The Intellectual Foundations of Political Economy | Pepperdine University | School of Public Policy

The Intellectual Foundations of Political Economy

The Austrian School


Natural Value:

BOOK 6, Value in the Economy of the State

by Friedrich Von Wieser

Chapter I Chapter IV
Chapter II Chapter V
Chapter III  

Chapter 1 - Introduction

In the exchange transactions of private economies with one another, objective exchange value acts as the economical measure of goods, while, within individual private economies, this part is taken by subjective value as each individual owner estimates it, whether it be subjective exchange value in connection with objective exchange value, or use value independent of it. All these forms of value, reflecting with more or less truth their common prototype, go back to one original form, viz. that which we have indicated as natural value; natural value being, in the last resort, the resultant of two simple fundamental components, quantity of goods and utility of goods. Even such phenomena as land rent, interest on capital, costs, are natural phenomena of value which could be suppressed only by a force so powerful that it would at the same time injure economic life and action itself.

Besides private economies there exist a great many public economies. The question now is whether, in them also, the value of goods holds the same place, and whether in them it takes on any new and peculiar forms. I shall limit my inquiry to the most important of social economies, that of the state, and deal even with it only in the most general way. The theory of social economies is yet in its infancy, and it would be impossible to discuss value in them at all exhaustively without first having thoroughly gone into a great many other subjects. It, therefore, appears to me best to confine myself to an entirely general and comprehensive statement.

State economy divides itself into two great spheres, the economy of income or finance, and the economy of expenditure or administration. Administration, however, belongs to the economy of the state only in so far as it is determined by economical considerations. This is the case mainly where regard is had to the material interests of the people, that is to say, in the economic administration or the economic superintendence of the state; but there is no single form of national activity but must follow economic principles, if only in the second instance; viz. in regard to the careful and economical employment of its resources.

Up till quite recently economists have not, either in finance or administration, recognised in value that importance which, by analogy, might be suspected from its role in private economy. With regard, in particular, to finance, theory has managed to do almost entirely without value. The principles of taxation have been and are almost always stated without value being mentioned, or if mentioned it has been, at the most, only cursorily touched upon by way of comparison. Taxation gets its warrant in specific considerations, not in general economic ones. We speak of minimum of subsistence, ability to pay, sacrifice of taxation, progressive taxation and so on, almost entirely as if they were facts and conceptions belonging to a distinct sphere, while neither is the relation of this sphere to the fundamental phenomena of all economy made clear, nor is any attempt made to make it clear.

Adam Smith and his school treat the economic administration of the state also in a similar manner. They explain it simply by the necessities of national life, and value never enters into their consideration. Where they do make mention of it exchange value is always understood, -- that being the only value which the school, as a rule, recognises. Any peculiar value pertaining to the economy of a state is never discussed, as in general all economic conceptions are borrowed entirely from the circumstances of private economies, and bear their characteristics. Connected with this -- as cause and effect -- there is a strong tendency to limit the sphere of state economy, and to extend that of private economy. Every theory formulates its conceptions in conformity with its fundamental tendencies, but it strengthens these fundamental tendencies in turn by the logical weight which the conceptions once constructed exert. A person who recognises no other value than exchange value will, wherever his common sense says that it is a question of value, generally allow exchange value to decide the matter in its one-sided way, or will, at all events, give to it too great a preponderance. The way in which Adam Smith rejects protection and argues for free trade may be regarded as typical of the school. The national income is to be measured by exchange value: but thus measured free trade will undoubtedly give the larger income in the near future: consequently, as it is always the income of the present that forms the capital of the future, free trade assures the greatest amount of well-being for all time to come.

In Germany this one-sidedness of the English school was early recognised. Many writers, as, for instance, Friedrich List, actively combated it. List placed his "theory of productive forces" alongside of his "theory of value": exchange value was to be the determining force in private economic relations, whereas, in the economy of the state, "productive force" was to take its place -- an antithesis whose inadequacy is most clearly shown from the consideration that "productive forces" are themselves estimated according to exchange value. Most writers took a different course. They tried, gradually, and at first altogether academically, to broaden the private economic views of the English School, in such a way as to make them as far as possible applicable to all economic relations. As regards value in particular, exchange value was traced back to the general conception of use value, and then conceived of as national or social use value. Thus little by little the theory altered its formal character. It undoubtedly became more rounded, more plausible, more adaptable, but at the same time more indefinite and inexact. Without following accurately the further development of this theory, I may point out its most important fact: that the scientific discussion did finally give up its academic hesitation, and, in spite of the slightness of its theoretic foundation, laid down with success and decision principles for the practical formation of a state economy. Like the financial system of the European states, their economic politics were gradually reformed by the active assistance of theory, although theory itself had not completely accomplished its task, nor, indeed, was quite aware what that task was. The "theory" was a highly-developed technology, capable of giving right direction, although it did not succeed in finding its justification -- and with that, of course, its limitation -- in absolutely convincing clearness.

The lately published work of E. Sax (Grundlegung der Theoretischen Staatswirthschaft) is the first to complete the transition from technology to the theory of national economy, and has thus at last reached a goal aimed at by the German economists through a long and steady development. In the sphere of administration Sax has succeeded in indicating how public interests may have the widest play, while still maintaining a fixed economic conception which holds fast by the essentially economic. The economic is one and the same in all its forms, everywhere entirely distinct from the non-economic. Very important is the application of Sax's work to the sphere of finance -- all the more important that here he had almost no predecessors -- and that the idea is thought out into details with great clearness. The whole system of imposts rests on value: this simple proposition makes the science of finance for the first time what it should always have been, a part of political economy. "Imposts of all kinds are examples of collective valuation which find their full explanation in the general nature of the phenomenon of value. The truth which finds expression in this formula is directly decisive for the theory of national economy, as a branch of the total theory of political economy, balancing that of private economy. The simplicity of the solution is a guarantee of its correctness. The apple falls from the tree and the stars describe their courses in obedience to one and the same law, that of gravitation. A Robinson Crusoe and a nation numbering a hundred million souls obey one and the same law in their economical transactions, that of value" (pp. 307-8).

The statement which follows is so general and so condensed that I have had but little chance of going into the rich contents of Sax's book. In the interests of the statement I have, moreover, considered it wiser, even where I disagree with Sax, to refrain from the most part from any attempt to prove my divergences with any great exactitude, as, in this portion of my work, even more than in the former, I have neglected the literary aspect of the subject. Here, as formerly, my task has been to demonstrate, comprehensively and as a whole, what has hitherto been considered only in isolation, if at all. It appeared to me foreign to the plan of my work, and likely only to increase the difficulty of the task which chiefly concerned me, -- that of affording a survey of the whole subject, -- were I to let myself be carried away by criticism and polemic into detail which I should not have gone into for its own sake.

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Chapter 2 - The Province of a State Economy

It is generally assumed that the object of the individual economy is provision for the wants of the individual -- that is to say, those wants which the individual feels as an individual; and that the economy of a community provides for the common or collective wants -- that is, those which are experienced by the individual as member of a community, or, to put it differently, the wants of a community. The economy of a state therefore provides for the wants of the state, i.e. those wants experienced by the citizens of a state in consideration of their civic connection with each other. This conception, however, scarcely corresponds with the actual division of the economic sphere. National interests, which are undoubtedly to be reckoned under the head of collective interests, are frequently furthered by personal sacrifice and expenditure. And more numerous instances may be adduced of the contrary case -- that individual interests are fostered by collective efforts. The desire to possess a means of coming and going to one's business, is undoubtedly personal in the highest degree; but the highways of traffic have been included among the concerns of the commonwealth almost since the beginning of time. In the communistic state the care of providing for the entire sum of individual wants, would fall altogether to the economy of the state without these wants having changed their nature in any way. It must, therefore, be some circumstance which does not touch the nature of the want itself that determines the division of the economic sphere.

A simple consideration enables us to recognise what circumstance this is.

The personal ability of the individual is in many cases sufficient to secure him the realisation of his personal wishes. In particular, the sphere within which the individual is capable of making himself felt with effect, is quite extraordinarily enlarged when men have learnt to make use of the division and co-operation of labour. By means of this they enter into combinations and exchange with one another, and thus increase enormously their power of work, while, at the same time, they calculate and distribute out again to the individual the advantages obtained, and thus remain separate from each other, as individuals with individual rights. There are, however, certain results which demand a more intimate kind of connection, -- a condition of real community, -- and cannot be obtained without it. The desire to obtain these results, which often amounts to the feeing of a peremptory necessity, leads to the formation of the commonwealth.

There are various reasons which may make the attainment of a certain result dependent upon the formation of collective bodies, and upon the carrying out of collective actions.

In the first place may be mentioned the nature of the action in question. For many kinds of action the individual, as individual, is not qualified; he feels himself too weak, or, it may be, quite incapable. From the first it has devolved upon the state to represent the common weal, in cases where nothing but the solidarity of many or of all is able to create the force that is lacking to the scattered individuals. Only as a united state can a people hope to ward off its enemies, and to protect its citizens when in foreign countries. Only a union of people can succeed in guarding a country's peace, and preserving order against crime within its borders. From the general feeing of justice are obtained the weight and power necessary for the laying down of laws which will bind every one, and for the appointing of judges and officers who will make every one bow before the one common law. And thus numerous interests, partly collective, partly the most ordinary general interests of the individual, lead to an ever-widening extension of the sphere of the state's activity, wherever the opinion prevails that only the state possesses the power of offering any guarantee of the satisfaction, or the full satisfaction, that is desired.

In the case of such actions as are executed in common, there is an overwhelming tendency to bear the burden in common, and to enjoy the results in common. Even if the power of the state is set in motion for the sake of one solitary citizen, the occasion cannot well be judged merely from the standpoint of the interest of that one citizen. The very fact that the power of the state has been set in motion at all, engages the interest of the public, because this power, once set in motion, cannot be allowed to move in vain. All its future success depends on the recognition of this. For this reason the outcome, for instance, of every single criminal or civil process is full of importance to the whole community. Every such process must be so conducted that respect for the law may be strengthened, not shaken. But generally speaking the occasions on which the machinery of the state appears on the scene are, in their origin, matters of great importance and of great compass -- frequently, of the greatest importance and the greatest compass; they are indeed such matters as only the united strength of the whole people is sufficient for. This circumstance of itself makes it impossible, as a rule, to divide out among the individual citizens the result obtained by the combined effort, or even to charge it to the individual according to its effects; hence the necessity of waking the benefit universally accessible, or ascribing it to the people as a whole without further distinction. It happens comparatively seldom that individuals can be indicated and singled out, whose interests are exceptionally concerned, and for whom the services of the state may be exceptionally interposed and charged.

In the second place, just as the results of a war are not to be bought or sold, and a war cannot therefore be carried on as a private matter,(1*) so it happens that, among the undertaking for which the means and powers of the individual citizens suffice, there are very many which must be excluded from the circle of private business because of the impossibility of obtaining any profit out of them. The most various circumstances may have this effect. The streets of a town would be useless for purposes of traffic if they were not free to use without payment; this makes it impossible that any citizen should retain public routes for his own benefit. The same principle holds in all cases where goods whose production costs something must be made over to the public free of charge -- "quasi-free goods," as Menger calls them. Many undertakings also, although the public interest demands them at once, give promise of return only in the distant future; -- so distant indeed that no private individual could be expected to wait for it: this is the case, e.g., as regards many railways. Very often again it is doubtful whether the return of an undertaking will ever be sufficient to cover the costs, while at the same time the results in case of success are temptingly large; here private enterprise would hesitate, either on account of the great amount of capital necessary or for other incidental reasons. Very often there is a scarcity of capable and energetic private undertakers, simply on account of the defective economical development of the citizens. And there are often cases where the goods concerned are, for the private economy, only in process of becoming -- still incomplete, unripe, latent; where the goods must first be got at, or the goods that are to supplement and complement them be discovered, before they become capable of rendering any useful service. How much latent labour power there is which must first become conscious of its own existence and train itself, before it can find a market! What hidden wealth may not slumber in a land favoured by nature but uncultivated, its existence suspected, even known, but out of reach owing to the general backward condition of industry, of wealth, of education, of credit, of law, or of peace! And, although, in such a case, there is as yet no secure foundation for private enterprise, what government would not regard it as a duty itself to come forward and take hold, not only in the way of general administration, but by economic undertakings which train and ripen human faculty though they may give no direct return? Sometimes only the want is there, crying urgently for satisfaction, while those who feel it have no power to pay for its satisfaction; in this case no private undertaker can do anything, and the state must step in to mitigate an evil which might grow to be a great public ill. Many other similar circumstances might be added, all acting in the same direction; that is to say, excluding private enterprise by reason of their unprofitableness, but demanding the activity of the state on account of the importance of the goods concerned.

In the third place, many undertakings which lie within the power of a citizen, and which also hold forth to him a promise of gain, are reserved to the state, for the simple reason that they would put too much power into the hands of the private undertaker, or assure him too great a gain. The fear is that the exceptional position they would necessary give to the person who undertook them might be misused. The businesses which belong to this class are mostly necessary monopolies, -- particularly monopolies of great extent, such as the post and the railway. We do not expect, in an independent private undertaker, the requisite reliableness, or the will to undertake such huge businesses, or to carry them through as we should like; or we expect that too high a price would be charged for the service. But in all these points people look for something better from a government. This does not, however, in the least involve that the form of undertaking for profit be entirely rejected. It may be retained, but, with the endeavour to obtain the highest business return, must be conjoined, in some way or other, the endeavour to serve the interests of the public. In particular, where any considerable want is concerned while the power to pay is wanting, the service must be undertaken at limited prices, -- that is to say, valuation according to exchange value must be replaced by valuation according to natural value. Thus emerges the "public enterprise." In the communistic state all production would be the affair of the state, and fall under public enterprise, from a consideration which amounts essentially to this; -- that private production is one-sided, and looks to the interests of the richer classes, while putting in the background the interests of the community in general. Even the affairs of the private household would be, for the most part, given over to the state.

If we cast a glance over the whole series of duties which constitute the economy of the state, it will easily be seen that, apart from the diversity of originating causes just described, they are also distinguished from each other by their content. Certain of them -- of which the last-mentioned group is the best instance -- are very closely related to private undertakings. Like them they have to do with the direct application of labour to goods; they have to do with detail and with individual production; and they are scattered in countless separate actions and occupations -- many of these of a similar nature -- over countless separate goods. Here it is considerations more remote and far - reaching that exclude private administration in matters where, otherwise, it might be suitable enough. This can be most clearly realised if we consider the businesses of production and of housekeeping as transferred to a communistic state. These would indeed cease to be matters of private economy in the personal sense, but, essentially or technically, they would remain, if the expression may be employed, "economic in detail."

Quite different is the character of the remaining acts of state economy, which chiefly belong to the first and second groups just described. Their duties do not admit of being discharged by private economies for various reasons, but these reasons all lead, in the last resort, to the same issue; -- that such acts are beyond the calculation of the individual, either because their products cannot be bought and sold, or cannot be bought and sold individually. Their results go without money and without price to the public, -- either in whole or in great part, -- according to what Sax calls the Princip des allgemeinen Genussgutes. They are transactions on a great scale, working with large means, and large returns, -- returns which it is often entirely impossible to distribute. They assure the general foundations of personal life and of economic action. Their results must be distributed over all the community and not divided out individually, even supposing it possible to conceive of them as distributed to the individual. Of course they are undertaken on account of the utility they promise; but it is frequently far from certain -- as e.g, in the case of war -- whether the desired result will ever be attained. And even if it is attained its amount can, for the most part, be only approximately determined, partly on account of the wide range which it covers, partly on account of the large number of persons concerned, partly on account of the impossibility of conceiving the individual's share in it, partly on account of the long process of development, and the long time that must elapse before many of its effects emerge. Very often all that one knows of an action is that it must not be neglected, and that we must summon all our forces to undertake it; while it is almost entirely uncertain how in the end the life of the people may be affected thereby. Often it is other generations that must pass judgment upon it.

In the communistic state also, if all economical matters are to devolve upon the state, decisions will certainly be made from this point of view; the affairs of the household and of ordinary production will be kept separate from those of the general economic and state administration. In the former case goods will be estimated at their natural value as that is now determined in private economy, i.e. according to marginal value; in the latter case, this form of valuation will be -- as we shall go on to show -- to a great extent abandoned. Alongside of it, or in its stead, will be placed another form of valuation, which we may best call "national economic" valuation, -- a term which certainly does not express the formulas of communism, but those of existing economical conditions.

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Chapter 3 - Value in the Natural Economy of the State

Suppose the utopian state of communism actually realised, there also, as we have just seen, where all economic life has become the concern of the state, must the same distinction as now be made between private economy and state economy, though possibly under different names. On one side must be grouped by themselves all those businesses of the household and of production which are now left in the hands of private individuals, together with many undertaking which essentially belong to private economy, but are at present, for special reasons, conducted by the state. On the other side and distinct from these, must be placed all matters of the general administration of the state -- or of all that is economic in it -- and of economic politics in general. Of course, there would be no lack of transferences to and from each group, and whatever might be the ruling consideration in the one group would have a place in the other. This does not, however, in any way conflict with the statement that the leading principles in each must be different.

In the former, or private economic group, where goods are capable of being measured very accurately as to their amount and utility, the main endeavour must be to obtain from every practically measurable portion of goods the greatest amount of generally recognised utility. This endeavour must find its expression in an estimate of value which takes its measure, for each single good, from the margin at which the most perfectly utilised supply meets the most perfectly sifted demand. In the sphere of production such an estimate of value takes, as we are aware, the form of an estimate of return or of costs. The value of stocks of similar goods must be represented as multiples: the value of production goods combined in the shape of products as sums of multiples. The individual amounts must be calculable -- in many instances very exactly calculable -- against each other. An exact economic calculus must be established, the advantage and disadvantage of every sufficiently familiar process being put in figures; and it must be regarded as the triumph of economic art to exactly ascertain and exactly realise that plan which the value calculation indicates as the best.

In the latter, or national economic group, the first principle must also be to secure the greatest amount of utility, the highest well-being of the citizens. But the utility and its amount will not be so exactly estimated; will often, indeed, as we have already proved at length, be very inexactly estimated. As the means necessary to achieve the ends of the state are for the most part very extensive, and the more or less cannot be so exactly determined, the indefiniteness of the valuation will be increased from the side of the goods also. The estimate of value will often be very vague, and in many cases unanimity of opinion regarding it is not to be expected. More exact estimates will be obtained only as regards such goods as are also employed in private economy, by transferring to them the definite estimate obtained by private economy, and also as regards such goods as are obtained through production. But where national economy makes use of specific goods which do not, either by reason of their employment or origin, take to themselves the estimate of private economy;(1*) where national economy stands absolutely and entirely by itself, and seeks to guard public interests by specific public methods; there, in place of the quantitative estimate of the value of goods in masses, will emerge the vague and disputable valuation of interests, influenced by inclinations and passions.(2*)

The opposition between natural value in national economy and natural value in private economy reduces itself, in effect, to an opposition between vagueness and definiteness, subjective valuation and exact calculation. Even thus the contrast is sufficiently great to obtain clear and peculiar expression in practical politics. Theoretically, of course, there can never be any doubt as to the relation of the two. Just as private economic interests, where they compete with each other, are ranked according to their relative importance, so the interests of private and of national economy are ranked in relation to each other. The more important aim takes precedence of the less important -- this forms the theoretic basis on which the estimate of value is built. But how will this rule work in practice when any doubt arises as to the degree of importance? As a matter of fact, the indefinite nature of national economic valuations must in practice frequently give rise to doubts as to the exact relation which the acts of private and of national economy should bear to each other. Very frequently it is the same goods that may be employed by either private or national economy; in the last resort, indeed, there is nothing but one fund out of which to provide for both, and only a few goods are from the first specifically reserved for one or the other sphere. A characteristic and common instance of the competition between the two interests occurs where an undertaking, which is profitable as a private business as shown by its calculable return in direct results, is maintained, from the side of national economy, to have an unfavourable, destructive, or undermining effect; that is to say, as regards results which are more remote and difficult to follow. Alongside of this we have the converse instance, that an undertaking which is unprofitable as a private business, and whose valuable returns do not cover the costs, may, from the point of view of national economy, be regarded as profitable, whether tending to progress or conservative as the case may be. What holds as regards individual undertakings, also obtains as regards whole groups of these, -- of the great acts of legislation and administration, of the various branches and spheres of production, of the activity of the producing class of a nation. It might e.g be disputed whether agriculture or the labouring classes ought to have public subsidy -- i.e. support which might not be justified, from the point of view of private economy, by the value of the land products or the results of labour, but might be justified if one looked at the maintenance of the stability of the national economy and of the life of the people.

In the communistic state, as in the economy of to-day, there will be no lack of occasions which will continually force people to decide anew between considerations of the quantitative and calculable proximate returns -- considerations of direct profit, -- and of results more remote and less calculable -- considerations of general interests. Suppose that the subject were some technical improvement like the establishing of railways, discussions would undoubtedly arise, -- as they did at the time when railways were introduced, -- as to their utility, feasibility, and consequences. And even after experience has put an end to the general discussion, there will still continue to be a conflict of opinions as to the more exact relation between the calculable results and the incalculable. Or, possibly, there may be a doubt whether the industry of a people should take the direction of trade or of agriculture; whether the power of the labouring classes should be more utilised, or more economised; possibly, also, whether it would be wise to carry on war, whether preparations should be made for it, or whether it might he better to foster the arts of peace, and so forth. And certainly there will always be one party which calculates, and which looks dispassionately to the profitableness or unprofitableness of any scheme, and another party which looks far ahead and leaves room for imagination and passion. Under different names the economical oppositions of interest to-day will recur. The conflict which we may observe now between exchange value and public interests, depends accordingly -- apart altogether from the opposition of personal advantage -- upon a difference in economic aims which is inevitable, and arises out of natural economic conditions.

If it must be confessed that, in the communistic state, the private economical valuation of goods is not satisfactory because it sometimes neglects necessary deductions, sometimes essential additions, and so comes out too high or too low, we must a fortiori say the same of exchange value in the present order of things, where it goes too far in emphasising the characteristics of the private economy. It is the exact calculation and the incalculable but actually observed influences, that, together, make up the full value of goods. The theorist must admit so much, however hard it is for him, when he considers how greatly economic theory loses by it in exact conception of its formulas and precepts. How simple and how easy to apply any advice whenever only calculable quantities are concerned; -- whatever, calculated by exchange value, yields a profit is economically permissible; everything else is forbidden! And how misty and obscure all theoretical solutions become when they put absolute laws aside, and are obliged to appeal to concrete existing circumstances to decide for them! In the end it is to politics we must leave the task of deciding, as well as of carrying out its decisions in the concrete -- remembering that politics belongs not only to the politician but to political science. however much the pride of theory may suffer in recognising this, it is a fact not to be gainsaid. In order to observe and understand things, they are often thought of as being less complicated than they really are: and this is right enough when nothing further is intended than to simplify the process of thought by beginning at the easiest. But it is not permissible to call a halt at this point, and apply the solution thus found, without more ado, to reality. This is the sort of thing that might be described as "the disease of theory": to take things first in the way in which they can be most simply grasped, and then to represent the whole world according to the picture we have just been able to think out for ourselves; to take what is most easily grasped, or at all events most precisely grasped, for the actual.

Like every exaggeration this also produces its own reaction, viz. the opposition to all theory whatever. The book which my readers now hold in their hands is a proof that I do not share in this opposition. Possibly it may not prove equally clearly that I consider every other direction of investigation, besides the purely theoretical one, necessary and significant in its own place; but no candid critic will, I hope, find any reason to dispute this.

That the theory, even when it recognises the influences of national economy upon value, in some sort paves the way for politics, is not likely to be denied. The man who has thought out the theory of value to the end, even within the limits just mentioned, will have cause to point with pride to the help which this has afforded him in political science and practical statecraft. It is a matter of the first importance -- one without which no decision can be arrived at, -- to recognise that there is a sphere within which the estimate of exchange value is applicable, and another in which it is not. Now if we could define these spheres, even in the most general way; if we could keep entirely and clearly separate the laws of the national estimate and the laws of the private estimate of value, so that every one who followed with sufficient earnestness would be convinced that they corresponded to the essential demands of economic action; if it were possible, besides, to indicate the directions in which the actual course of things diverges from these laws most frequently and with the most serious results: in that case the foundation for political action would be so plainly laid down, and would compare so well with all the errors and difficulties which beset its path without these principles, that no one would deny that such a theory had justified its existence. To mention only one special case. The representing of goods by weighed and counted sums of barren metal or paper, and the consequent valuation of goods, and of the well-being they secure, by numbers and figures, by items and weights, is in itself a somewhat mysterious matter; a matter which a man who wishes to obtain a clear view of things might imagine to have an artificial and unhealthy origin; a matter which does, in fact, lead many an honest and intelligent thinker to such a conjecture. It is, then, a conclusion well worthy of consideration when a science succeeds in proving that such a manner of procedure is, at bottom and in its own place, sound and simple, and that it would be impossible to obtain a more exact and distinct measure for the thousandfold variety of economic satisfactions, than that afforded, under the necessary conditions, by the natural marginal value of goods.

NOTES:

1. We may take as illustration the case of a barren island whose occupation is demanded by military or political considerations.

2. Even in private economy, all thing considered, one has to deal with masses of goods and with wants of great compass: private undertaking are in fact more numerous than state undertaking, and form the principal part of the body economic. All the same, the extent of the undertaking, in private economy, has only to a trifling extent that indefiniteness of valuation which it so easily gives rise to in national economy. In private economy one has to deal with more, but smaller objects; in state economy, with isolated but more wide-reaching matters. In the former all quantities finally resolve themselves into divisible sums; in the latter, they do not. This contrast is so important, and recognition of it affords so deep an insight into the structure of exchange value, that, at the risk of repeating myself, I shall try once more to give to it as exact expression as possible.

There are two considerations which must be carefully taken into account if we would understand the calculus of private economy.

First: all stocks of goods of a similar kind -- and, along with these, all goods which, as products, relate themselves through costs to such stocks -- come within the range of the marginal law, and are measured as divisible sums made up of the smallest units, each unit estimated at one and the same value. This makes it appear as though all wealth were split up into "atoms," but it is so only in appliance; as a matter of fact within the sphere of the marginal law every "atom" in the whole circle of wealth is valued by this method of measurement; not only are all the marginal employments put in evidence but, with and though them, all permissible employments from the highest down to those standing on the margin, -- only that we are saved the trouble of putting into the calculation any but the marginal uses. This makes it possible to calculate even the almost infinite quantities which are destined to meet almost infinitely various wants. For the purposes of carrying on ordinary private business, for instance, the whole enormous agricultural wealth of a nation can be quite properly grasped through the ordinary economic estimate of the same, even although this estimate, which only takes stocks and marginal employments into consideration, is very far from giving expression to the whole importance which those satisfactions that are provided through agriculture have for the life of the nation. There is, therefore, nothing more misleading than to introduce a treatise on the price of agricultural products by a disquisition upon the importance of agriculture in this latter sense. The "surplus value" left out from the calculation need not be taken into the calculation; for one thing, that it is omitted, not only in agricultural taxation, but everywhere, and, for another thing, that, as regards detail, a quite adequate balancing of agriculture against trade, industry, and the other branches of economy, and also of the individual businesses of agriculture against each other, may be obtained, if only the margin be everywhere observed down to which wants are satisfied, production extended, and cost goods expended.

If this same agricultural wealth be considered with regard to the purposes of general economic politics, the point of view changes. We are no longer concerned with innumerable individual goods as opposed to each other, but with that which affects them all in common. Thus agriculture, or great parts of it, become a whole; then is the time to consider the importance of all its services; and then we have to face an enormous complex of results which must all be estimated in their entire extent.

Second: by private economy the whole productive return -- again taking into account the smallest quantities -- is distributed among the complementary productive factors without remainder. The sum of all the "productive contributions" is equal in value to the total return, and the productive value is consequently as clearly calculable as the value of the products. On the other hand, in questions of economic politics, if the destinies of large quantities of production goods have to be weighed all at one time, the estimate of the "contribution" does not suffice. It becomes necessary to undertake the exceedingly difficult task of considering how deep the "complementarity" of the productive factors in its ultimate ground may reach, and how far these factors mutually condition one another -- in the way of fructifying or serving as foundation -- if they are all at once brought together in masses, or severed from each other. Here, again, in the "contribution" of private economy we calculate only the marginal value, whereas, in the total "co-operation" of national economy, we calculate the more far-reaching and less easily calculable importance of the goods.

This must all be understood with the above-mentioned limitation, that we have here indicated only the leading characteristic of the two economic systems, while each system always shows traces of the other, and the transitions from one to the other escape notice.

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Chapter 4 - Value in the Present-Day Economy of the State

The conduct of economic life, as actually carried on, adds another and a stronger contrast to that which naturally exists between private and national valuation.

The state as it actually exists -- unlike the communistic state -- has not the management of all economic matters, but only of a trifling portion of them. And, again, all economic goods do not belong to the state. Indeed it does not possess even enough for the proper carrying out of its own objects. As a rule it possesses only the buildings and the fixed plant necessary for the exercise of its public functions. Whatever beyond is required for the current service must, for the most part, be handed over to it by the citizens in the shape of annual contributions from their property and income. The most important of these contributions are raised, as we know, in the shape of taxation, and to the consideration of this alone we shall here confine ourselves.

Schaffle (Steuerpolitik, p. 17) has already laid down the principle on which the goods which form the income of the citizens should be divided out, between taxes on the one hand for the satisfaction of public interests, and domestic outlay on the other for the satisfaction of private wants. He calls it the "principle of proportionate provision for the wants of the individual and the wants of the government." The income of the citizens must always be devoted to those employments which at the time are the most important. There must not be too rich an endowment of the public housekeeping at the expense of keeping down the citizen's, nor of the private housekeeping at the cost of deterioration in the public service.

Sax has developed the same idea still further. Goods obtain their value from the uses to which they are put. The correct principle for the appropriation of income to the purposes of the state is therefore simple; it is the universal principle of economical employment, viz. that goods be employed in accordance with their value. If the state should claim too much, it diminishes value, by expending goods for purposes of state economy which would have a higher value if employed in private economy. If it claims too little, value is again diminished -- as in this case also the entire importance of the goods is not realised.

This law obtains its full significance in consequence of the fact that riches are unequally distributed, and that personal incomes and, moreover, personal wants are of different degrees. If every one had the same wealth, income, and wants, all the citizens would have to contribute the same quota of taxes. But as this is not so, they must contribute unequal quotas and again it is value which provides the measure. Every individual economy, in respect of the relation of supply and demand peculiar to it, has what Sax calls an "individual Werthstand." The same amounts of goods are valued differently, or, what amounts to the same thing, the same amounts of value are expressed in different quantities of goods. To understand this expression of Sax, it may be best to recur to a fact which we have already taken as a starting-point in arriving at the law of price. We said that every intending purchaser who goes on the market calculates to himself, or ought to calculate, the money equivalent of the goods he wishes to buy, i.e. the sum of money whose value to him will equal the value of the goods, so that it is not economically permissible for him to go beyond it. Now a similar money-equivalent must be calculated for the value which the services of the state have to the individual citizen. More than this money equivalent it cannot, economically speaking, be the duty of any citizen to pay in taxation, but, on the other hand, it is the duty of every one to pay taxes up to this amount in order to meet the costs of th e public service.

This acknowledged, the next matter is the more exact estimate of the individual equivalents. The circumstances which decide are wealth, income, and want. The greater the wealth and income, the greater will be the subjective equivalent or the taxation; and the greater the degree of want, the smaller will be the subjective equivalent or the taxation. All the same, taxation cannot simply be fixed proportionally to wealth and income: a progressive rate of taxation is justifiable. The man who only earns enough to sustain the physical minimum of existence has nothing left to give up to the state. I cannot go further than this and show the reasons which Sax gives for the claim of exemption of those who are at the minimum of existence, for the progressive rate of taxation, and all the other familiar claims of modern taxation. While it need scarcely be said that, as the science grows, many things will probably be formulated otherwise, still he has reached the essential matter. In all points which have been indicated as important by economic discussion up till the present, and which developed legislation has called into notice, he has discovered the connection between them and general economic facts and principles, and thus given to what has been empirically reached a basis in theory.

Hitherto, as regards the most important points of the theory of taxation, the science of finance has rested its tenets on an appeal to the claims of justice. In this almost unanimous dependence upon outside and non-economic considerations, the imperfect condition of that science betrays itself even more than in its lack of agreement over the purely economic part of its investigation, and so far as this remains it must resign all claim to be regarded as an essentially economic doctrine. Thanks to the labours of Sax this is to a great extent altered. All the principal requirements of the theory of taxation have obtained an economic foundation in being derived from the general economic categories -- Want, Goods, Economy, Value. In spite of this, however, I cannot believe -- though this brings me into opposition to Sax -- that the economic basis of taxation has proved so perfect as to be able to dispense altogether with considerations of justice. Without attempting any complete proof of this statement -- which could not he done without the difficult and tedious work of distinguishing between the economic and the just, -- I should like to advance one single argument which appears to me sufficiently to corroborate its correctness.

Sax as we have seen requires that every one pay in taxation the full money equivalent in which, according to his own individual standpoint of value, is expressed the value of the services of the state to him. This claim is certainly absolutely economic, in so far as it prevents the less able being taxed at their maximum or above it, while it taxes the more able under their maximum. The claim is, further, certainly an economic one, in so much as it excludes the possibility of any one being taxed above his maximum. But in so far it is not an absolutely economic claim; it rests also upon the legal assumption of private property; it would be uneconomic if it could be proved that private property is itself uneconomic. But how would it be if this claim were set against one which demanded that the rich, and possibly the middle classes also, should be taxed at their maximum, while the poorer and poorest classes were taxed below it? What could be opposed to this claim? Certainly no absolutely economic consideration; for the result of this being realised would be, economically considered, a more perfect satisfaction of the people's want. The only thing that could be opposed to it would be the consideration that, as a matter of justice, the same formal fundamental proposition must hold for all, -- equal justice for all; a consideration which might, perhaps, in the last instance, be traced back to an economic basis, but which, in the present state of scientific development, is simply derived from the feeling of justice, and represents a quite distinct phase of that feeing. It may possibly be that, at a later period of time, it will be declared the duty of the rich to free the poorer classes from all public burdens, in order somewhat to mitigate the privations they suffer from the unequal distribution of wealth. Sax himself suggests (page 522) that, when that time comes, there may be an active endeavour, based on altruistic motives, to extend exemption from the "physical" minimum of subsistence to a "culture" minimum. It is possible that this endeavour might be only a symptom of gradual development in the direction of freeing the weakest and weaker classes, entirely or in part, according to the degree of their weakness, from the burden of taxation.(1*)

As it is with the ordering of taxation, so is it, in my opinion, with all valuations in private and national economy, in so far as they have to weigh the conflicting interests of many persons. The principle which will reduce to a common measure of advantage the interests of persons who are differently situated in respect of wealth, has, I think I may venture to say without hesitation, not yet been found. So long as it remains undiscovered, it is impossible in such cases to dispense with some reference to that ranking of personal claims with which the feeing of justice is somewhat satisfied. If we give our assent to the principle of taxation demanded by economic theory, it is only because, without having an entirely strict theoretical justification for it, practical considerations which cannot be rejected compel us to approve of private property, and, moreover, of a degree of its utilisation quite definite and in accordance with modem ideas.

NOTES:

1. Sax (page 522) remarks that, in any case, as regards the over-burdening of the rich, the economic margin is already given in their "individual valuation looking to possible taxation." But even granting that this margin is of purely economic origin, there remains, as we have seen, inside of it, sufficient room for the activity of other than purely economic considerations.

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Chapter 5 - The Fundamental Law of Collective Valuation

If the burden of taxation is distributed among the citizens in the manner just described, a very remarkable contrast emerges between the law which regulates public imposts, and that law of price (under free exchange on a market uncontrolled by the state) which regulates the burden that must be borne by all individuals when they wish to acquire goods produced or offered for sale by private industry. As return for the services of the state, or as contribution towards meeting the costs of these services, each individual gives the maximum which he is able to give, the full equivalent. In free exchange, on the other hand, the (approximate) maximum is paid only by the marginal purchaser; the other purchasers get off more cheaply, as the one price is established for all, and no one requires to pay more than the equivalent of the marginal purchaser, even although his own valuation may be much higher. The state, accordingly, takes advantage of the purchasing power of every one in a much more thorough way; and, more especially, the purchasing power of the wealthier citizens. It does not suffer the rich to pay according to the standard of the poor, but insists that every one shall be taxed in accordance with the full measure of his own personal estimate of the value which the services of the state have for him.

Hence is derived a peculiar law of national economic valuation -- as of collective valuation generally. In every self-contained economy equal quantities of goods have an equal value; similar items, or fractions, or units, of a stock have for their owner the same value. This law holds also in all free economies, and for the economic bodies created by it; similar goods have on the same market the same price, the same exchange value. But it is different in the case of the national economic body, as, generally, in that of every collective economy which binds together several otherwise independent economic subjects to carry out distinct purposes. Here the goods which belong to the individual economic subjects, and from which the taxes are to be drawn, are valued as unequal, -- equal taxes have unequal value, the same value is expressed by unequal taxes. The valuation of individual wealth and income on the part of a government agrees exactly with the individual degree of valuation for purposes of taxation; a government estimates the property of each person exactly as he estimates it himself, and in so far the collective economy is not like a self-contained economy. Not until the government comes to the spending of the taxes does it act in accordance with the universal law; not till then do sums, which were valued as unequal so long as the government had to collect them, come to be equal in value.(1*)

Not only, then, does the levying of taxes rest on valuation, but in the levying of taxes is directly expressed a distinct valuation; a valuation which -- as regards the wants of the public housekeeping -- estimates every good at a lower figure in proportion to the number of other goods which are bound up with it in one individual's wealth, or in proportion to the limited character of the private wants to which it is devoted. In other words, the theory of taxation, in its economic foundations, belongs not to the applications of the theory of value, but to the theory of value itself.

The fact that, when levying taxes, a government, in contrast to the general law of ordinary economic life, rates economic property differently according to the individual circumstances of those who are taxed, has, economically speaking, undoubtedly beneficial results. It allows that the public burdens of the poorer classes be put at a lower figure; it allows the ability of the wealthier to bear taxation to be more fully utilised; and it thus places the taxes where they will cause least injury to the satisfaction of private needs. Were the state to act otherwise; were it to impose equal contributions, like poll taxes, on every citizen; it would inflict on the poorer classes privations in no way compensated by the extended indulgence in luxury that would now be possible to the richer.

To this extent it might be desirable that the same principle should also apply in free economic life; that there also each should pay according to the amount of his purchasing power. In this way a universal equalisation of satisfaction might be attained; if every person were obliged to pay a dearer price according as he possessed more means, riches would offer no advantage, poverty no privation; all would have in the long run the same satisfactions. It need scarcely be said that, so long as our economy remains free, this cannot be. For so long as it is so, every one will strive to buy as cheaply as possible, and sellers will meet buyers in the same spirit -- inasmuch as they will make the slightest advance in price an occasion to give the preference to the buyer who offers it, and will not in the least insist on adapting the objective amounts of price to the subjective purchasing power of the buyers. And just because this law of the free economy is so closely united with the freedom of that economy, it would be useless to condemn it for the undoubted evil effects which it directly has upon the distribution of the satisfaction of wants. In order to judge adequately, one must in any case take into consideration as well the effects of economic freedom -- or, to put it differently, of private economies and private property -- on all other economic relations, and particularly as regards the formation of productive returns. It may very well be that private property gives rise to great inequalities in the satisfaction of wants, while it, nevertheless, secures, even to those who receive the smallest share in the general distribution, an enormously increased satisfaction of want on the whole the reason being the enormous increase in productive return which it allows and bring with it. And here, perhaps, may be found a reason for the remarkable phenomenon that one and the same community should contain at the same time two such diverse organisations as a free economy and a collective economy. In the former of these it diverges from the natural measure of value in that it over-estimates the goods reserved for acquisition by the rich, while, in the latter, it diverges from it in that it puts all goods possessed by the rich at a low figure so far as the public housekeeping is concerned. In the former the community is governed by a law which spares the rich, except where they come into competition with each other; while in the latter it lays down a law for itself which utilises their purchasing power to a quite unlimited extent In the former it favours the unequal distribution of satisfactions: in the latter, it helps to equalise them. Such deeply-rooted divergences can only be explained by showing that the two organisations serve different purposes, -- purposes in which personal freedom demands different scope.

We could not follow out this line of thought without leaving the sphere of the theory of value, and trespassing into the wide sphere of economic justice and economic philosophy. The explanation of the social organisation within which the valuations take place, is a task with which the theory of value, with its limited means, is not capable of dealing. And it is not only the theory of value which is unequal to this task; only a theory of society, which took into consideration other than merely economic facts, could adequately undertake it.

If now, in closing, there is one thing which, more than another, I wish to repeat with special emphasis, it is the intention which has dominated me throughout the whole work, and in every part of it, -- the intention to be, in the best sense of the word, empirical. I may perhaps hope that the attainment of this object has not been disturbed by the fiction -- undoubtedly unempirical -- of a natural value and of the utopian state of communism. So far as I can judge of my own work, I have nowhere pointed to any foreign non-empirical power in the actuality of economic life. The only liberty I have taken has been to leave out of consideration facts of whose activity there could be no doubt: -- the actual imperfections of valuation, the individualism of our economy, and, finally, the inequality of wealth. At the same time, however, I have not neglected to indicate, at all events in a general way, the directions in which these circumstances must of necessity cause value, both in the private economy and in the economy of the state, to deviate from the natural standard. I hope that my statement has not by this means become untrue, though I know very well that it must of necessity be imperfect. But what is incompletely stated is certainly not, on that account alone, non-empirical -- if it were so, what statement would be empirical, seeing that we are unable ever to do more than investigate mere fragments of the great organic structure of our world? All judgment as regards any attempt at investigation must depend on whether the fragment, with which the inquiry is concerned, be large enough and solid enough to have a coherence of its own, and to deserve consideration by itself. If the imperfect description of the phenomena of value, which I have attempted to give, is justified in this sense, it is empirical.

The form of the fiction cannot have misled any one. I might, of course, have stated drily that I intended to abstain from the consideration of certain facts. But like one who wishes to look at certain things undisturbed by the impressions of other things, and aids his senses by spreading a veil over the disturbing objects, I thought to aid imagination by making use of the easily comprehended figure of a communistic society, concerned to abolish in actuality all that I wished to disregard in thought. The fiction which I have employed must be regarded in that light alone, and I trust that the veil has been transparent enough to allow the complete body of phenomena to be clearly outlined at every turn under its slight disguise

NOTES:

1. A great deal of the history of taxation may be explained by the fact that people only learnt gradually to distinguish between the valuation of goods in national economy and in free economy. In ordinary economic life one feels injured who has to pay a higher price than any one else; and it can be easily understood that in face of this rooted opinion, it was hard to introduce the principle that every person should pay more taxation for the same state services according as he possessed more goods for the satisfaction of his wants -- and that not simply but progressively.

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