- but only practically, -- that is to say, in some given situation, and in connection with its working out in that situation. If this be true, how else shall we better prove our scientific statements than by appealing to the recollection which every one must have of his own economic actions and behaviour? For this reason, every expression which may be taken as confirming this recollection, is welcome as an aid to our investigation. For instance, when we find that the unbiassed answer of the layman indicates that he considers usefulness to be the source of value, this judgment is a finger-post which we dare not neglect, unless the most searching and careful examination has proved that it points in a wrong direction. And who else is the final judge of the theory but the public? The only true theory of the estimate we call "value," will be that to which practical life gives its entire assent. Only, of course, the judge must first himself be educated. He has to judge whether he recognises himself in a description which informs him about his own life and being, and which he himself is incapable of giving.
I trust that what follows may meet the approval of those who not only act economically, but reflect on their actions. I have no other wish than to gain this approval, but I cannot allow the right of judgment to those who protest without having reflected. It costs much trouble to give a clear description of even the simplest and most familiar trade or business, and certainly, in the theoretical study of a matter so many-sided and complicated as that of value -- even though it is so familiar to all, perhaps because it is so familiar to all -- we cannot do without the most earnest and ample reflection.
The Value of Satisfaction of Want
In its ordinary use among economic writers the word Want signifies every human desire, whether great or small, justifiable or unjustifiable, necessary or unnecessary, material or immaterial. Bodily well-being, idle delights, artistic pleasure, moral satisfaction may all be classed together as objects of human want.
In this sense all the "use of goods" -- all the utility which goods afford -- amounts in the last resort to satisfaction of wants, and the opinion that the value of goods arises from their use may be more exactly stated by saying that it rests upon the satisfaction of wants which they furnish. It is the satisfaction of wants which, in the first instance, has value, or "worth" or "importance to" us. Satisfaction is that which is really desired, and is worthy of desire: and, as we do not desire goods for themselves, but for the satisfaction they give, so do we value them only for that satisfaction. The value of goods is derived from the value of wants.
The theory of value, then, has first of all to do with the value of wants, this being the form in which value first appears.
What it is that gives value to the satisfaction itself we shall not here attempt to explain. It will be enough if we give the symptom by which the degrees of value or importance are recognised. It is the intensity with which the satisfaction is desired. Were we to place the different satisfactions on a graduated scale, it would probably be remarked that those which stand highest are not those which provide the purest pleasure, or which will most serve to beautify our lives. Our most urgent concern is rather with the warding off of extreme want, and with the prevention of care and suffering; the necessaries of life must first be assured "before we can reach the good things of this world." There is a difference between what men might like to have, and what they must first decide to secure; and it is according to the latter, not the former, that interests are actually ranged above and below one another. The actual ranking of the valuable -- no matter how moral judgment or fancy would dictate -- is simply that which men recognise by their actions when they are called on to choose between having one thing and another.
In this sense the amount of the value of want depends on the class of want, but, within this class, it depends upon the degree of satisfaction already attained.
This latter point in detail we must now discuss. Here, first, we shall have occasion to remark the influence of quantity upon value. And it is not the value of goods alone that is affected by quantity, but the value of wants.
Gossen's Law of the Satiation of Want
Every one knows that the desire for food decreases as the want is gradually satisfied, until, finally, when what we may call the "satiation point" is reached, the desire is for a certain time entirely allayed, and possibly changed into its opposite, surfeit and disgust. Every one knows that the same happens in the case of numerous other desires; satisfaction diminishes the craving, and in the end fully destroys and transforms it.
There are several authors who have the merit of having, independently of each other, extended this observation scientifically speaking, and made it the starting-point of their theory of value. These have been mentioned in the preface. Among them Gossen is worthy of particular notice, owing to the fate of the book in which he gave expression to his discovery and to his ideas on economics generally. His Entwicklung der Gesetze des menschlichen Verkehrs und der daraus fliessenden Regeln fur das menschliche Handeln, was published in Brunswick in 1854, but it almost entirely disappeared from sight in Germany, although its author had hoped to win for it a Copernican fame. Any one who reads the book will understand why, as well on account of the peculiarities of its excellences as of its faults, both of which are great. Jevons, in the introduction to the second edition of his Theory of Political Economy, and also Walras, in an essay which appeared in the Journal des Economistes in 1885, have given somewhat detailed accounts of both book and author. Economics owes a great debt to Gossen, and it is with this feeling that I call the law of the satiation of want Gossen's Law, although my statement of it is not entirely in accordance with his.
It scarcely requires illustration. Gossen himself added to its clearness by the following addition. Alongside of the weakening effect which continued satisfaction has upon desire, we find also, in certain circumstances, the opposite tendency; that the desire grows by repetition and exercise, inasmuch as it is thus developed, gets to know itself, its own end and its own means, becomes purified and elevated. Thus, during the period of development, the law of diminishing desire meets with an opposite tendency, and the law applies unlimitedly only to wants which are entirely developed. Granting this, however, it applies to every want without exception.
There can be no doubt that it applies to those coarser material wants, which recur periodically, as, for instance, the desire for food. Here, however, we must distinguish between the want as a whole and the several feelings of want which are included in it.
The want as a whole of course retains its strength so long as man retains his health; satisfaction does not weaken but rather stimulates it, by constantly contributing to its development, and, particularly, by giving rise to a desire for variety. It is otherwise with the separate sensations of the want. These are narrowly limited both in point of time and in point of matter. Any one who has just taken a certain quantity of food of a certain kind will not immediately have the same strength of desire for another similar quantity. Within any single period of want every additional act of satisfaction will be estimated less highly than a preceding one obtained from a quantity of goods equal in kind and amount.
Many material wants are not intermittent, but require a continuous satisfaction. Such for instance is the need of warmth, the human body requiring to be kept at a certain temperature. Here also Gossen's law applies. That action which is needed to secure the required minimum temperature, -- that is, the expenditure for clothing, fuel, and so on, indispensable for keeping the body in sufficient warmth, -- will be most intensely desired, while the multiplication of this necessary expenditure does not affect our well-being in the same degree, and will be much less eagerly desired. In the long run the prospect of any further increase will be met with aversion.
With regard to the higher wants, -- those which come into existence whenever the necessaries of life are secured, -- the same law obtains. It is not, however, so noticeable to ordinary observation, and, indeed, appearances are rather against it. The wants of wealth appear to be the very opposite to those of poverty. The latter are urgent but narrowly limited; the former can be done without, but, when awakened, show themselves many-sided and extensive. Many-sided, because they are from the first rich in varieties, and become always more so, as one gives rise to another; and extensive, because they frequently include objects of great compass, increasing with the degree of culture attained. On this account it might well be thought that such wants were infinite and subject to no diminution. But on looking more closely at the matter we shall find that, when the same act of enjoyment is repeated without variation, -- the very same, and neither extended nor changed,the result is in this case also weariness and disgust. The thirst of a collector seems to be insatiable, and his object certainly is one of extraordinary compass, even though it be confined to one article. The man who collects books or pictures requires a great fortune, and may not even then be able to fully satisfy his wish. Every new book he acquires serves to stimulate instead of to weaken his desire, and this is not due to morbid extravagance: it is entirely justifiable, as it brings him nearer to his object, the possession of a perfect library or a perfect picture gallery.
But how would it be, if he were offered a duplicate of some work he already had? This and this alone, as Gossen remarked, would be a case of exact repetition, -- of the repeated satisfaction of the same impulse; and here, without doubt, the desire would be much lessened, probably entirely destroyed. And thus we shall ever find it to be if we direct our attention strictly to the proper object. Even desires such as that of power or of wisdom, even ambition, greed of honour, thirst for knowledge are not exempt from the same rule. The sum of what these crave, when at their height, is infinite; no man's life or strength is sufficient to satisfy them wholly even once, not to speak of repeating it. But the single acts which make up this whole sum, the individual effects, exercises of power, acquisitions of knowledge can be repeated and tired of. The charm of the whole lies in the power to vary the items. Nothing on earth is of such a nature that man can go on enjoying it over and over again, and lose himself in its contemplation. This holds of all emotions, from hunger to love.
The Scales of Satiation
If we were to follow out the course of satisfaction of a want, and mark every separate act of satisfaction with the value that accompanied it, we should obtain a diminishing scale, the zero of which would be reached with full satisfaction or "satiation," while its higher point would correspond with the first act of satisfaction. If we had a common and exact measure for desire and non-desire, we might be able to put into figures the "satiation scale" of every want, and so compare the scales with each other. We are far from having that. But we are able to say quite positively that there are great disparities between the individual scales. It is not only that the higher points of such scales differ, and differ to an extraordinary degree, as the experience of every one sufficiently shows, but that, in the scales, the degrees between one act and the next are very different. There are many wants which almost leap from the point of highest desire to that of full satisfaction -- such, for instance, as the coarser needs of daily life. There are others which, although little felt to begin with, continue for long periods without any very perceptible diminution of their strength, -- as, for instance, many of the finer wants. Even as regards the individual want the decrease of desire is frequently quite irregular -- decreasing more slowly now at the beginning, now at the end of the scale. It must not in the least be expected that every scale will present all the different degrees of desire between which it is possible to distinguish. Assuming the possibility of distinguishing between one hundred different degrees of intensity of desire on the whole, we should certainly find no single scale that would show exactly all the hundred degrees; each would miss one, or another, or even many of the degrees; we should not perhaps find any scale which would regularly move, say, ten degrees at a time. Individual scales are, indeed, likely to be formed with considerable irregularity, and we shall find such a series as 100, 90, 80, 10, 0; or 20, 14, 5, 3, 2, 1, 0, and so on.
This statement, rude and imperfect as it is, will be found of great use in what follows. We shall have to turn back to it at several important points. Even here, it gives us a first suggestion of how one of the fundamental difficulties of the problem of value may be overcome; that, namely, arising from observation of the contradiction between value and usefulness. A few words will make this clearer. A sensation of want which belongs to a very important class of wants may nevertheless not possess any great importance. The importance of the entire class is measured by the entire scale of satiation, especially by its highest degree. But the importance of every separate sensation of desire is measured by some particular and possibly low point upon the scale, according to the condition of satisfaction which has already been reached. The want for food, measured by its class, is more important than that for adornment or finery, but none the less may the individual sensations of vanity, in the first stages of their satisfaction, be far stronger than the desire for food, supposing the latter desire to be satisfied for the time being.
Classes of goods correspond to classes of wants, and judgments concerning the importance of classes of wants will correspond with judgments on the usefulness of classes of goods. But the single commodity need no more realise the usefulness of its class than the separate sensation of desire need realise the importance of its class. The last course eaten by one who has almost dined has a comparatively small utility, although it contains in itself the property of saving from the pangs of hunger. Suppose that one has a sufficiently large number of goods of the highest usefulness, some of them can be put only to a very trifling use, and, indeed, if there is a superfluity of them, he will have no use whatever for that part of the supply which is in excess of the demand.
In economic life we have to do not only with classes of wants and classes of goods, but also with the state of subjective satisfaction already reached, or the supply. We cannot, therefore, judge of goods simply by their usefulness; we must judge by the amount of use attainable in the individual case; and, consequently, the value of goods must be kept at least as distinct from their usefulness as the use to which we put them is.
Even where nature is most lavish with her gifts, there are but few kinds of goods with which she provides man in such superfluity that he can satisfy every, even the most insignificant, sensation of want. As a rule the supply of goods of which he can avail himself is so scanty that he must break off his satisfaction at a point on the scale short of complete satiation. This point -- the smallest utility obtainable in the circumstances, assuming the most thorough possible utilisation of the goods -- is of peculiar importance, both for the act of valuation and for economic life. To it refer the expressions, "Werth des letzten Atoms," of Gossen, "Final degree of utility," or "Terminal utility" of Jevons; and "Intensite du dernier besoin satisfait (rarete)" of Walras. Menger uses no particular designation. The name "Marginal Utility" was suggested by me (Ursprung des Werthes, p. 128), and has since been generally accepted.
Where the supply of goods is too scanty to satisfy every sensation of desire, the necessary break must be so made that it will be felt as little as possible. This will be the case when we begin by satisfying the most intense sensations of want, and go on to extend to its utmost the compass of enjoyment; or, in other words, when we reach, in unbroken satisfaction, the lowest possible marginal point of enjoyment. Economic conduct requires that the marginal utility in this sense be placed as low as possible. The means by which to reach this end are, on the one hand, the utmost possible quantitative exploitation of goods, and, on the other hand, the utmost care in choosing how the goods are to be employed where there are several competing ways of employing them. Such a competition of employments may arise from two circumstances -- first, where goods are capable of manifold and various uses, and, second, where supplies are accumulated and their consumption should be spread over periods of time. In the first case our concern must be to choose between the separate forms of employment, and to keep the economic balance even; in the second, to distribute the goods so as best to meet the wants of the whole period.
The difference between the various satiation scales of wants comes into play in the case of goods of many-sided usefulness. Every different kind of employment has its own particular scale of satiation, with a culminating point peculiar to itself and a course of satisfaction peculiar to itself. On account of this the determination of the marginal utility in the given case becomes a very complicated matter. Its principle will be best explained by an example, and we need be at no loss for examples, as goods of manifold utility are numerous enough. The most important are found among the means of production. Who could count up the services which iron, wood, or coal is capable of rendering? Or those for which human labour is fitted? The most many-sided of all goods is, however, money; through exchange it can be turned into almost any other commodity, and thus made serviceable for the satisfaction of almost any want. From no other commodity can we obtain so clear a presentation of the idea of "marginal utility." I therefore take it as example, although money is really useful only as a medium, and presupposes the existence of exchange, a phenomenon of which we shall not treat till the following book.
The money income of the richest man is usually not sufficient to cover every outlay that he might desire. Acting economically therefore, so as to secure what Gossen calls the Grosste an Genuss, the greatest possible enjoyment, we shall distribute our expenditure so as to "make it go as far as possible," from the satisfaction of the most urgent wants down to the most insignificant. The larger the income is, the farther it will go, and the longer will it be before we need to break off our satisfaction. But the Grosste an Genuss could not be reached if the separate branches of expenditure were not adequately weighed against each other. Nowhere must the boundary-line be overstepped, which is fixed by the general circumstances of our wealth. Every overstepping in one branch will have to be paid for in another, which other, as represented by a higher degree on the scale of wants, will impose a sacrifice greater than the enjoyment got from it. To this extent it is quite possible to speak of a "level of household expenditure," of a general condition of life prescribed for every household by the peculiar amount of its demand and the peculiar amount of its means, and necessitating strict adherence to it in all its branches. It would, however, be a mistake to believe -- as almost every writer who has occupied himself with this question has done, Jevons more than any other -- that it is necessary to keep strictly in every branch of expenditure to the same degree of satisfaction, the same level, the same marginal utility. That is quite against the nature of wants, for wants have not each an equal but each a peculiar satiation scale. Were the "level of household expenditure" to be understood in this way, every addition to income would require to be laid out equally in corresponding enlargement of every branch of expenditure. As a matter of fact it is usually spent on a few individual branches, while the others remain as they were; or, if the additional income be so great as to allow of an improved condition of things all round, the extra expenditure is distributed in the most irregular manner. The satiation scales of wants are very diverse; the receptive power of one want is great, that of another comparatively small; that is to say, one is susceptible of a degree of intensity which another does not teach, or which it oversteps. The principle for the economic employment of goods of manifold usefulness is not, then, that we must, in every employment, obtain the same lowest possible marginal utility, but that in all employment as low a marginal utility be reached as is possible without necessitating the loss, in some other employment, of a higher utility.
What has just been said applies as well to the economic management of supplies of goods destined to cover periods of time. Premature and extravagant indulgence should not impose unnecessary burdens on the future. It would be best to divide the enjoyment equally over the whole period, but this is frequently made impossible by the nature of goods, which does not allow of their being kept, as also by the uncertainty of providing for changes of value in the economy in question. The limit of employment should always be of such a sort as promises the greatest amount of utilisation on the whole.(1*)
A special question is here suggested: -- Are present and future satisfactions to be estimated entirely alike? Is not precedence in time also precedence in degree of importance? Is it not right that enjoyments should be considered of less value the further they are in the darkness of the future? Jevons has answered this question in the affirmative, and since him many others, some with great positiveness, though, as I think, wrongly. We cannot avoid going into this matter more closely, even though it detains us a little from the attainment of our present object, the deduction of the elementary law of value.
1. See Ursprung des Werthes, p. 146, and Sax, p. 371.
The Value of Future Satisfactions of Want
If we did not possess the power of providing for future wants, our lives would be but poorly provided for. No new products would be prepared; those we already possessed would be thoughtlessly dissipated; only chance and the goodwill of nature would provide for the morrow. And as it is of importance that we should be sensible in advance of the wants of the future, so is it of importance that the degree of that sensibility should be sufficient. Anxiety about future necessaries should be as powerful as the passion with which we give ourselves away before the urgent feelings of the moment. If future satisfactions of want were represented in present valuation, not at their full future value but at only a small fraction of the same, all economic life must in the end fall to pieces, just as though they were not represented at all; only that the course of economic decay would be less rapid and its end farther off.
It is evident that man possesses the capacity of acting in consideration of future feelings of want, but observation of human nature makes it very obvious that he will act with less energy than when he is under the influence of present feelings. The future want, wherever it comes into the domain of the present, is preceded by a psychical reflection, and this reflection is of a totally different nature from the want itself. It is far finer, more innerlich, and, even in the case of purely bodily wants, is always mental. The hunger of a future day, e.g., does not act as hunger, but as anxiety for sustenance; the object of desire is the same, but the desiring is different. Instead of a want of we have an interest in. Is not, then, some energy lost in this change from the coarser to the finer? Must not the anxiety about a future want always have less weight than the actual appetite that comes after it?
If men in civilised societies do possess the degree of foresight required for a prosperous economic condition, one thing is certain; -- they have not always possessed it. It has been gained through the labour of civilisation, just as, in moral conflicts, strength to meet the fires of passion has been gained through the feeling of duty. At bottom the economic conflict between the needs of to-day and those of to-morrow is really of a moral nature; it is a special case of the struggle between impulse and reason. Uncivilised races are only to a small extent capable of considering in advance the wants of the future; -- to so small an extent, in fact, that the miserable condition in which they are found can be fully explained by this alone. It is not only the foreknowledge that is wanting, but, quite as much, the previous mental excitation, the uneasiness which the civilised man experiences in the consciousness that wants are coming for which there is no provision. A heavy numb apathy deadens the sense of the savage. He awaits with indifference, or at most with a feeling of helplessness, the misery from which he does not suppose it possible to escape, but which he certainly could escape had he only the energy to will it.
Whether civilised races have reached the high-water mark of development that is desirable, may easily be ascertained by consideration of their economic actions. How do they behave in the majority of cases? Do most people sacrifice their means for the pleasure of the moment, or do they lay by for future needs? -- There can be no doubt that, on the whole, the wise householders outnumber the spendthrifts. Certainly there is no one entirely without economical sin; no one who has never consumed too soon some thing which he afterwards bitterly desired and had not. But, on the whole, it is an economic principle which is as well obeyed as any of the fundamental economic principles, that wealth and income should be economised with a view to the future and to old age. Every supply of goods should, so far as possible, be distributed over the wants of the period of time which it is intended to cover, in such a way that, whether the time at which they occur be earlier or later, all the more important sensations may be satisfied, and only the less important -- those which it is impossible for the supply to cover -- be left out. The exceptions to this rule are so few in number, that a theoretical inquiry which regards the principle as invariable, and asks as to its further effects will help to explain our economy, not only as it ought to be, but also as it actually is.
To avoid misunderstanding I shall try to explain my meaning more exactly. I have no wish to deny that, in general, the futurity of an event has the effect of weakening its impression. As a rule this is also true in economics. It seems to me, however, that, in a civilised state, every good householder, and, in the main, every average one, has learnt to master this weakness of human nature in one respect; -- so far, namely, as to distribute a regularly-acquired income among regularly-expected wants, and, in connection with this again, so far as to try to acquire a regular income, and secure the conditions thereof by exercise of labour power, and maintenance of the parent stock of wealth. The call for forethought in this latter connection is peculiarly strong, and it should not excite wonder that it is more active here than in any other direction.
Moreover a well-regulated and prosperous economic condition does not in the least demand that every future sensation be fully realised in the present. Only those require to be considered which have to be provided for, and those again only in so far as they require to be provided for. First in importance are all those wants which must be covered by the present supply of consumption goods, and by the income available at the moment, and which consequently, in economic management, come into conflict with present desires. Alongside of these we may put the far more numerous wants which have to be covered by suitable employment of the present parent wealth. Our conception of both groups of wants, but particularly of the latter, takes a peculiarly simplified form, which easily gives the impression that they are entirely shoved into the background. They are conceived of in the mass, and grouped together in periods of time; and we are generally conscious of them only in so far as they are represented by the goods which are devoted to their satisfaction. Foresight for the wants of a remote future and of later generations, for instance, is seen in the precept which forbids diminishing of the parent stock of wealth, even although this precept only refers to the goods which form the wealth, while the wants themselves appear to retreat more and more into a darkness which the imagination does not seek and need not seek to illuminate.(1*)
1. Many economists would explain interest, particularly the interest on productive capital, by the difference in value between present and future feelings. This seems to me an error. Interest derived from productive capital is a phenomenon of the very best ordered economic transactions, of those managed with the highest possible degree of foresight. It is not in the least a sign of a defective economy. See, however, Book IV.
The Value of Goods
Originally only the human has importance for man. Thought for one's self, interest in one's self, comes by nature. Towards things, on the other hand, man is originally indifferent, and his interest in them only awakens in so far as he finds them connected with human interests and destinies. This takes various forms; such as pity, when the lower animals are seen to suffer just as man does, or religious or poetic emotion, when observation of the living in nature awakens suspicion of the connection of all life, or, finally, economic valuation, when things are conceived of as instruments to and conditions of human well-being. This is the coldest form that our interest takes, as it regards things simply as means to human ends; it is, however, at the same time, the most far-reaching, as it embraces most things, and claims not only existence, but property.
Our natural indifference towards things is nevertheless so great that it requires a special compulsion, a peremptory challenge, to make us look upon them as objects of importance, objects possessing value. Nor does the mere observation that things are "of use" to us, and that the use has for us importance or value exert this compulsion. Where we employ goods for our own uses, but where at the same time these goods are at our disposal in absolutely assured superfluity, we use them, but concern ourselves no more about them than about the sands of the sea. Whether they increase or decrease -- always supposing that the superfluity remains -- we merely think, "What does it matter? we have always enough and more than enough of them!" In Paradise nothing would have value but satisfactions -- neither things nor goods. Because there one could have everything, one would not be dependent on anything.
On the other hand, where there is not an assured superfluity, interest awakens in the train of self-seeking calculation, and communicates itself to such goods as we notice ourselves using and not caring to lose. Men in general thus lay their account with things, as the egoist with persons. And here we are not speaking only of cases of real need, of extremest want, where the little that one has is guarded with an Argus eye; nor of objects of great scarceness or rarity, such as a work of art which is quite unique, and whose loss it would be impossible to replace. We refer also to cases where people are fairly prosperous, but nevertheless require to economise; and even to cases of extreme wealth -- always supposing it is not assured natural superfluity -- where, in many respects, a man has everything, but where, all the same, the "everything" requires continual guarding, administration, and renewal. In these circumstances there is not a single change in a man's possessions which is entirely indifferent. Every addition brings some addition of enjoyment; every loss, even the slightest, disturbs, makes some gap, and breaks the expected line of enjoyments. Happiness and sorrow are dependent on our possessions; the destinies of goods mean the destinies of men. There is an intimate association of ideas between human interests and goods. Goods, indifferent in themselves, receive value from that value which their employments have.
Goods which are to be had in an assured and natural superfluity are called Free goods; all others are Economic goods. Thus only economic goods can possess value. The value of goods, according to Menger's definition, is "the importance which concrete goods, or quantities of goods, receive for us from the fact that we are conscious of being dependent on our disposal over them for the satisfaction of our wants."
It should be noticed that no part of free goods receives value; neither that part which is superfluous, and cannot therefore be used, nor yet that part which is used. Of the water which flows abundantly from some spring, neither that portion which fills the jar, nor that which overflows has value. The value of goods, although it has its origin in use, does not all the same reflect the utility: there are cases in which great use is obtained, where nevertheless no value -- i.e. no value of goods -- is created. The theorist, therefore, who would explain value must not content himself with explaining the change in amounts of utility; he must go further and examine those laws by which amounts of utility are changed into amounts of value. It may be suspected -- and we shall find this suspicion confirmed in what follows -- that value, owing in many cases so little of its origin to utility, is, even where it has so originated, equally far from always containing the full amount of utility.
If the use of a good in the individual case be so far removed from its general usefulness, its value, if our suspicion is indeed confirmed, must be even further removed from that general usefulness -- and here is opened up to us a second point of view from which we may explain and make intelligible the contradictions which experience points out between value and usefulness.
The Valuation of a Single Commodity
Goods are valued either individually and by themselves, or in connection with other goods. The latter form of valuation takes place chiefly in one of three ways. A good may be valued in connection with other similar goods belonging to one and the same stock or supply; or in connection with goods from which it can be produced; or in connection with goods which can be added to it by purchase. Of these three cases the first is the elementary one, to which both of the others may be traced back. It is with this first alone, therefore, that we shall deal in the elementary theory of value.
It is extremely seldom that goods are valued singly. It may be some chance or other which has isolated them, or it may be a consequence of some peculiar character which allows of them being obtained only individually. In the first case, they are irreplaceable during the period of their isolation; in the second, they are altogether so; and, in both cases, they must, on any reasonable valuation, have ascribed to them the full value of the utility which is expected from them. The means without which an end cannot be reached must be valued as highly as the end itself. If the good is by nature fitted for several purposes which, however, mutually exclude each other, so that it can actually serve only one of them, that employment to which the greatest importance belongs decides its value. Only a barbarian could value the Venus de Milo by the utility of the material of which it is made. A starving man will value his last bite at its full life-saving value, -- supposing the saving of his life to be of consequence to him.
Now and then, too, considerable supplies of goods are valued as one indivisible whole, and, consequently, as one good. A vendor may, for instance, lay down as a condition of selling some large supply of goods, that it be bought entire or not at all. If circumstances force the buyer to consent to this condition, he on his part must estimate the value of the supply as a whole. He has to reckon up the whole sum of useful services which he may expect, from the highest utility which the goods composing the stock are capable of rendering, down to the marginal utility fixed by the amount of the stock and of the demand for it; and the sum of all those services gives him the value. Value here reflects the whole utility aimed at in employing the goods.
Suppose a community were forced to buy the grain it requires from some foreign country and in one lot, if the conditions just described were laid down, the government would have to make a valuation which would be almost infinite. It would require to consider that, without the purchase, a great part of the community might die of hunger, and to calculate all that would be gained by the prevention of this most extreme misfortune, and by securing the health and vigour of the people.
Besides that would have to be reckoned all the less important useful results, which really are obtained although their marginal effects are inappreciable. It is obvious that the valuation of the harvest which is actually made stands far behind any such valuation as this. And what is the reason of it, seeing that the actual effects of the harvest are no less important, -- that it does in truth keep away hunger and misery, and maintain the strength of the citizens? Why does its full use not enter into the valuation? The reason is, obviously, that we are not forced to obtain and value the harvest in one lot. It comes through thousands of busy hands, by a thousand different means of transport, from thousands of storehouses; and it passes through thousands of purchases to those who need it, and is by them consumed in thousands of different acts. The question as to the effect on the whole is never put; the only thing we have ever to do with is the effect of individual parts, which, compared with the whole, are vanishingly small. And this brings us to a law of valuation by which an amount of value is ascribed to the single part, and, therefore, finally, to the sum of all the parts, which is as far removed from the amount of value that would otherwise pertain to the united whole, as the resisting power of all the single rods in a bundle is from that of the whole bundle.
This law we have now to trace. It might be described as the General Law of Value, since it holds in almost every case. Almost all supplies which we possess and employ, which are bought and sold, which are used up and produced, are acquired and used in parts. Seldom only is a supply of goods the object of economic use and valuation as a whole -- a whole of which nothing can be lost without everything being lost. As a rule every supply or stock of goods comes to us as a sum of parts, each of which has its separate destiny, and can be individually disposed of.
The Valuation of Goods in Stocks. The Law of Marginal Utility the General Law of Value
Suppose a poor man receives every day two pieces of bread, while one is enough to allay the pangs of positive hunger, what value will one of the two pieces of bread have for him? If for instance a still poorer man, who has nothing whatever, begged of him one piece, what sacrifice would the first make in complying with the request? Or -- what comes to the same thing -- what use or utility would he retain if he refused to comply with it? The answer is easy enough. If he gives away the piece of bread he will lose, and if he keeps it he will secure, provision for that degree of want which makes itself felt whenever positive hunger is allayed. We may call this the 2nd degree.
One of two entirely similar goods is, therefore, equal in value to the 2nd degree in the scale of utility of that particular class of goods. One of three goods, under the same conditions, will have the value of the 3rd degree; one of four, of the 4th; in short, any one good, in a stock of goods of the same kind, will have in general the value of the final or marginal utility. The larger the supply -- the need remaining unaltered -- the smaller will be the marginal utility and the value, and vice versa; while, on the other hand, the greater the need the higher will be both marginal utility and value, and vice versa.(1*)
This, however, is not enough. Not only has one of two goods the value of the second degree of utility, but either of them has it, whichever one may choose. In our example, neither of the two pieces of bread -- so long as the possessor has both -- will have that value which belongs to the allaying of positive hunger, because, so long as they are both in his possession, he will never be exposed to this extremity. He may give away one of them -- whichever he likes, so long as he keeps the other -- without losing his provision against starvation. But, if either of the two pieces is equal in value to the second degree of utility, both together have twice this value. And three pieces have together three times the value of the third degree of utility, and four pieces have four times the value of the fourth degree. In a word, the value of a supply of similar goods is equal to the sum of the items multiplied by the marginal utility.
Say that a harvest, consisting of 1,000,000 quarters, is short, and that the community has to be so sparing in its use of it that grain dare not be consumed unless the act of consumption yield a satisfaction equal to the figure 10: the value of the harvest will be calculated as 1,000,000 x 10. The value of a harvest of 2,000,000 quarters, where the act of consumption need only yield, say, 4, is equal to 2,000,000 x 4. The value of 1,000,000 tons of iron, where the marginal utility is 1, is 1,000,000, and the value of 100,000 oz. of gold, with a marginal utility of 50, is 5,000,000.
As the use obtained from free goods represents no value whatever, so is the use obtained from supplies of economic goods not fully represented in their value, and for the same reason In the case of free goods we need not concern ourselves at all about their use, that being always assured so long as the goods remain in superfluity; and in the case of economic goods, our only concern is with the marginal utility, all the higher utilities being assured so long as the amount of the supply remains unaltered. In the former case we need have no anxiety as regards the provision for our wants generally; in the latter we need have no anxiety as regards the provision for the principal part of our wants -- and the larger the supply the less the anxiety -- and need only concern ourselves to see that the proper margin of employment is maintained.
The law of value just described owes its existence, on the one side, to the peculiar formation of the scales of want, but, on the other, to the peculiar conditions under which goods are possessed. If goods did not come forward in stocks or supplies consisting of similar items, but only individually and each with a separate form, the law would not hold. Where such stocks do appear, however, it must hold. How could things entirely similar be differently valued, -- supposing, of course, that they belong to the same person, and are used to satisfy the same demand? Even if any one in an anxious mood were to set apart certain items, as a reserve for extreme exigency, and, as such, might think of putting a special value on them, he would surely find, on reflection, that the reserved goods were in no way different from all the rest, and that there would be no danger of this extreme case arising, even if some accident destroyed the reserve, so long as the other stock held out.
This law of value unites the conceptions of value and of utility in a way that is fully confirmed by facts. When experience shows that iron is worth less than gold, and that an abundant harvest may be of less value than a poor one, our law can give the explanation. In the main, it clears up all the contradictions which appear to separate the conceptions of value and utility from each other; and it only remains for us now to combine the fact of costs with the law of marginal utility, -- a task we shall undertake later. Meanwhile we have not yet completely exhausted the elementary theory of value. In the first place we have only externally resolved the contradictions between value and utility. Under certain conditions iron must be of less value than gold, and the rich harvest of less value than the poor one -- but what hidden import is contained in this? However unconditionally one adopts our law and is convinced by our logic, he will nevertheless scarcely be able to deny that its inmost content is veiled in darkness. In one connection it appears paradoxical; in another it even seems to comprehend within itself a complete antinomy. The final task of the elementary theory of value will be to clear up this paradox and explain away this antinomy. Only when this is done, shall we obtain a clear idea of the essential nature of the phenomenon of value.(2*)
1. The amount of supply depends chiefly on the result of production, and thus the elements of production come into relation with value. The nature of this relation we shall first discuss, however, in Book V, under the head of "Costs." Meantime we shall assume that supplies exist without production.
2. We have here reached a decisive point in our examination. Experience shows us daily that similar goods obtain similar prices; and the majority of theorists (although they may use different names for the same thing) are agreed that these prices are fixed by a marginal law. In this is involved that exchange value, which rests on prices, is the same for all similar goods, and obeys a marginal law. We, however, have gone still further, and say that Value generally and in every form, even in that of use, and even where there is no exchange -- as e.g. in a community organised on a socialist basis -- must be the same for all similar goods, and must obey a marginal law. Jevons, Gossen, and Walras have not gone so far as to assert this. To these writers the utility of the separate portions or items of one supply is different, according to the amount of use which each actually gives. I can scarcely hope to have brought home to the reader, and still less to have converted him all at once to such an unfamiliar aspect of the question. But I trust that the following presentation of the theory of value, which is founded on the foregoing, and which examines, and -- so far as my judgment goes -- explains all the different relations of value, will be found convincing.
There is just one more point to which I should like now to draw special attention. Price not only regulates the amount paid by buyers, but also the amount of production by sellers: it gives to the latter its level. All goods produced for the market are produced under a valuation which considers similar goods as equal to one another, and which subjects them to a marginal law, and it is with reference to this valuation that the costs permissible are calculated, that all stocks are inventoried, that all undertakings make up their balance-sheets, and that all profit and loss is reckoned. If a socialist community were to give up exchange -- the payment of buyer to seller -- it would not on that amount require to give up this measuring scale for the valuation of goods. It could continue to value similar goods at the same figure, and to bring them all under a marginal law. And might we not gave some right to ask, what reasons it would have to discontinue this? Certainly it would require weighty ones to justify a change in a method of valuation which has been followed ever since, if not before, human economics began to be enlarged through trade. And, finally, we have still to ask whether it would ever be possible to cease valuing goods in this way. Is it possible to value equal things unequally? Can we ever regard the useful but unimportant as important?
Menger's theory of value differs essentially from its rivals on this point. He asserts that the law of equality and the marginal law refer not only to price but to value. In my opinion this places his theory in advance of all the others, and wins for him the fame of being the first to lay a perfect foundation for the theory of value. The other authors we have named examine only the laws of want and the laws of price. Menger alone includes the laws of value. His view of the question is the most wide-reaching, inasmuch as it not only aids us to the clearest comprehension of the present economy, but also enables us to think out possible future forms of economy.
The Paradox of Value
Assume that a man owns one good, and that the employment of it gives a utility equal to 10; and suppose that his holding gradually increases up to 11 goods, in the course of which the marginal utility decreases proportionally down to 0. The value of the stock at each point will be as follows: --
When he has The value is =
1 1 x 10 10
2 2 x 9 18
3 3 x 8 24
4 4 x 7 28
5 5 x 6 30
6 6 x 5 30
7 7 x 4 28
8 8 x 3 24
9 9 x 2 18
10 10 x 1 10
11 11 x 0 0
goods units of value
Here a regular decrease of the marginal utility, and, therefore, of the value of the single good, is seen to take place along with an increase of the supply, and further explanation is unnecessary. Each additional good brings with it a diminished increment of utility and must, therefore, bring only a diminished increment of value. It is otherwise when we consider the value of the whole stock, and follow its development from 10 up to 30, and back again from 30 down to 10 and 0. Judged from the standpoint of that aspect of value with which daily economical life impresses us, this scale seems completely paradoxical. Value is commonly regarded by us as a simple and absolutely desirable characteristic of goods, mathematically expressible as a positive amount. It corresponds with this view when the series shows an increase of value along with the first additions to the stock, but it entirely contradicts it when, towards the end of the series, every further addition to the stock is accompanied by a corresponding decrease in value, until, finally, when the point of superfluity is reached, value completely disappears. Whence comes this contradiction? How is it to be explained? The first half of the series appears to confirm the view that value is something desirable, something positive, while the second shows it as a negative quantity, something burdensome or evil. Which then is true? And how can both ever be brought to agree?
Very easily, so soon as one gives up the preconceived notion that value is a simple positive amount. Value (as marginal value) arises from a combination of two elements, the one positive, the other negative. It is a complex amount; or, more exactly, a residual amount. So soon as one distinguishes between these two elements in the formation of value, the series we have just drawn above explains itself in the simplest manner possible; and the semblance of irregularity, which must have proved insuperable for those who expected and sought a simple progression, disappears.
Both elements in the formation of value have been explained by what has already been said.
The positive element is the enjoyment in the use of goods. Every additional use which is furnished by a newly-acquired good is welcome. The good which is first acquired brings the largest increment of utility because it satisfies the most urgent stage of desire; every one that follows has a lesser utility because it meets a desire which has been already comparatively satisfied. And should the accretion of goods cross the margin of want, there will be no addition to the positive element in the formation of value. There will now be no employment for additional goods; they will not bring enjoyment to any one.
Taking the former figures, the increment of the positive element in value will be as follows: --
With there will be
goods units of goods
And the total amount of this positive element, calculated for
the whole stock, will be as under: --
With The total enjoyment is
2 19 (10 + 9)
3 27 (19 + 8)
4 34 (27 + 7)
5 40 (34 + 6)
6 45 (40 + 5)
7 49 (45 + 4)
8 52 (49 + 3)
9 54 (52 + 2)
10 55 (54 + 1)
11 55 (55 + 0)
goods units of value
The negative element arises from the indifference with which men naturally regard goods. Only when forced to it, do we transfer our interest from the uses of goods to the goods themselves; and, in the process of transferring, we have to overcome a natural opposition which varies in strength according to the circumstances. The greater the need, the more eager will we be to get possession and keep possession of goods: the smaller in this case will be the opposition. The opposition will be completely broken down where our need rises to extremity, for here we identify our destiny with that of the goods, and in their loss we see our own calamity. On the other hand, the opposition will be complete where everything is present in superfluity; here we can enjoy without any feeling of gratitude for, or interest in, the objects which procure for us the enjoyment. Between extremest need and superfluity the opposition is a graduated one: we bestow upon goods an amount of interest derived from the interest we have in the services they render us. But we do not give them the whole of this interest; we make a certain reservation. That is to say, all the single items of a stock are considered only at the value of their marginal utility. The surplus value, that which goes beyond their marginal utility, is withheld from the goods. Here, then, is the numerical expression for the strength of this opposition: the negative element in the formation of value is equal to the subtracted surplus value. Making use once again of the foregoing figures, we find that, so long as we own only one good, there is no deduction in the formation of its value; the entire value of the use is transferred, undiminished, to the good. With two goods, on the other hand, there will be a deduction of 1 from the value, as each of these is valued only according to its marginal utility 9, while the utilities of both added together amount to 10 + 9. Three goods have each a value only of 8, and their utility is equal to 10 + 9 + 8, the surplus value deducted being therefore 3. Reckoning further in the same way, we shall find the minus amount in the formation of value as follows: --
With a stock of the minus is
goods units of value.
If we put together the plus and minus amounts we shall obtain the
following as result: --
Positive (+) Negative (-) Residual (+)
1 10 0 10
2 19 1 18
3 27 3 24
4 34 6 28
5 40 10 30
6 45 15 30
7 49 21 28
8 52 28 24
9 54 36 18
10 55 45 10
11 55 55 0
goods units of value units of value units of value
Thus we obtain the same scale as that which resulted from the multiplication of amount by marginal utility.
It is now seen that the apparent irregularity of the scale is really a consequence of the strict regularity of its conditions.
The value of a supply must increase with the increase of its items so long as the positive element preponderates; in other words, so long as the increment of value, furnished by the utility of the newly-acquired good, is greater than the value which is lost through the decrement of value which its addition causes to every good already in the stock. This is the ascending branch of the movement of value, or, as we might call it, the "up grade" of value.
On the other hand, the value of a supply must decrease with its augmentation, whenever the negative element gains the ascendency. This is the descending branch of the movement of value, or the "down grade" of value.
Strange though it seems, the value must touch zero twice in the course of its development: in the one case, where we have nothing; in the other, where we have everything. If we possess nothing, there are no objects to value; if we possess everything, there is -- just on account of the superfluity -- no subjective inducement to an act of valuation. Only if we possess something -- be it much or little -- does the phenomenon of value appear; and between the two zero points, so different in their importance, it has its existence. It presents itself with the first goods that come into our possession, and increases up to a certain culminating point, from which it decreases, until, when superfluity is reached, interest is again completely withdrawn from the goods.
As a matter of fact, human economies move almost entirely in the ascending branch. In most things we are so far from having a superfluity that almost every multiplication of goods shows a corresponding increase in the total value. The single good certainly falls in value as the stock increases, but as a rule we find that the loss in the items is outweighed by the gain on the whole. On this account we are accustomed to measure wealth and riches by the sum of value of their constituent parts, and regard it as a misfortune if the value of property and revenue goes down. And therefore it appears to us paradoxical when, at times, we are forced to notice that, although the amount of goods and of enjoyments, of wealth and well-being, has been augmented, their value has decreased. It may be that exceptionally favourable weather has resulted in an over-abundant harvest; or it may be the discovery of some new productive stratum of unsuspected fertility; or some sudden and enormous increase of returns through advance in technical processes: or it may be caused by some error on the part of the producer, who has been misled by greed of gain, or a mistaken and exaggerated estimate of demand, into too greatly enlarging his production. But it is always some unusual accident when individual branches of economy are transferred to the descending branch in the movement of value. It is improbable that our whole economic system will ever permanently come under such favourable conditions, and production be brought so near to superfluity, that the ascending movement of value will cease to be the dominant one. The example, however, of those few free goods which nature offers leaves us no room for doubt that value disappears whenever superfluity is reached; and this is really the best proof for our contention that value must begin to decrease whenever superfluity approaches. Even though experience shows the scale of value to have many gaps, yet it gives us sufficient facts to let us trace its ideal course from end to end.
The Antinomy of Value and the Service of Value
As consequence of the observation that, in the overwhelming majority of cases, the value of possessions increases with economic prosperity, the exceptions have been either entirely forgotten, or put on one side as unessential and unimportant disturbances. The idea has gone abroad that value is the highest principle in economic life, and that all our economic action must be regulated with reference to it. It has been said that people should so act as to obtain on the whole the greatest amount of value.
If this idea were correct, our economic life would be directed by a power which would, in some measure, work against the aims of economic conduct; to the extent, namely, of preventing the realisation of economic ends beyond a certain point; that is, beyond the up grade of value. And one would be justified in speaking of an antinomy in the law of value, which would refer not only to exchange value, as Proudhon has asserted, but to every form of value. It would be expedient for every one, not only from a money-making and selling point of view, but in his own private economy -- even for a Robinson Crusoe who could not sell at all -- to convert superfluity into want, and want into greater want, in order to create and increase value. No one, however, would wish to act in this way, and it is therefore untrue that value has the guidance of our economies. The highest principle of all economy is utility. Where value and utility come into conflict utility must conquer; there is nothing in the nature of value which could give it the ascendency. Utility is imperfectly contained in value, with the accompanying peculiarity that the amount of utility which is contained is intimately associated with the very idea of goods. But this latter phenomenon cannot have the effect of preventing any one from entering into transactions which a complete addition of the utilities to be got from the goods acquired would show to be profitable. If I were able, by any method whatever, to secure for myself a constant superfluity of all the services of goods, the idea that my interest need not thereafter be cared over from the services to the goods themselves, would not cause me a moment's hesitation in securing the superfluity. Or suppose that I expected a great amount of utility from some transaction. and the transaction at the same time caused me a certain loss of interest in the goods, this latter circumstance would not deter me in the faintest degree from carrying through the transaction.
Under these conditions, then, what service remains for value to render in economic life? A highly important one. The cases where there is a conflict between value and utility -- where increase of the one is decrease of the other -- occur but seldom. Experience shows that economic life moves almost always on the "up grade," and here the tendencies of increase or decrease are similar for value and utility. Whenever the utility of a stock increases with the augmentation of the stock, the value also increases, and whenever the utility of a stock decreases with a diminution of the stock, the value also decreases. A greater value almost always corresponds with the greater utility, and a lesser value with the lesser utility, and on this account transactions which commend themselves in consideration of their utility, commend themselves also in consideration of their value. The service of value consists, then, in representing utility wherever both show the same tendency. We do not calculate utilities; we calculate values. Value is the form in which utility is calculated, and this renders calculation infinitely more easy. It is difficult indeed to estimate the utility of a stock; easy to estimate its value. That is to say, the value of a stock can be expressed as the single product of stock and marginal utility; it is a multiple of the marginal utility: whereas utility can be expressed only by a sum which contains as numerous and as various amounts as the stock contains items. The utility, for instance, of a harvest of a million quarters can be represented only by an almost inexhaustible description of all the benefits accruing from it, from its greatest effects down to those of the least important employments economically permissible in the circumstances of the case. The value of this same harvest is easily and shortly ascertained by multiplying the utility of the marginal employments by the whole amount. mathematically expressed, the formula for expressing the utility of a stock of 50 items, the most intense use of which -- that of the first item -- reaches the figure of 100, if we assume a regular decrease in intensity for every successive item, will run: 100 + 99 + 98 + ... 51. But the value formula will be simply: -- 50 x 51.(1*)
The simplification of economic calculation by the use of a value instead of a utility measurement is noticeable in proportion to the economic state of development. While the utility formula becomes continually more wearisome and less clear, the value formula becomes more comprehensive and uniform, particularly through the entrance of costs, -- which we shall discuss later. Where money is the medium of exchange everything is measured equally, for purposes of trade, according to its money value; all utility in its illimitable variety is reckoned by the value of coin, the separate items of which are all equal to each other, and the amounts of which appear in the calculations as multiples of one and the same unit.
It is the possibility of calculating utility in terms of value which first puts us in a position to draw out exact economic plans and foresee their necessary limitation. Thus value comes to be the controlling power in economic life.
1. The value formula is an abridged utility formula. Only that part is left out which, on the one hand, renders calculation more difficult, and, on the other hand, is really unnecessary as an adequate motive to economic actions; viz. that surplus utility which is above the marginal utility. Economic actions which have value (in the up grade) for their motive, are not only approximately, but completely and exactly weighed and limited. The greater utility is always reached when the greater value is aimed at.
It may be interesting to go more into detail regarding this. There are two occasions on which economic goods become objects of valuation; first, when we wish to acquire goods, and to measure the amount of the acquisition; and, second, when we wish to part with goods in order to devote them to some given end, and to measure the amount of the service which they thus will render. On the one side, then, we have to measure results in goods, and, on the other, outlays in goods. It may be remarked in passing that, without some such end in view, goods are never valued: they are never valued for valuing's sake. At most, goods are valued in advance to be ready for any contingency; but value never plays the role so readily ascribed to it by, theory; -- it never acts simply as the means of valuing wealth. Wealth may be valued in all sorts of ways, according to the purpose which it is intended to serve. The rules of valuation which are actually followed have their origin in the fact that they serve towards the ends of economic life, whatever these may be. Value is adapted to its economic environment, and can only be understood through it.
First, as to the measurement of results in goods. All acquisitions of goods which increase value are profitable. Of two acquisitions, between which one may choose, that one will be chosen which gives the greater amount of value, because it also gives the greater utility. Augmentations of value arising from intentional destruction of goods are unprofitable, and, in consideration of utility -- which is the stronger consideration wherever there is a collision between it and value -- are forbidden. Acquisitions of goods which, inasmuch as they follow the "down grade" of value, diminish the amount of value, are nevertheless profitable.
An increase of value occasioned by increased necessity, and unaccompanied by any change in the amount of goods, must not be described as an economical result. It is not created by any economical act. Once created, however, it naturally influences economic action, etc., through the fact that it changes the value of goods used as outlay.
Second, as to the measurement of "outlay" in goods -- whether in purchase of other goods, or in production, or in mere satisfaction of personal want. In every appropriation of goods to a particular purpose the value of the sacrifice involved must be estimated an compared with the expected result. The greater the sacrifice of value, -- if we disregard the circumstances of the "down grade," -- the greater the sacrifice of utility, and it must be justified and made good by the obtaining of a higher result. It is different to show this as regards consumption. The employment of goods towards the satisfaction of personal wants must also be guided by the value of goods. But how can marginal value serve this end? Would not that require that only marginal wants be satisfied? The difficulty solves itself whenever we give up the old and deep-rooted but erroneous belief that consumption as such is an economical act. Consumption as such does not arise from any economical considerations. It is only economising in consumption that is economical (see Ursprung des Werthes, p. 133). The demands of economising are, however, exactly met when we keep to the marginal utility. In other words, value does not control consumption: it only forbids uneconomical consumption; that, namely, which would not assure uninterrupted satisfaction down to the lowest attainable utility. This prohibition and nothing else is expressed in marginal value; no employment of goods which goes below the margin drawn can be allowed. Through the fact that want on its side is active and demands satisfaction, economic satisfaction is reached by a combination of claims and refusals. Whoever possesses 1000 items of the value of 10, may permit himself every enjoyment which has an intensity of 10 or more. Whoever possesses 2000 items of the value of 8 may go further, and allow himself all enjoyments which have at least an intensity of 8, two thousand times. This is the true meaning of that estimate of the value of supplies of consumption goods, to which we generally give the more material formulation, that the first possesses 1000 x 10 = 10,000, and the second possesses 2000 x 8 = 16,000 units of value.
See, upon the calculation of value my Ursprung des Werthes, p. 180, and Bohm-Bawerk's Werth, p. 46; further, on the service of value, Book II, chaps. iv and v and Book V, chap. xiii below.