AN INTRODUCTION

TO THE

THEORY OF VALUE

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AN INTRODUCTIONTO THE

THEORY OF VALUEON THE LINES OF

MENGER, WIESER, AND BOHM-BAWERK

BY

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

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

Reprinted 1923, 1926, 1931.

PRINTED IN GREAT BRITAIN

W. S. H.

PREFACE TO THE SECOND EDITION,1910

THIS little book was written in 1891, when I wasfresh from my translations of Bohm-Bawerk andsomewhat overborne, perhaps, by the ideas of hisschool. It has been out of print for many years, and,although often pressed to republish it, I refrained,for the reason that a busy life had prevented mereturning to the later developments of that school.But I still feel, as I did when I wrote it, that myEnglish-speaking colleagues have never given suffi-cient attention to that side of the one Theory of Value(for there is only one, however much individuals mayemphasise the demand side or the supply side) whichJevons first laid stress on. Having now mortgagedmy life to what seems to me the greater claim ofwriting the Economic Annals of the NineteenthCentury, the most I can do is to reprint the editionof 1891, with a few verbal alterations, submittingit as no more than it originally professed to be—anIntroduction to the theory which lies at the centre of

vffi PREFACE TO THE NEW EDITION

Political Economy, and must occupy the mind ofthe young economist for many years of his appren-ticeship. The few who may be interested to knowwhat place I give, after many years of teaching, todoctrines which had so great a part in forming myeconomic views, will find it suggested, perhaps, inAppendix II., entitled " Theory of Value: theDemand Side." It is a summary of lectures, whichI put into the hands of my students to be studiedalong with Book III. of the classic which hasmoulded modern economic thought, ProfessorMarshall's Principles.

WILLIAM SMART.

UNIVERSITY OF GLASGOW,November, 1910.

PREFACE TO THE FIRST EDITION

THIS book has few pretensions to originality. Thetheory is that enunciated by Menger and Jevons, andworked out by Wieser and Bohm-Bawerk. I havedone little more than take it out of its German setting,and pass it through my own mind. As the translatorof Bohm-Bawerk's Capital and Interest and ThePositive Theory of Capital, I may claim to have morethan a superficial acquaintance with the work of theAustrian school, and this must form my credentialsfor the present Introduction. At the same time Imust emphasise that it claims to be no more than anintroduction. I do not consider that the last wordon Value has been said by the Austrian school, butthat seems to me no reason why the principles ofthe new theory should remain any longer beyondthe reach of the ordinary English student. And incase it be said that I have stopped short of themost interesting part of the Naturlicher Werth, theapplication of the Value theory to the theory of

x PREFACE TO THE FIRST EDITION

Distribution, I may explain that, in justice toProfessor Wieser, I have preferred to put the transla-tion of that most brilliant and suggestive book into thecapable hands of one of my students.

WILLIAM SMART.

QUEEN MARGARET COLLEGE,GLASGOW

CONTENTS

CHAP. PAGE

I. INTRODUCTORY . . . . . i

I I . T H E A N A L Y S I S OF V A L U E . . . . . 9

I I I . T H E D I F F E R E N C E B E T W E E N U T I L I T Y AND V A L U E 13

IV. T H E SCALE O F V A L U E 18

V. T H E M A R G I N A L U T I L I T Y . . . . . 2 9

VI . D I F F I C U L T I E S AND E X P L A N A T I O N S . . - 3 5

V I I . COMPLEMENTARY G O O D S . . . . . 4 2

VI I I . S U B J E C T I V E E X C H A N G E V A L U E . . . - 4 7

IX. F R O M S U B J E C T I V E TO O B J E C T I V E V A L U E . . 52

X. P R I C E 55

X I . S U B J E C T I V E V A L U A T I O N S T H E B A S I S OF P R I C E . 61

X I I . COST O F P R O D U C T I O N . . . . 67

X I I I . F R O M M A R G I N A L P R O D U C T S TO COST O F P R O -

DUCTION . . . . . . . . 74

X I V . F R O M COST O F P R O D U C T I O N TO P R O D U C T . . 78

XV. CONCLUSION 84

A P P E N D I X I . . . . . . . 87

A P P E N D I X l l . . . . . . . 9 1

I N D E X . . . . . . . . 103

WRITERS AND BOOKS REFERRED TO

CARL MENGER (Professor in the University of Vienna),Grundsatze der Volkswirthschaftslehre, Vienna, 1871.

FRIED RICH VON WIESER (Professor in the University of

Prague), Ueber den Ursprung und die Hauptgesetze des wirth-schaftlichen Werthes, Vienna, 1884.

Der natiirliche Werth, Vienna, 1889, translated as NaturalValue, Macmillan & Co., 1893. -

EUGEN v. BOHM-BAWERK (Honorary Professor in the Uni-

versity of Vienna), Grundziige der Theorie des wirthschaftlichenGiiterwerths, published in Conrad's JaJirbiichcr, 1886.

Geschichte und Kritik der Kapitalzius-theoriem, Innsbruck,1884, translated as Capital and Interest, Macmillan & Co., 1890.

Positive Theorie des Kapitales, Innsbruck, 1889, translated asThe Positive Theory of Capital, Macmillan & Co., 1891.

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

CHAPTER I

INTRODUCTORY

THERE is an understanding among economists,dating at least as far back as Adam Smith, that, ineconomic science and discussion, the ordinary termsof the industrial world are to be used in the sensegenerally attached to them in that industrial world.In many respects this has been unfortunate : thescience is bound for ever to a loose nomenclature.It is particularly unfortunate for English politicaleconomy, which has not the possibility, so enviablein German science, of combining a new predicate withan old stem in such a way that the combined word isexact and yet not unfamiliar. Hence very manyterms in economics have a long and chequered historyattached to them, according as economists, in writingtheir systems, have tried either to follow the usage ofthe market and the street, or to free themselves fromthe vexatious restraint.

No term affords a better illustration of this thanthe word Value. It is deeply rooted in popular con-ception and in popular speech. Of all words used ineconomic theory, it has most need of exact definition,because there the theory of value occupies the chiefplace. Yet the history of economic science is strewnwith the wrecks of theories of value.

2 INTRODUCTORY CHAP.

Every one knows Thornton's story of how SydneySmith retired from the Political Economy Club,because his chief motive for joining it had been todiscover what Value was, while all he had discoveredwas that the rest of the Club knew as little about thematter as he did! Every one, too, has smiled atMill's statement, made in 1848, that there was nothingin the laws of value which remained for him or forany future writer to clear up. And many felt sym-pathy with Jevons when he threw the term overboardaltogether, declaring that neither writers nor readerscould avoid the confusion so long as they used theword.

But although it might be possible, by a very strictattention to proof sheets, to keep the word out of abook, it would not be possible to keep it out of theeconomist's mouth, any more than it would be tobanish it from ordinary speech. And—happily, as itseems to me—the recent writings of the Austrianschool have shown that we may retain the old familiarword, and yet attain the exactitude of scientificnomenclature.

There is a time-honoured classification to which isdue much of the present confusion. In the Wealthof Nations (Book i. chap, iv.), occurs the followingpassage:

" The word Value, it is to be observed, has twodifferent meanings, and sometimes expresses theutility of some particular object, and sometimes thepower of purchasing other goods which the posses-sion of that object conveys. The one may be called' Value in use,' the other ' Value in exchange.' Thethings which have the greatest value in use havefrequently little or no value in exchange; and, on

I INTRODUCTORY 3

the contrary, those which have the greatest value inexchange have frequently little or no value in use.Nothing is more useful than water : but it will pur-chase scarce anything; scarce anything can be hadin exchange for it. A diamond, on the contrary, hasscarce any value in use, but a very great quantity ofgoods may frequently be had in exchange for it." *

This passage, like much else in Adam Smith, doesnot bear all that has been read into it by subsequenteconomists. It does not say that Use Value andExchange Value are two great branches of oneuniversal conception of Value. Nor does it say thatthey are entirely different conceptions. It merelysays that the word has two different meanings. Whatconcerns us, however, is the use that economists havegenerally made of this passage. They have quotedit with approval; shown that the two kinds of valuedo not by any means coincide ; and have then goneon to discuss the latter as " economic value," or" what we mean by value in political economy." Thebest thing we can do, meantime, is to try to forgetthis old classification, and begin anew.

It scarcely requires proving that Value, in which-ever of its various senses the word is used, does notexpress any inherent property of things. Very often,indeed, we can scarcely help thinking of Value asa quality of a material object,—particularly when theobject is one of universal desire, such as gold coin.

1 The division is as old as Aristotle. " Of everything which we pos-sess there are two uses both belonging to the thing as such, but notin the same manner ; for one is the proper and the other the improperor secondary use of it. For example, the shoe is used for wear, andit is used for exchange ; both are uses of the shoe."—Polities(Jowett), §9.

4 INTRODUCTORY CHAP.

But Walker's monetary formula, " Money is thatmoney does," may remind us that the value even ofgold coin is given it by the service it renders in ahighly organised community, and that, if to anysubstitute can be given the confidence that gold com-mands, the same value will attach to it—" attach "but not " inhere." Sometimes, again, value is sostrongly a personal experience that we are tempted tothink of it as purely a subjective matter, and this isparticularly the case among people who understandRuskin's famous words, " There is no Wealth butLife." The different value set upon any work ofart by different individuals, classes, or nations, issufficient proof of this.

But although it is almost impossible to use theterm without suggesting an inherent property,1

1 " Value is the life-giving power of anything ; cost, the quantityof labour required to produce it; price, the quantity of labour whichits possessor will take in exchange for it. ' Value ' signifies thestrength, or 'availing' of anything towards the sustaining of life,and is always twofold ; that is to say, primarily, intrinsic, andsecondarily, effectual. Intrinsic value is the absolute power of any-thing to support life. A sheaf of wheat of given quality and weighthas in it a measurable power of sustaining the substance of the body;a cubic foot of pure air, a fixed power of sustaining its warmth ; anda cluster of flowers of given beauty, a fixed power of enlivening oranimating the senses and heart. It does not in the least affect theintrinsic value of the wheat, the air, or the flowers, that men refuseor despise them. Used or not, their own power is in them, and thatparticular power is in nothing else. But in order that this value oftheirs may become effectual, a certain state is necessary in therecipient of it. The digesting, breathing, and perceiving functionsmust be perfect in the human creature before the food, air, or flowerscan become of their full value to it. The production of effectualvalue, therefore, always involves two needs : first, the production ofa thing essentially useful; then the production of the capacity touse it."—Munera Pulveris, i. § 12.

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

I INTRODUCTORY 5

Value in all its forms implies a relation. The wordseems to arise fundamentally in the relation ofMeans to End, and will accordingly take variousforms according to the " end " conceived of. Thisend may be, directly, the Wellbeing of man, whetherconceived of as the ideal good of humanity, or thesocial ideal current at the time, or the realisationof individual character, or merely the gratificationof individual desire. Or it may be some mechanicalor technical result, which has no direct referenceto personal wellbeing, or at least admits of beingconsidered, for the moment, as a merely objectiveor intermediate result. Corresponding to these twoclasses of " ends," we may divide the phenomenaof value into Subjective—or Personal—Value andObjective Value. The expressions are not by anymeans perfect,1 but they are the terms generallyused by the Austrian school, and they are perhapsthe best we can get.

Value, in the subjective sense, we may call,generally, the importance which a good is consideredto possess with reference to the wellbeing of a person.In this sense, a good is valuable to me when Iconsider that my wellbeing is associated with ordependent on the possession of it—that it " avails "towards my wellbeing.

1 For instance—to say nothing of the fact that all economic endsmust be subjective—of the four ways indicated above in which Well-being may be conceived, the three first may be considered objectiveas compared with the subjective fourth, while the wellbeing of mangenerally—particularly the ideal good—may very well be called theonly objective end in contrast to the accident of a technical result.But, as it is impossible to keep the economic vocabulary clear of thephilosophical, we may be satisfied if these names are definite enoughto keep before our minds the broad lines of the division indicatedabove.

6 INTRODUCTORY CHAP,

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

There is no doubt that " Value " is generally used,in ordinary language and thought, in both thesesenses. But there is also no doubt that powers orvalues of the latter sort in general do not enter intoeconomic study at all. We have nothing to do withthe heating value of coal, or the resisting power ofiron, or the fattening properties of oil-cake ; theseare purely physical or technical matters. But, insidethis class of Objective Values, there is one specieswhich has a peculiarly economic interest, and that is,the " power of exchange " or " purchasing power."By this is meant the capacity or power of a goodto obtain other goods in exchange. Of course, theword " power " here is also misleading. No good hasthis power in itself. It is, at best, a power conferredon goods by the complex machinery of an organisedeconomic community, and it does not exist outsideof a system of exchange. It is a power that lies inthe connection or relation of two things, and notin either of the things. Jevons very well called it a

I INTRODUCTORY 7

Ratio of Exchange. But it is purely an " objective "relation as we have denned i t ; as objective, forinstance, as heating power. When the quarter ofwheat in the market exchanges for 25s., we say,indifferently, that the " exchange value of the wheatis 25s.," or that " the purchasing power is 25s.," orthat " the ratio of exchange between the wheat andthe shillings is as 25 to 1."

It has been the ambition of economists to explainall kinds of value from a single universal conception,but so far the result has only been to group hetero-geneous elements under a common name. It mightbe possible, perhaps, to connect them all under thegeneral conception of " that which avails," or underthe relation of Means to End ; but whether much isgained by this for economic science is doubtful.1

Here, at any rate, we shall follow the line whichhas led to good results among the Austrian econo-mists, and consider Subjective and Objective Value ingeneral as two independent conceptions accidentallyassociated in common usage.

But, while this seems true, as regards Subjectiveand Objective value in general, we shall find thatthere is a close and necessary connection betweensubjective value and that one branch of objectivevalue just referred to, namely, Objective ExchangeValue. In what follows it will be shown that thislatter Value, while, in itself, an objective, and, as itwere, a mechanical power, is a superstructure on the

1 Bohm-Bawerk, like Neumann, while acknowledging that the twoconceptions have many internal and external relations, and that bothspring undoubtedly from one common root, thinks that any moreuniversal conception, which should embrace them both, would beganz leer und schattenhaft.

8 INTRODUCTORY CHAP. I

subjective or personal estimates of value put upongoods by buyers and sellers within a market. Inshort, we shall have to vindicate, or at least defend,Jevons' assertion, now become a text of the AustrianSchool, that " Value depends entirely on Utility."

From what has been said the reader will be pre-pared for the claim of this school, in opposition toAdam Smith and many of his successors, that, whenthe word Value is used without qualification, itshould mean Subjective—or Personal—Value, andnot Purchasing Power. The first and the main workof the theory of value, then, is to inquire into thenature, causes, and standard of Subjective Value.

CHAPTER II

THE ANALYSIS OF VALUE

POLITICAL Economy is based on the analysis oieconomic conduct. As has been said, we are not atlibert}/ to lay down new categories or even to givenew names to economic phenomena. We have totake our categories and our vocabulary alike fromthe industrial and commercial world, and our mostoriginal work in this department is no more than theinterpretation of a life which is, for the most part,unconscious of its own laws : a category of " theuseful" or " the valuable " which practical peopledid not recognise as containing useful and valuablethings and no other, would be quite unscientific.True, the economist has sometimes to show thatthe practical world is unfaithful to its own principles,but he can do so only after extended study of theeconomic organism has yielded these principles.The theory of value, therefore, must begin with acareful analysis of what the word means in themouths of ordinary people.

A man values food, clothing, shelter, and thelike, because they minister to his physical life, andhe values music and books because they ministerto what he calls his " higher life." As a nation, wevalue our service rifle because it can kill at so many

io THE ANALYSIS OF VALUE CHAP.

hundred yards, and many forms of art and literatureare highly valued because they minister to corruptdesires and moral decay. A collector values a pieceof ugly china because it is old and rare, just as mostwomen value their diamonds because everybodycannot wear diamonds.

Taking these instances as fairly typical, andcollating the common ideas out of them, we seemto learn three things about value.

First, that, in probably the great majority of cases,the word has some direct or indirect reference tohuman life. On the whole, one would be inclined tosay that the root idea of the valuable is that whichavails towards life.

Second, that men, as not only imperfect in naturebut erring in judgment, have made an easy extensionof the term " human life " to cover " human desire,"and count things valuable because they satisfy somewant or other. The economic " want " is not neces-sarily a rational or a healthy want—and politicaleconomy, as primarily analytic, must not be censuredfor the statement, nor condemned as if it approved ofthe fact—but simply a want, and the things whichsatisfy such wants we call " goods." The desirableis interpreted in economics by the desired.

Third, that the element of scarcity somehow playsa large part in many, and seems to have a share inall, estimates of value.

Were it not for this element of scarcity one mightconclude that the " valuable " and the " useful " weresynonymous terms. Few writers have been carefulto keep the two conceptions sufficiently separate,and the distinction which we have now to draw,while contained in Ricardo, was not scientifically

ti THE ANALYSIS OF VALUE n

formulated till the appearance of Menger's Grund-sdtze in 1871.

The economically Useful is that which is capableof satisfying the want of man—always meaning by" want " no more than " desire." *• Correspondingwith this conception, economically, is that of the" Good." 2 To constitute a good, four things, ac-cording to Menger, are required : (1) a human want,(2) certain properties in an object which make it cap-able of satisfying a human want, (3) the knowledgeof this capability, (4) power to dispose of this objectin the satisfaction of want.

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

We shall find the Valuable separating itselfnaturally from the Useful if we look at what arecalled the free gifts of nature. Air, water, light, arerecognised by every one as useful. But are theyvaluable ? Most people—economists without know-ing it—would answer in the negative, althoughcertainly there is reason to suspect that they basethis answer on the fact that they " could not getanything for them." Again, those scarce thingswhich we seem to value just because they are scarce

1 " Anything which an individual is found to desire and to labourfor must be assumed to possess for him utility. In the science ofEconomics we treat men, not as they ought to be, but as they are."—Jevons, Theory, 26. Edition, p. 41.

2 It is one of the difficulties of our economic vocabulary that,where we wish to express the singular of " goods," we have to use" commodity " or some such word. In my translations, I havemade no scruple of rendering the honest German Gut by its literalequivalent, and it is in this sense that the word is used above andthroughout this book. It will be noted in what follows that there isa difference between simple goods and " economic goods."

12 THE ANALYSIS OF VALUE CHAP. 11

fas rare statues, pictures, books, coins, wines madefrom grapes of one limited locality, etc., to useRicardo's examples), have always a background ofusefulness, as satisfying some social, or class, orindividual desire.

Evidently Usefulness or Utility is the larger con-ception of the two, and embraces Value. But if allvaluable things are useful, while all useful things arenot valuable, value must emerge at some particularlimiting point of utility. Value, then, will be basedon utility—utility limited in some particular way,but still utility.1

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

CHAPTER III

THE DIFFERENCE BETWEEN UTILITY ANDVALUE

UTILITY and not Value, says Wieser, is " the supremeprinciple of all economy ; where value and utilitycome into conflict, utility must conquer." The state-ment is suggestive. The economic goal of civilisa-tion is to turn the whole natural environment of manfrom a relation of hostility or indifference into a rela-tion of utility. Certain goods we have from naturewithout money and without price, and the incessanteffort of the industrial world is in the direction ofbringing all goods nearer to that category. Indeed,some of the necessaries of life have already beenbrought so nearly to that condition that states andmunicipalities occasionally pay the small remainingprice, and distribute them as heaven does the rain.The effort to improve production generally is nothingelse than the effort to multiply utilities and, asconsequence, to reduce their price. For, while valuereflects utility, the mirror is too small to hold all thepicture. To use Wieser's words again, " Value isthe calculation-form of utility "—an expression whichwill be appreciated if we realise how impossible it isto estimate the utility of a harvest, how easy tocalculate its amount and its price.

i4 DIFFERENCE BETWEEN UTILITY AND VALUE CHAP.

Value, then, is a much less comprehensive concep-tion, and does not emerge till a certain limitation isput upon this utility. But the limitation in questionis not an arbitrary one. To drain a river of a fewhundred gallons, or even to drain it all but a fewhundred gallons, will not necessarily give theremainder any value. To change utility into valuethere must be, not only a capability of satisfyingwant, but a felt dependence of some want on theparticular good containing the utility. The relationof value to utility, in fact, may be described as therelation of a positive condition to a capability. Ascapable of quenching thirst, all water is useful, butit does not obtain any value till some limitation ofthe available quantity makes it the indispensablecondition of a satisfaction. The water led into acity may come from a stream which, as a whole,flows to the sea unvalued, but, in the city, it con-ditions the wellbeing of thousands of people, andobtains a value from the satisfaction of wants thatare conditioned by it.

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

Thus we may say that, while utility is the import-ance which a good possesses as generally capable ofministering to the wellbeing of a subject, Value isthe importance which a good possesses as the indis-pensable condition of the wellbeing of a subject. Ormore fully : Value is the importance which a goodacquires as the recognised condition of somethingthat makes for the wellbeing of a subject, and would

in DIFFERENCE BETWEEN UTILITY AND VALUE 15

not be obtainable without the good.1 It cannot betoo firmly grasped then, that the relation betweenutility and value is quantitative, and that the samething may or may not have value according tochange of circumstances, or difference in points ofview and comparison.

To put this in another way. The first thing theeconomist sees in man is, that he stands in a relationof want to the world outside him. Economically,man is a complex of wants, some physical, someintellectual, some aesthetic, and so on. And, thehigher man rises in the scale of spiritual being, themore numerous and varied are his wants. But wantis in itself, if not a painful feeling, at least, a feelingof incompleteness. As an animal, man knows in-stinctively, and, as an intellectual being, he learns byexperience, that certain things or arrangements inthe outside world are the objects which such a feelingcraves : as they are supplied to the organism in whichthe wants inhere, the feelings of want, gradually orimmediately, fade away, and feelings of satisfactionor pleasure supervene. In time the satisfaction fades,the wants reappear, and the process begins overagain. Thus the wants of man's life, whether thesewants are wise or unwise, natural or acquired,constitute a demand for satisfaction. Each individualhas his quota of wants, and the sum total of all wantsmakes the community's demand for satisfaction.To meet this demand the working portion of thecommunity is set producing. The whole end and

1 Menger's definition is " Die Bedeutung, welche concrete Giiteroder Giiterquantitaten fur uns dadurch erlangen, das wir in derBefriedigung unserer Bedurfnisse von der Verfugung iiber dieselbenabhangig zu sein uns bewusst sind."—Grundzilge, p. 78.

16 DIFFERENCE BETWEEN UTILITY AND VALUE CHAP.

aim of the industrial organisation of society is to putthe matter and forces of nature into shapes capableof satisfying this demand, and these shapes, nowrecognised as " good," society significantly calls" Goods."

If, in any class of goods, the supply is not suffi-cient to meet this demand for satisfaction (whetherthe demand be that of the individual or ofthe community), some want goes unsatisfied; thepainful feeling of emptiness points to some good orother as the condition of a certain wellbeing; therelation of dependence between person and thing isestablished, and value emerges. If, on the otherhand, the supply of any class of goods is so great thatevery demand is met, and yet there is such a surplusthat no ordinary waste will cause scarcity, then nowant goes unsatisfied, and value does not emerge.Suppose that a housewife is in the habit of using tengallons of water a day for various domestic purposes.If the well, from which she draws her supply, holdsjust ten gallons and no more, then every gallon is thecondition of a definite use or satisfaction, and everygallon has a value—the test being that, if one gallonis lost, some domestic purpose is not served. But ifthe well yields twenty gallons, the loss of even tengallons involves no loss of wellbeing to the house-wife ; no want goes unsatisfied ; no value emerges.Andv again, if the wants increase to eleven, or thesupply sinks to nine gallons, certain wants gounsatisfied, and value emerges.

One begins to see that the centre of value iswithin us. It is only by association that we transferto goods the " value " which we get through the con-sumption of them. We attach importance to goods

in DIFFERENCE BETWEEN UTILITY AND VALUE 17

only as we find that our life is incomplete orimpossible without them. Thus water, air, etc.,being, in their totality, conditions of our life, weattach value to them as a whole, and, indeed, speak ofthem as " infinitely valuable/' But we do not attachvalue to any individual portion of them, because,where there is enough to allow of waste, our lives arenot dependent on any individual portion.

Thus it is that the theory of value lies at thebasis of all economic theory. The only goods we" economise "—the goods which alone are objects ofeconomic attention—are the goods which are insuffi-cient, or just sufficient, to meet our wants. Con-trasted with these are the " free gifts of nature,"meaning by the expression such things, adapted toman's use, as are given us by nature in superfluousabundance. As goods which we economise, there-fore, are the only goods which we recognise asconditioning our satisfaction, we may say that, whileall goods, by definition, have utility, only economicgoods have value.1

1 In view of the loose way in which we use " economic " and" economise," Menger's definitions are worth remembering. Whenmen recognise that their wellbeing is bound up with the commandover certain goods within certain periods of time, and that such goodsare likely to be insufficient for their demand, their impulse is (1) toget such goods into their possession or disposal; (2) to preserve theuseful properties of the same ; (3) to decide which are their moreimportant and which their less important wants, and to satisfy theformer only ; and (4) to so dispose of the goods as to get the greatestpossible result or satisfaction on the whole, and to obtain everyindividual result with the smallest possible expenditure. " Theactivity men direct to those ends, in its totality, we call their' economy,' and the goods which stand in these quantitative rela-tions, as the exclusive objects of that economy, we call ' economicgoods.' "—Grundsatze, chap. ii. § 3.

B

CHAPTER IV

THE SCALE OF VALUE

I F the cause of any good having value is that thesatisfaction of some want is dependent upon it, thedegree or amount of value must, one would imagine,be measured by the importance of the dependentwant; that is to say, by the amount of wellbeing itssatisfaction conditions. But here most people willhesitate. They would, probably, be willing to admitthat utility is, in a general way, the cause of value,or, like Ricardo, that utility is " absolutely essentialto exchangeable value." But they are shaken in thisbelief when they remember that things which seemto be of great utility, like salt, are little valued, whilethings of little utility, like diamonds, are very highlyvalued, and are told that it is this contradiction whichled to the distinction between " value-in-use " and"value-in-exchange"—practically to the abandon-ment of the former.

We have here a heritage from our earlier economicscience. Old classifications are more easily dis-missed than got rid of; and it may not be wastedtime to point out in this chapter how Adam Smithhopelessly confused utility and value by the intro-duction of the hermaphrodite " use-value."

CHAP, iv THE SCALE OF VALUE 19

We have already defined the economically Usefulas that which is capable of satisfying the want ofman. If utility, then, is relative to human want, itwould seem that, before pronouncing on what hasgreat and what has little utility, we must classify thevarious wants, and arrange them on some sort ofscale. The familiar expression, however, " Oneman's meat is another man's poison," might be takenas a text to show the difficulty of classifying wants.There are certain wants which require periodical orcontinuous satisfaction, such as the needs of food andwarmth. These wants seem to tie us to the earth,and they keep us perpetually in mind of our physicallimitations. However high we soar into the regionsof spirit, hunger and cold bring us to earth again;and, if these wants are not satisfied, the animal natureasserts itself, and we are ready to sell our birthrightfor a mess of pottage. Such wants, then, are funda-mental and universal—instinctively we call them" needs." But there are two very notable circum-stances connected with them. One is that they arelimited. More meat than the body requires clogs thewheels of life; more than a certain amount of clothesis a burden. The other is that these fundamentaland limited wants are precisely the ones for whichnature makes the most abundant provision. Theremust be many millions of people who have neverknown what hunger is except by hearsay, norimagined the torturing cold of a night on the street.

But, on this simple and, to a certain extent,measurable basis of necessary, universal, and limitedwants, we rear a superstructure of other kinds ofwant. Of the distinctively human wants, there aremany that become " necessary " from the individual

20 THE SCALE OF VALUE CHAP.

or social development of intellectual and spiritualbeings. Beyond these, again, there are innumerabledesires, caprices, and follies. These, however, arenot in the least limited in their demands: here" the appetite grows by what it feeds on." As civil-isation and as wealth progress, not only does theold circle of want expand, but new wants awaken.This makes classification of such wants all butimpossible. Between the wants of the savage or thechild and those of the educated man or delicatelynurtured woman, there is a long gradation of almostinfinite fineness. How are we to put in one categorythe hunger and thirst which are satisfied, amongmembers of one class, by bacon and beer, and, amongmembers of another class, by stately dinners andrare vintages ; or the " love of dress," which in onesphere demands " a black silk and a gold brooch," inanother, diamonds and old lace ? Yet the fact thatgoods may be purchased at prices from a farthingupwards, proves that the community has classifiedits wants in some sort of way. We find exchangeexisting in all communities, even the simplest, andexchange presupposes that we have already arrangedour wants on a scale, and said that the satisfactionof such and such wants confers a high value on thegoods which satisfy them, and the satisfaction ofsuch and such a low value. What is the principleof this scale ?

Adam Smith, and all who have followed him inparaphrasing his text " a diamond has scarce anyvalue in use," certainly referred to a scale of wants,and considered this scale so important, and souniversally recognised, that they had to separate offthe value measured by it (use value) from the value

IV THE SCALE OF VALUE i\

measured by money or barter (exchange value).But they did so instinctively, and, if we inquire whatthis scale is, we have some difficulty in translatingthe instinctive expression.

There is a rough, but sometimes convenient,division of goods into Necessaries, Comforts, andLuxuries. Corresponding with this classification ofgoods, we might consider the physical needs satisfiedby " necessaries " as the most important; and in thefirst rank of utilities, therefore, we should put goodsnecessary to sustain life, such as food, clothes, shelter.Next would come health and fulness of life, and inthe second rank of utilities we should put good food,good clothes, good shelter. Last we should put therefinements or the artificial appetites of life, and,corresponding with these, we should have music andpictures, liquor, tobacco, and so on. It is easy to seethat the sanction or principle of this scale is a nega-tive one. It is not based on the satisfaction we getfrom goods, but on the consequences which will ensueto our lives if these wants go unsatisfied. Food is inthe first rank of goods, because here death followsunsatisfied need. Tobacco is in a subordinate place,because the want of it causes, at worst, discomfort.And diamonds come in the lowest rank of usefulgoods because the loss of them involves a quitetrifling loss of wellbeing. Here is a scale of wantswith a definite enough principle.

But it is a scale adapted to circumstances sosimple as to have no resemblance to any knownform of society. Possibly the economists' favouriteclassic, Robinson Crusoe, has had something to dowith the making of it. Certainly there never wasa people who divided out their labour to satisfy

21 THE SCALE OP VALVE CHAP.

successively the wants of such a scale, not producinganything for fulness of life till all had the necessaries,nor anything for pleasure till all had the necessaries ofefficiency. Such a division of labour would evidencea higher level of reason and self-restraint than ourcommunities have reached, since it would be foundedon a deliberate theory of social life. The very sugges-tion that the loss of diamonds is " trifling " wouldjustify the reproach one has sometimes to bear, that" i t is well seen political economy was written bymen ! " The fact remains that this is nobody's scale :the poorest savage, the worst paid mill-girl, the mostrefined woman, will put ornament only second tobare necessaries.

Yet it seems that it must have been a scale some-thing like this by which the older economists measuredutility. In the interpretation they gave to " usevalue," they assumed that utility is relative to merephysical life. Those who speak of diamonds havingno use-value, and of food as having infinite use-value,must be drawing their ideas, not from the life ofmen but from the life of cattle. It is possible todraw out a scientific catalogue of what things andamounts and conditions will put a sheep or bullockinto the best condition for the market, just as it ispossible to consider the human labourer as a force ofso many foot-pounds. But the economic end of thesheep is—mutton, while the economic end of labouris—the labourer. That is to say, the " life " by whicheconomists, as distinguished from butchers, mustmeasure utility, is the life of a spiritual being forwhom and towards whom all economic effort exists.To such a being, it is inconceivable that bread shouldhave the highest use-value and diamonds none at all.

IV THE SCALE OF VALUE 23

Compared with this purely theoretical scale, let usinquire of facts as to the scale which men in ordinarylife adopt as regards £oods.

Consciously or unconsciously, every man whosemeans or wealth or resources are more limited thanhis wants—and this is, practically, the case withhuman beings generally—has a scale of wants in hismind when he arranges his expenditure. On thebasis of this scale, he satisfies what are his moreurgent wants, and leaves the less urgent unsatisfied.But which are the more urgent wants on his scale ?Are they determined by anything like the classifica-tion just mentioned ? If so, how is it that a trampwith sixpence in his pocket will spend threepence ona bed in a lodging house, a penny on bread, andtwopence on tobacco ?

This by itself is sufficient to show that AdamSmith's graduation of wants is quite misleading inthe present connection. When we ask about the" degree " or " urgency " of any individual want, weget no information by determining to what class orkind it belongs—whether, for instance, it is the needfor a necessary or the desire for a luxury. Thecraving for food, as has been suggested, belongs soconspicuously to the first class of wants, that we donot so often speak of " wants " of subsistence, as of" needs " of subsistence. The desire for liquor, again,some people would scarcely dignify by the name of" want" at all. Yet many people will attach asmuch importance to the one as to the other. If weare to judge by his expenditure, the working manmay graduate his wants thus : bread, house room,liquor, tea, tobacco, clothes, meat; while a rich manmay spend more on his horses than he does on his

24 THE SCALE OF VALUE CHAP.

house, and his grocer's bill may be less than hisflorist's. The fact seems to be that, with the scaleof wants which each man makes for himself, thegraduation by classes or kinds has very little to do.From the consideration already pointed out, thatcertain wants are fundamental, necessary, and uni-versal, the class must, indeed, have something to dowith it, but the other two considerations, the limitednature of these wants and the abundance of provisionfor them in most communities, throw the considera-tion of necessity quite into the background.

There is one case, however, where Adam Smith'sscale comes nearly true;—where the income is justsufficient, and no more, to cover the barest wants ofman as a living being. If a seamstress has to sustainlife on a shilling a day, she will take care to disposeof the shilling in such a way that she spends on foodjust enough to keep life in, on clothes, enough tokeep her warm, while the meanest roof that will keepout the rain will satisfy her " want of shelter."And, in proportion as we approximate to this direstpoverty, will the class have more to do with thescale. Even the seamstress, however, will probably" jump " the class of comforts, and spend her lastpenny on the highest concrete want among theluxuries of the poor, tea.

This was the first mistake made by the oldereconomists in the matter : it based " use-value "on a false or, at least, an unduly limited, concep-tion of utility. The second—and more subtle—was in keeping no clear distinction between thisutility and the so-called " use-value." For wantof this distinction, it was overlooked that, in therelation between wants and goods in which value

iv THE SCALE OF VALUE 25

emerges, the supply of goods plays a part. Valueemerges when a good becomes the condition of asatisfaction ; it is conferred by the dependence of a, feltwant, not of a possible one. Hunger, for instance,—understanding by that the overmastering cravingwhich puts all other feelings into the background—is not a felt want if food lies around like the mannaon the Israelites' plain. The nearer we get to makingany object of want similar to a gift of nature, theless value has that object—not that its capabilityof use is any less, but that the abundance of supplyhas abolished the relation of dependence. A wantnever felt, would, of course, not be a want at all.But a trifling want unsupplied attains an importancefor wellbeing which elevates it into a cause of value.Now, in the case of goods adapted to satisfy thenecessary and universal wants of mankind, as noman can escape from these wants, there is always alarge and steady market for these goods, and wecall them " necessaries." Wherever we have such amarket in economic life, we may be sure that thebrains of men and the resources of nature have beentaxed to the utmost to make the supply abundant andcheap. Hence the tendency of economic progressis to assure the satisfaction of these fundamental andlimited wants ; in proportion as this is done, do menescape from that dependence which gives value : andthus many goods tend to come nearer to the freegifts of nature—their value falls and falls. The oldtheory, then, in taking hunger as the type of themost urgent want, was not dealing with wants, butwith possibilities of want. Want is, at bottom, a feel-ing of incompleteness. It may indicate somethingwanting to our physical organism which, if entirely

26 THE SCALE OF VALUE CHAP.

unsupplied, will cause death. But if a few mouthfulsbe sufficient to' make this want disappear for themoment, and if there be no probability of thesemouthfuls ever being absent, we have been too hastyin giving it the highest rank among human wants.To consider food as having the highest use valuebecause the want of food means death, is likeestimating the greatness of a danger by the loss oflife which it might cause, without considering theprecautions taken to prevent i t : it reminds oneof the schoolboy's proposition, " Pins have savedmany thousands of lives—By people not swallowingthem."

To sum up. In assuming that bread and waterhad a higher " use-value " than iron, iron than gold,gold than diamonds, the earlier economists evidentlyreferred to a theoretical scale of wants which isnot recognised by any man as his scale; and, asthey could not ignore the fact that practical men,in making their valuations, seemed to put diamondsabove gold, gold above iron, and iron above bread,they had to divide off their so-called " use-value "sharply from the value which ruled the economicaltransactions of the world, and to call the latter" exchange value." The modern economist says thatthe phenomenon of bread possessing little valueand diamonds much value, is not in contradictionwith the theory that value depends entirely on utility.Bread is little thought of, and diamonds muchthought of, because, when all the circumstancesare taken into account—the circumstance of limita-tion of want and the circumstance of provision forwant—the importance to concrete human want ofthe one is little, and of the other is much.

IV THE SCALE OF VALUE 27

NOTE

The Austrian writers, whose economics are stronglycoloured by the utilitarian psychology, usually put thematter in the following way. The course of the satisfac-tion of a want may be represented by a diminishing scale.Of most wants, material and intellectual alike, it is truethat the pleasure got from the first draught of satisfactionis the keenest. The complete satisfaction, then, of anywant might be represented by a graduated scale diminish-ing to zero—beyond zero, the satisfaction turning intosatiety and disgust.

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

I II III IV V VI VII VIII IX X10

9 98 8 87 7 7 76 6 6 . 65 5 5 - 5 54 4 4 4 4 4 43 3 3 - 3 3 - 32 2 2 . 2 2 . 2 2

1 1 1 1 1 1 . 1 1 1

0 0 0 0 0 0 0 0 0 0

Here the Roman figures indicate classes or kinds ofwants, the Arabic, the concrete wants, or part wants, ineach class. We thus see at a glance that, the more impor-tant the class, the more important are the concrete wantsthat stand highest in the class : that, even in the highestclass, there are concrete wants which are outweighed byconcrete wants of almost every other lower class : and thatthere are classes of want, like IV and VII, which are notsatisfied gradually, as in the assuaging of hunger, butwhere want breaks off at a high level and does not emergeagain till wants of much inferior classes have been met.

28 THE SCALE OF VALUE CHAP, IV

As an illustration, this scheme has a certain value, butit suggests more objections perhaps than it settles. Thedivision of wants into kinds or classes, whether the prin-ciple of that division be determined by the nature of thesensations or by the objects which satisfy them, requires abetter psychological basis than has yet been demonstrated.For instance, a generic want like that called Needs ofSubsistence, is about as vague a conception as could wellbe imagined. And, again, on the " calculus of pleasureand pain," the satisfaction of want generally involvesdegrees and levels of physical, intellectual, and aestheticfeeling which cannot be represented by any such simplediagram. For these reasons—and also because the theoryof value is not accredited by seeming to rest so much on autilitarian psychology—I have not included the Sdttigung-scala in the text. There are some ingenious and interest-ing calculations on the subject in Wieser (NatiirlicherWerth, p. 27), which I have added in the Appendix.

CHAPTER V

THE MARGINAL UTILITY

THUS far we have seen that, utility being the genera]relation in which all goods, by their very definition,stand to human wellbeing, value is that higher, moreintimate, more limited relation in which some par-ticular importance to human wellbeing is conditionedby the having or losing of some particular good, anda relation of actual dependence is established betweenthe want and the good. We pass now to the posi-tive consideration of the measurement of value.

If one good stands over against one want—that isto say, if the satisfaction of a single want is depen-dent on the possession of or power over a single good—there is no difficulty : the value is the entire utilitywhich the good affords in the given case.

But the estimates of value which practically con-cern us are not so simple. We must face the factthat most goods which we have to value are not singlearticles, but many goods of the same kind—stocksof goods—and that, at the same time, most goodsare capable of satisfying several wants. Water,for instance, may be used for drinking, for washing,for cooling, for ornamental fountains, etc., as booksmay be used for reading, for lending, for ornament,for packing, for waste paper, and so on. But these

30 THE MARGINAL UTILITY CHAP.

are uses of very different importance, and the ques-tion is : Which of these utilities is it that determinesthe value ? This important point cannot be tooplainly put, and it will be wise to follow the Austrianwriters generally in taking the risk of being tediousrather than of being obscure.

A sailor and his dog, the sole survivors from awreck, have been tossing on a raft for many days.Land is in sight, but still far away, and the foodis reduced to a couple of biscuits. Both man anddog are equally famished, and it becomes evidentthat, unless each gets a biscuit, one of them will notlive to reach the shore. Here we are confrontedwith the opposing claims of two wants, that of thesailor and that of his dog; and, as the sailor is,presumably, the valuer, the two wants are of verydifferent importance to him. The question is, Whatmeasures the value of the biscuits ? According toour formula, the answer will be found by ascertainingwhich is the dependent want—which is the satis-faction that the biscuits condition.

, At first sight, one would say that the actualdestination of the biscuits determined this ; but thatwould be to say that two exactly similar biscuits,both available to the one man, and available underexactly similar conditions, were of different value.In this dilemma, one little consideration easily deter-mines the point. If one of the biscuits were lost,which want would go unsatisfied ? For the wantw.hich is satisfied if the good is present, and unsatis-fied if it is not, is evidently the dependent want.1

1 There are two typical cases where valuations are made :—wherea man values something he has, with the view of parting with it (inselling, giving, lending, etc.), and where he values something he has

v THE MARGINAL UTILITY 31

The dependent want, in this case, is that of thedog ; that is, it is the less important of the two wants.

To put it now in more general terms. As we saw,the (necessarily) limited resources at each man's dis-posal, he, consciously or unconsciously, apportionsout among his various wants according to his parti-cular scale, taking care that the more urgent ones areprovided for before the less urgent. It is obvious that,in these circumstances, there is a least want that issatisfied, although ordinarily we are not consciouswhat it is. But it immediately comes to the frontwhen, from any cause, our resources are diminished.If a working man's wage is reduced from twentyshillings to nineteen shillings a week, he becomespainfully conscious that some want, hitherto satisfied,must go bare, and the particular want on which heeconomises immediately points out which was hisleast, or least urgent, or final want. In this case, allthe wants previously satisfied are still satisfied exceptthe last one, and it is proved that none of themdepended on having or losing the shilling. Again,all wants under this, just as before, remain unsatis-fied whether the shilling is there or not. Only thismarginal want is satisfied if the shilling is presentand unsatisfied if absent: it alone, then, is thedependent want.

To recur to our illustration. So long as the sailorhad the two biscuits, one of them would go tosatisfying the higher want (his own), and the otherto satisfying the lower want (the dog's), and eitherbiscuit was capable of satisfying either want. But,when one biscuit was lost, the one that remained

not, with the view of acquiring it. As will be seen from above, thetwo methods of valuation come practically to the same result.

32 THE MARGINAL UTILITY CHAP.

was instantly elevated to satisfying the higher wantonly: it rose, literally, in value because then it wasnot a man's or a dog's life that depended upon itbut a man's only: what was lost was the means ofsatisfying the dog's want: the less important of thetwo wants was the dependent one; and it is therelation of dependence, as we said, that determinesvalue. We may formulate the proposition thus. Thevalue of a good is measured by the importance ofthat concrete want which is least urgent among thewants satisfied. And we find that what determinesthe value of a good is, not its greatest utility, nor itsaverage utility, nor yet its least conceivable utility,but its marginal utility in the given circumstances.Jevons called this the Last or Final Utility. Weshall follow Wieser literally in calling it the MarginalUtility. Simple as this proposition is, experience inteaching tells me that it is not easily retained so asto be used. For this reason, it may not be super-fluous to confirm its truth by testing it in variouscircumstances. I cannot improve on Bohm-Bawerk'sadmirable illustration, and only modify it in non-essential particulars.

A modern Robinson Crusoe has just harvested fivesacks of corn. These must be his principal mainten-ance till next autumn. He disposes of the sacks,according to the scale of his wants, in the followingway. One sack he destines for his daily allowanceof bread. Another he devotes to cakes, puddings,and the like. He cannot use more than these ineating, so he devotes a third to feeding poultry, anda fourth to the making of a coarse spirit. Withthese four sacks, we shall say, he is able to satisfyall the wants that occur to him as capable of being

v THE MARGINAL UTILITY 33

directly satisfied by corn, and, having no morepressing use for the fifth sack, he employs it infeeding dogs and cats and other domestic animals,the companions of his lonely life. The question is :What to him is the value of a sack of corn ? Asbefore, we ask : What utility will fail him if he loseone sack ? It is inconceivable that Crusoe shouldhave any doubt as to his answer : he will, of course,apportion out the sacks that remain as before;—twoto food, one to poultry, one to spirits, and he willgive up only the feeding of dogs and cats. This isseen to have been the Marginal Utility—the utilityon the margin of economic employment or use.What he loses, then, by losing one sack is hisformer Marginal Utility ; and this marginal utilityundoubtedly determines the value of a single oneof the five sacks. But here we come upon anotherfeature of this valuation. If the marginal utilitydetermines the value of one, it must determine thevalue of all, as, by hypothesis, all sacks were alike,and therefore all interchangeable. Thus we obtainthe universal formula for the valuation of goods inquantity. The value of a quantity of similar goodsis the value of the marginal good multiplied by thenumber of the goods.

To follow the illustration out. If another sackgets lost, the marginal utility is found to have beenthat of the making of spirits ; if still another, thefeeding of poultry. Finally, suppose Crusoe to bereduced to the one sack. Then the satisfying of alllesser wants is out of the question ; the losing of itmeans death to him ; the marginal utility and thehighest utility are one.

Again, suppose Crusoe as merchant bargaining,

34 THE MARGINAL UTILITY CHAP, V

say, with the Spaniards. If he have five sacks, hewill sell one at a low rate; if he have four, he willask a higher price; if he have only one, he willnot part with it for any money. Extend this to thephenomena of an industrial community. The fivesacks represent a larger supply than the four, thefour than the three, and so on ; and, as the supplydecreases, the value of the single sack rises. Nowone of the commonest phenomena of a market isthat, ceteris paribus, increase of supply brings downvalue and decrease of supply sends it up. To put itin terms of our theory: When the quantity of anygood produced is increased, the good is put to lowerlevels of use; the last want supplied determines thelast satisfaction ; and this last satisfaction determinesthe value of all the stock. Here we have theexplanation of the old Paradox of Value. If anycommodity is available in such quantity that allpossible wants for that commodity are supplied, andyet there is a surplus of the commodity, the marginalutility is zero, and the value of the entire stock is nil.And it is also explained how diamonds have ahigh value compared with bread. The quantity ofdiamonds available is never sufficient to satisfy morethan a fraction of the desire for them : the marginalutility, then, is high. Bread again is, happily, to behad everywhere at a comparatively small expenditureof labour, and the immense supply as compared withthe limited wants, puts the marginal utility lowo

CHAPTER VI

DIFFICULTIES AND EXPLANATIONS

A CHAPTER may be devoted to answering certaindoubts which naturally arise in the reader's mind,and to disentangling some complications which hidethe working of our fundamental law.

I. Some goods are perishable, some durable;some are single goods, some are groups of separableelements ; and, of these groups again, some are com-posed of homogeneous, some of very heterogeneouselements. Consequently there is a difference in theway in which goods give off their use, and themarginal utility is not always perfectly obvious.

Thus the first warning we require to take to our-selves is that we must make sure what really is thegood we are valuing. In the illustration of lastchapter, it was the sack of corn, not the individualgrains of corn ; it was, that is to say, a group ofhomogeneous elements considered and valued as awhole. Obviously this is a very different kind ofgood from, say, a horse or a piano. As durablegoods, the latter are, economically, a complex of allthe services which they are capable of renderingduring their lifetime as goods : their value, therefore,is to be determined by the least use to which theirservices, one year with another, are put, and not by

36 DIFFICULTIES AND EXPLANATIONS CHAP.

the least use to which, exceptionally, they are put.Otherwise we should conclude that the utility whicha hunting horse may sometimes put forth in drawinga plough, or that which a piano may render at thehands of a schoolgirl, are the marginal utilitiesdetermining the value of these goods.

Neglect of this consideration led Schafile to makethe objection that, in desert journeys, the traveller'sskin of water, according to our theory, would bemeasured by the least use to which the water wasput: that is to say, the quantity of water employed,say, in washing, would measure the value of thewhole skin, while, practically, everybody can seethat a good, the possession or non-possession ofwhich meant life or death to the traveller, could notbe measured by its washing value. The answer isthat here the good which is being valued is thewhole water-skin, not the individual drops of water:what measures its value is the amount of well-being that would be lost if the skin were lost. If,on the other hand, we were valuing individual cubicinches of water in the skin, or if we were valuing oneskin among many, then Scha file's calculation wouldbe quite right: that the least use to which the goodbeing valued—the cubic inch or the skin—was put,determined the value of that particular good, thecubic inches or the skin.

Similarly, if we ask what is the value of a water-supply to a city, we are putting a different questionfrom " What is the value of the individual gallon ofwater ? " The supply, as a whole, is the indis-pensable condition of a collective human want; theunit of valuation here is not the gallon, but the wholesupply. So with the value of a mill stream. We

vi DIFFICULTIES AND EXPLANATIONS 37

must not confound it with the valuelessness of wateras drinking water. What the miller values and paysfor is the head of water, and on this the individualcups or gallons used for drinking make no difference.Indeed, we have here one of the exceptional casesmentioned in the beginning of last chapter, thevaluation of a single good. The water-supply inthe above illustrations cannot usually be put along-side of similar supplies and considered as a memberof a stock. Its value is measured by the entire utilitywhich it affords.

A more difficult case is presented by the pheno-menon of " capitalised value." A quarry or minewhich will be worked out in fifty years is valued ata sum much less than the sum of its fifty annualoutputs. These annual outputs are seen in a per-spective of value diminishing according to theirremoteness in time. Say that the first year's outputis £100, the second (at an interest rate of 5%) willnow be worth only £95.23, the third, £90.70, andso on. Adding these together, we obtain a sumwhich is very much less than £100 x 50, and weexpress it—conveniently if somewhat misleadingly—by saying that the capital value is so many years'purchase of the annual rent. In other words, todetermine the marginal utility of a durable goodinvolves a calculation of the agio on present goodsas against future.1

II. One must guard against an easy misunder-standing of the expression Lowest Use. Most goodspermit of two or more entirely distinct kinds of use :

1 The difficult subjects of capital value and of interest on durablegoods are fully treated in B6hm-Bawerk's Positive Theory of Capital.See particularly p. 339.

38 DIFFICULTIES AND EXPLANATIONS CHAP.

a book, for instance, may be read, or it may be usedto light a fire. On the principles just laid down,one might think that it is the latter which determinesthe value of the book. There are two mistakes here.The first will be seen on referring to the terms ofour cardinal proposition. It is the least use towhich a good is put, and is, of course, economicallyput, that decides—not the possible uses to which itmay be put. If we were valuing two exactly similarcopies of one book, and if the only uses to whichthese copies could be put were, to be read or to beburned, then the value of each would be waste-papervalue.1 But this is an almost inconceivable supposi-tion. Books are made to be read, and to enumeratelighting of fires among the possible uses of a bookis to make the mistake already alluded to—of notbeing clear as to what is the good that is beingvalued.

The second and more important mistake is thathere we are presenting a case which is essentiallydifferent from the typical one given in last chapter.In the case of the peasant we are valuing one of astock of five similar goods, and concluded that theuse to which the fifth sack was put determined thevalue of the five. In other words, we had a stock ofgoods competing for employment. Now we haveemployments competing for one good, and, wherea good or stock of goods is not sufficient for allpossible employments, of course the only econo-mical possibility is that the highest use, and sothe highest marginal utility, should decide thevalue.

1 Just as the nutritive value of the horse competed with its draughtvalue during the siege of Paris.

vi DIFFICULTIES AND EXPLANATIONS 39

III. It follows from what has been said that thevalue of a good is almost never measured by theutility it actually affords,—its utility to me,—but bya foreign utility. In our first illustration of the twobiscuits, the utilities actually afforded by the biscuitswere, the satisfaction of a man's hunger and thesatisfaction of a dog's hunger; but the value of theparticular biscuit which actually satisfied the man'shunger was measured by the use of the biscuit tothe dog. In modern circumstances, where the exist-ence of money and the presence of stock permit ofgoods being instantly exchanged for other goods,we can—and do almost unconsciously—change thedisposition of our resources so as to shift the loss(which will define our marginal utility) to the leastsensitive part.

Suppose that a thrifty housewife has laid in herwinter stock of butter, and that by some accident itgets spoiled. Will she be likely to do without butterfor the rest of the winter ? She will, of course,replace the butter, and do without some comfort orluxury which she would otherwise have allowed her-self. That is to say, she will shift the loss to theleast sensitive part of her total expenditure. Somepart of the total satisfaction must be given up, andthis will always be the least in her particular scale.In the circumstances, the satisfaction she now deniesherself indicates her least urgent want. Not—be itremembered—her last conceivable want, or her lastactually felt want, but the last want that wassatisfied when she had the means, or the firstthat was deprived of its satisfaction when she hadto curtail her expenses; in short, the last wantsatisfied.

4o DIFFICULTIES AND EXPLANATIONS CHAP.

Similarly, if I am calculating the loss of valuewhich I suffer from a horse going hopelessly lame, Ido not estimate it by the satisfactions of riding anddriving I am likely to lose. I replace the horse byeconomising in other things—perhaps by doingwithout my summer holiday—and the value of thehorse is measured by the " foreign " utility of thesummer holiday.

IV. There is a question which naturally rises outof all that has preceded. The value of goods ismeasured by the lowest, or least, or last use econo-mically made of them :—What determines that thisor that particular use is the last ? In other words :What determines the level of the marginal utility ?The answer is;—the relation existing between aman's wants and the resources or provision he hasto meet them. If his wants are few and his resourcesabundant, the marginal utility will be low, for hereall the more urgent wants will be satisfied, and theonly wants left to satisfy will be insignificant ones.The value of an additional sovereign to a rich man,for instance, is very small, simply because he has fewwants that remain unsatisfied. The same is the caseif wants are what we might call " weak " ; to theplain liver, the value of the additional sovereign isperhaps as small as to the rich man. If, conversely,a man's wants are many and strong, and his meansscanty, the marginal utility will be high, and thesovereign will find wants, and urgent wants, waitingto welcome it. " It comes nearly to the same thing,"to quote Bohm-Bawerk, " to say that Usefulness andScarcity are the ultimate determinants of the valueof goods. In so far as the degree of usefulnessindicates whether, in its way, the good is capable of

vt DIFFICULTIES AND EXPLANATIONS 41

more or less important services to human wellbeing,so far does it indicate the height to which themarginal utility, in the most extreme case, may rise.But it is the scarcity that decides to what point themarginal utility actually does rise in the concretecase."

CHAPTER VT1

COMPLEMENTARY GOODS

As the ultimate goal of economic effort is not theobtaining of goods but the satisfaction of humanwant, we are not finished with our subject till we havetraced the finished good to its end and raison d'itrein affording this satisfaction. In the present chapter,we have to consider cases where several goodscontribute to one satisfaction, and to find whatinfluence this satisfaction has upon their separatevalues. In such cases the " good " we have to valueis, properly speaking, a group, and in the variousforms taken by these groups, we meet with somepuzzling and far-reaching peculiarities.

The class of Complementary goods, to use Menger'sterm, is much wider than we are apt to suppose. Inconsumption goods, it tends to increase with thevariety of modern wealth and the development of newtastes. Many of our enjoyments depend on theco-operation of a great many factors, of which usuallyone is prominent, and the others only assert them-selves on rare occasions. Thus the part played bythat insignificant commodity, salt, in most of thepleasures of the table, is never appreciated till thewant of it—say, at a pic-nic—suggests how indispens-able a complement it is. Among productive goods.

CHAP, VII COMPLEMENTARY GOODS 43

again, where the division of labour is constantlyadding to the number of factors which work togetherin the making of any good, the complementarycharacter becomes even more apparent. The firstthing to be noticed here is that the value of a group,as a group, is determined by the marginal utility ofthe group, not of the separate members. But, aseach group may on occasion be broken up, theinteresting question is as to the distribution of valueamong the members, the difference in value betweengoods as complements and goods as isolated articles.

The simplest case is where the single members ofa group are all useless in any other form but that ofthe group, and are at the same time economicallyirreplaceable. In valuing boots, for instance, the" good " is the pair; if I lose one, I lose the entireutility. In such cases—which are, of course, com-paratively rare—if I have had the pair and lose one,I lose the entire value of the pair : if I have one andobtain another, I gain the entire value of the pair.Here, then, the value of one single member of thegroup is the same as the value of the whole group.

This case, however, is really of importance only asintroducing the others which follow; under theassumed conditions we are dealing with a goodsimilar, say, to a pair of compasses or a pair ofspectacles, which we can divide into two only atthe cost of the whole; that is to say, it is onlyexternally a group.

A more common form is where the group canafford one utility, and the individual members of it inisolation can afford another but a less utility. Thusthe utility of a well-matched pair of roans will bevalued at a figure much higher than would be realised

44 COMPLEMENTARY GOODS CHAP.

by selling the horses separately. Suppose that theutility of the pair is represented by ioo, and that ofA roan and B roan separately by 50 and 40 : whatis the value of A ? To calculate it from the side ofthe owner : if he has A and B, he has a value of 100 ;if he lose A, he has only B, and B separately has avalue of only 40. What he has lost is the differencebetween 40 and 100. Or, from the side of thebuyer: if he gets B he obtains 40 ; if he gets A inaddition he obtains 100 ; the value of A, as before,is the difference between 40 and 100. Here, then,A has a different value as complement and as isolatedgood : in the one case it is worth 60, in the other 50.If we take the case of a well-matched four-in-handteam, we have a more complicated instance of thesame ; the whole team makes the most highly valuedgroup, but each pair within that again has a highergroup value than the sum of the isolated valueswhich would be attached to each single horse. Thiscase of valuation holds in the very numerous caseswhere goods are in sets : if we " break the set," theseparate members have a less value than they hadas complements.

A third case is, where, as before, the group canafford one utility, and the individual members of itseparately can afford a less utility, but where somemembers are replaceable and some are not. In thiscase, the replaceable members can never obtain anyother than the one value : however indispensable theymay be to the making of the group, goods that canbe easily replaced cannot rise higher than the com-petition of all other uses allows. Although a load ofbricks, for example, were absolutely indispensable tofinish the building of a house, the load could never

VII COMPLEMENTARY GOODS 45

obtain any higher value than that determined by themarginal utility of bricks generally: that is, asdetermined by all the uses to which bricks generallyare put. To the irreplaceable member, on the otherhand, falls the remainder of the value of the group.Thus suppose a group A, B, and C, with a groupvalue of 100, and isolated values of 10, 20, 30. IfA and B are articles of large manufacture and greatdemand, while C is a monopoly good, A and Bwill get 30% of the value, and C the other 70%,although, if the other members were not present inthe group, the only value C could realise wouldbe 30.1

1 How far the theory of Complementary Goods admits of beingapplied directly to the problem of distribution of product among thevarious factors is matter of controversy. Bohm-Bawerk considersthat it is the key which will lead to its solution. The line which thissuggests would be something like the following. Labour and Capitalenter into the composition of all productive groups : in proportion asthey are abundant and mobile do they enter into competition with alllabour and all capital, and become perfectly replaceable. In enter-ing into products, then, they cannever secure more than their outsidevalue—that fixed by all their employments or uses. The surplus inthe price of each product goes to the monopolist factor, whether thatmonopoly be caused by natural and site advantages of land, mentaland technical qualities of undertakers and workers, peculiar condi-tions of process, or the like. And in proportion as these factors losetheir monopoly, does the value of the group shrink ; if all the mem-bers were to become replaceable, as when first-class land in othercountries becomes available through rapid and cheap carriage, orwhen education makes unskilled labour the exception, the groupvalue, as distinct from the combined isolated values, would disappear.

Wieser, again, considers that this is no more than a valuable sug-gestion. What guidance, he asks, will this law give where thereare several irreplaceable members, and how is the outside value ofreplaceable members given if not in other combinations of comple-mentary goods which in turn require to be split up into their factors?He points out acutely, in reply to Menger, that, to estimate the pro-

46 COMPLEMENTARY GOODS CHAP, vn

portion contributed by any factor by the loss which would accrue ifthat factor were absent, is to reckon too much to it, as the loss of afactor from a co-operation will generally disorganise the group andcause more damage than its presence would cause gain. Instead ofusing the doctrine of Complementary Goods in this way, he proposesto find, by a series of equations, what each factor positively contri-butes ; not, of course, the physical share, but the proportion of valuewhich may be economically " imputed " to it. A great part of theNatiirlicher Werth is taken up with this doctrine of the " Zurech-nung," which is treated in Wieser's usual strong and graphicmanner.

CHAPTER VTII

SUBJECTIVE EXCHANGE VALUE

BEFORE passing from subjective or personal value,there remains for consideration one point, which isat once important in itself, and decisive against theold division of the total phenomena under discussioninto value in use and value in exchange. To thesubtle analysis of Bohm-Bawerk and Wieser we owethe recognition of subjective exchange value, asdistinct from the purely objective exchange valuewhich we have to consider in following chapters.Aristotle said that every good had two uses, " bothbelonging to the thing as such " : similarly we saythat every good has two subjective importances, thatwhich it can directly afford, and that which thethings got in exchange for it can afford. A littlereflection will convince us that subjective valuecontains these two distinct branches, use value andexchange value.

It may occasionally suit the economist, for pur-poses of illustration, to discuss the economy of aCrusoe—particularly in problems of productionwhere the essential features of society, as at once aproducing and consuming body, are obscured by thedivision of labour—but, in the simplest form of

48 SUBJECTIVE EXCHANGE VALUE CHAP.

society known to experience, there is always somebarter or exchange of goods. But, wherever this isthe case, every good acquires a second possible valueas an exchange form of other goods, or a potentialityof obtaining other goods. In the organism calledsociety, each man becomes—at least potentially-richer or poorer with the increase or decrease ofits wealth. Some part of our neighbour's goodsbecomes available for the satisfaction of our wantwhenever exchange becomes possible between us,inasmuch as the actual existence of his surplus—notto mention his enjoyment of it—depends on our co-operation. Thus the goods which were first valuableto us personally, as possible satisfaction of our want,get a secondary value. Every good becomes potenti-ally a number of other goods, and the range of ourpossible satisfactions becomes by so much widened.The presence of exchange, in short, gives us a choiceof values.

These two kinds of value are possessed in varyingdegree by different goods. In some, the exchangevalue may be greater than the use value—as, forinstance, when a change in productiveness in thecommunity increases the quantity or improves thequality of things I can get in exchange, while theuse value of things I can give in exchange remainsunaltered : in others it may be less, as in all caseswhere habit and association root the goods in ouraffection. What has to be emphasised is, that theposition which every man occupies as a member ofsociety gives to all goods of personal use this othervalue, and that, as we saw on p. 37, whichever of thetwo valuations we place higher determines the totalsubjective value. In other words ; there is, as we shall

VIII SUBJECTIVE EXCHANGE VALUE 49

see later, a direct and an indirect satisfaction of wants,corresponding to the division of goods into consump-tion goods and production goods. Just as grain maybe used for bread or for seed, and just as the valueof the grain is determined by calculations of marginalutility which take both bread and seed into accountas possible uses, so has every good, subjectivelyconsidered, a use value and an exchange value,and the total subjective value is calculated on theconsideration of both of these as possible uses ofthe good.

On the other side, there is no doubt that theanalysis of exchange value into subjective and objec-tive is subtle, and that it is difficult to keep thetwo distinct. The real difference may be most easilyseen by an illustration. Say that the first edition ofModern Painters, which cost me £18 some years ago,now stands in the booksellers' catalogues at £30. Itmay be assumed that my pleasure, as a cultured man,in the possession of this first edition is measured bysomething like £30. But suppose I now suffer areverse of fortune. The subjective use value of thebook remains as before : the objective exchange valuealso remains as before : but the subjective exchangevalue has immensely risen. In my former circum-stances the price of £30 was a bagatelle : now it mayperhaps pay my insurance premium : this secondsubjective value is distinct alike from subjective usevalue and objective exchange value.

In former chapters, we have seen that the value ofa good is determined by the marginal utility whichdepends on i t : in the same way this secondary valuewill be determined by the marginal utility whichdepends on the things obtained in exchange for the

50 SUBJECTIVE EXCHANGE VALUE CHAP.

good. This being so, the amount of this exchangevalue will depend on two things : (i) on the objectivevalue, or price, of the goods—which determines whator how many things can be got for them : (2) on theexisting state of the owner's want and provision—which determines what place the satisfactions, obtain-able from the goods got in exchange, have in hisscale of living. For instance : the use to me of theone riding horse which I can just afford may be quitedefinite, as giving me a pleasant form of exercise.But its subjective exchange value depends (1) on thesum of money I could get for him, and (2) whatpart this sum of money plays in my scale ofliving.

And here we come in sight of the decisive dis-tinction between subjective and objective exchangevalue. The objective exchange value of the horse isthe same to every one; the subjective exchange valuevaries from person to person according to the previousstate of his wants and resources. An article in apoor man's house which he can, in case of need, sellfor 20/ has a very different importance to him fromwhat a similar article has to a rich man—20/ is alarge part of a £50 wage, but a very small proportionof a £1000 income.

The necessity of drawing this distinction lies inthe fact that Money has no subjective value otherthan its exchange value. As the tool of exchangethe only use to which we can put it is to part withit. It is one of the virtues of a good money that itis never " used," say, as a metal, but passes fromhand to hand without question in satisfaction of debt.And yet, as a pound note in a man's pocket is thetemporary form of so much bread, meat, lodging,

vin SUBJECTIVE EXCHANGE VALUE 51

clothes, etc., it is clear that the pound note to theworking man has just the marginal utility whichthese things have. To use Wieser's terse expres-sion : The exchange value of money is the anticipateduse value of the things it buys.

CHAPTER IX

FROM SUBJECTIVE TO OBJECTIVE VALUE

THUS far we have considered each man's wants asranged on a scale; in correspondence with thesewants, each man attaches degrees of importance tothe goods that come within his knowledge and con-trol, and ranges goods also on a similar scale. Wehave seen that, owing to the infinite subjectivedifferences in men on the one hand, and the effect ofprovision on the dependence of want on the other,every man's scale is different from every other man's.That is to say, every man, subjectively, attaches hisown valuation to goods. As no man, however, livethto himself, these valuations come together and arecompared in every act of barter and exchange. Thereflex influence of the valuations that each man meetsin any market, however simple, is very great; constantcontact of man with man in exchange assimilates thevaluations of all, till, unconsciously, we come verymuch to regard the average valuation made by thepeople we meet as our own valuation. For instance,in buying an article, if we looked solely and entirelyto what that article represented in life, pleasure,satisfaction, self-realisation—however we name oursubjective centre—we should, perhaps, value it atioo. But if we meet everywhere with people who

CHAP, ix SUBJECTIVE TO OBJECTIVE VALUE 53

value that article, say, from 50 to 60, it is inevitablethat our estimate should be strongly affected thereby.And this explains how that, notwithstanding theenormous differences in temperament, culture, andconditions, the valuations which meet on a marketdo not diverge so widely as one would expect. Ifwe consider that, of three men who bid for a horse,the value of it to A may depend on his being acountry doctor, to B, on his being a hunting man,and to C, on his having a sluggish liver, we couldscarcely understand how these different values cometo be assessed within a few pounds or shillings ofeach other, if it were not for this kind of arbitrage.

When we say, then, that men who meet asexchangers of different goods put their own subjec-tive valuations on the articles they bring to market,we must be understood to mean valuations that arenot more subjective than man himself is. A man'svaluations can no more escape being to a greatextent the valuations of other men, than he himselfcan escape being what other people " make " him.

How it comes that each man can compare theimportance he attaches to a commodity, as condition-ing the satisfaction of want, with the importance ofa piece of metal or paper whose only " use " is topass on, belongs to a department of our science onwhich, happily, we do not require to enter. It issufficient for us to say that, in the modern community,we measure " goods in general" by one good, and wegrow up so familiarised with the current money scalethat no one sees anything strange in valuing, say, aBible, at thirty pence, or even its author at thirtypieces ! In other words, if I enter the market as abuyer for a horse, with the figure of £50 in my mind

54 SUBJECTIVE TO OBJECTIVE VALUE CHAP, IX

as the limit of my bid, it is not from a judgment thatthe horse to me is equal to the satisfaction I couldget from fifty gold sovereigns, but from a judgmentthat the enjoyment or use to be got from the horseis equal to the other personal satisfactions that fiftygold sovereigns represent—to all the current wants ofmy life which I measure, in my own mind, by thatsame scale, and count worth £50. The money valueis only the universal language in which we expressour valuations generally. Thus, through habit andeducation, it comes that it is more definite andintelligible, either as regards ourselves or others, forus to say that a horse is worth fifty sovereigns, thanto say that it is worth so many quarters of corn orhundredweights of iron.

CHAPTER X

PRICE

IN an early chapter, it was said that the one class ofobjective values which had an interest for economicscience was the (purely objective) value in exchangeor purchasing power. We escape using this cum-brous expression if we substitute the word Price.The two terms are of course not equivalent: powerin exchange is a different thing from the quantum ofgoods obtained by that power and measuring i t : butobviously the two are inseparable, and the laws ofthe one are the laws of the other. Our present task,then, is the theory of price.1

It would, perhaps, not be very difficult to arguethat a universal theory of price is impossible. Theattempt to base an entire economy on the motive ofSelf-interest has not been so successful, that many ofus are willing to risk the credit of the whole scienceany longer on an assumption that was never quitetrue, and is becoming less so as wealth increases andis increasingly spent with a directly moral aim. But,

1 As might be expected of a reaction against the old positionclaimed for value in exchange as the sole economic value, theAustrian economists have devoted their energies mainly to theneglected branch, Subjective Value. Bohm-Bawerk alone hasfollowed out the marginal theory of value in detail into the theoryof price.

56 PRICE • CHAP

in certain great departments of exchange, if any-where, the old competitive laws do hold. In stockexchange dealings, in banking, in international trans-actions, in great organised markets, as iron, wool,cotton, grain, and so on, the egoistic motive is sostrongly marked that it is possible to found on it alaw which comes, perhaps, as near a scientific law ofexchange as we can expect. It may be described as thelaw of price under perfect competition. It disregardsall motives but those of advantage from the exchange—always, of course, within the recognised limitsof law and respectability. In such markets the" strong " exchanger (buyer or seller) is the one whoattaches most importance to the good he wishes toget, and the least importance to the good he gives inexchange—as we can see from the simple considera-tion that the bidder most likely to carry away apicture from a studio is the one who thinks most ofthe picture and least of his money, while the artistmost likely to clear his stock is the one who thinksleast of his pictures and most of the money he willget for them.

The assumptions on which the law is based arethe following: that the market is an open andorganic one ; that buyers and sellers are ordinarilyconversant with the conditions of supply and com-petition ; that each party will make an exchangewhenever he sees a gain in i t ; and that he willprefer a greater gain to a less.

They are the assumptions of any ordinary com-mercial " market." x For simplicity's sake, we shall

1 In justice to that large class of economists who strive to suit thestubborn fingers of the economic man to the lute of social life, it maybe said that their dislike of the egoistic motive is due simply to its

X PRICE 57

begin with the simplest possible case, and graduallycome to the more complicated.

ist Case. (Isolated Exchange.) A peasant Bwishes to buy a horse, and his circumstances are suchthat he puts the same estimate upon £60 as he doeson the possession of a horse. His neighbour S hasa horse which he values as worth £20. Here therewill certainly be an exchange, as, at a price, say, of£40 both make a gain of £20 over the amount atwhich, in the worst case, they are willing to exchange.But if the exchangers act on the principle " better asmall profit than no exchange," the price may be any-thing above £20 or under £60, and the actual figureis determined by the " higgling of the market."Here, then, the price will lie between a minimumof the seller's subjective valuation and a maximum ofthe buyer's subjective valuation.being egoistic. If struggle and fight is the necessary and healthy con-dition of industry and commerce, then the utmost demand of thereformer must be a fair field for every one and no favour; if the ethicsof commerce are necessarily the ethics of war, we may weep over thefallen but we shall not waste our time crying mercy. But a greatmany people—and these not the worst economists—think that theeconomic field may justly be regarded, not as a battle, but as a har-vest field, where the greatest results are to be had, not by fightingagainst, but by working with each other. For the last hundred years,they would say, men have been dazzled by the new possibilities of lifewhich the great increase of wealth has opened up, and the solidarityof mankind has been broken up by the eagerness of each to get holdof an advantage which, obviously, could only be had by the few. Nowthat the world is passably rich, should we not draw breath, and try toorganise the industrial life with an end to the character and conductof the workers ? Ideas like these have a way of making the egoisticmotive seem a little contemptible. But,in justice also to the practicalman, it must be said that he ridicules all this mainly because he doesnot understand that it is a new point of view—the subordination ofthe economic to the higher life—and because his spiritual advisershave long allowed him to think that the business life has canons ofits own, with which " theoretic " morality may not intermeddle.

58 PRICE CHAP.

2d Case. (One-sided competition of Buyers orSellers.) First, of Buyers. Suppose, instead of onepeasant, there are three, Bx B2 and B3, bidding for onehorse. Bx values it at £60 : B2 considers it worth£50 : B3 thinks it worth only £40. Only one canget the horse ; but, as S values his horse at £20 only,any of the three buyers may get it. Accordinglythey will bid against each other till the figure goesabove £40, when B3 retires from the competition :above £50 B2 is excluded, and Bx is left the solecompetitor. Then, as in the former case, the pricewill be fixed somewhere between £60, the subjectivevaluation of the purchaser, and £50, that of the mostcapable of the excluded competitors, or, as we shouldsay, between the subjective valuation of the success-ful and that of the first unsuccessful buyer.

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

3d Case. This is the ordinary case of what maybe called complete competition—where there areseveral buyers and several sellers of similar articles.Suppose the case of six buyers each wishing topurchase a barrel of apples, and five sellers eachwishing to dispose of one barrel. We assume thatthe barrels are all of equal quality and offered simul-taneously, and that the competitors on both sidesknow their own interests and follow them.

Buyer i

Buyer 2Buyer 3Buyer 4Buyer 5Buyer 6

values the ban el at}and will pay any >

price under ),,

„

18/6

18/

17/6

17/16/

15/

Seller

SellerSellerSellerSeller

1

2

345

values the barrel at"jand will accept any \ 13/

price above J14/15/16/

17/

X PRICE 59

Here the subjective valuation which the first threebuyers put upon the apples is so high that they are,economically, " capable " of purchasing from any ofthe sellers. But, naturally, they will not pay morethan necessary, and the transaction begins by lowoffers on the side of the buyers, and holding back onthe side of the sellers. Let us follow the course ofthe bids methodically.

At 13/6 there are 6 Buyers and 1 Seller14/ „ 6 „ 1 „14/6 6 „ 2 „15/ » 5 .» 2 „15/6 , , 5 - 3 »16/ „ 4 „ 3 „16/1 , , 4 » 4 »16/6 „ 4 ',, 4 „16/11 „ 4 „ 4 „17/ 3 „ 4 »

Thus we see that, at any price from 16/1 to16/11, there will be as many buyers as sellers, andthe conditions will have emerged at which exchangestake place and price is determined. For, at that price,four buyers and four sellers will make a gain byexchanging. The fourth buyer was willing to payanything under 17/ and the fourth seller willing toclear anything over 16/; thus both gain by a pricewhich falls between 16/ and 17/, while the threemore capable pairs gain proportionally more. Andat that price the valuations of the remaining competi-tors, be they few or many, are unable to have anyeffect on the exchange. 16/1 will not suit buyers 5and 6, who are not willing to give more than amaximum of 15/n and 14/11, and 16/11 will notsuit sellers who demand at least 17/1.

60 PRICE CHAP, x

Again, any price above 16/11 would cause thefourth buyer to withdraw, and any price under 16/1would cause the fourth seller to withdraw. Theprice, then, will be determined somewhere betweenthe subjective valuations of the last buyer and thelast seller—what we may call the Marginal Pair.1

And the most capable exchangers are proved to havebeen those who put the highest valuation on thecommodity they wished (apples or money), and thelowest valuation on the commodity they had (moneyor apples).

1 To be exact, this limit may be more closely drawn. Bohm-Bawerk's law is that the price is determined between the valuationof the last buyer and that of the first excluded seller as Higher Limit,and the valuations of the last seller and first excluded buyer asLower Limit, viz. between the valuations of the Marginal Pairs.But, for reasons which will shortly be evident, it is scarcely worthwhile adding to the difficulty of the subject by too great exactness.

CHAPTER XI

SUBJECTIVE VALUATIONS THE BASIS OF PRICE

IT was said in the introductory chapter that weshould find Objective Exchange Value to be a super-structure on Subjective Value. The typical schemein last chapter will abundantly prove this. It is thevaluations with which the parties on both sides enterthe market that decide;—first, what parties will takepart in the competition ; second, what is the degreeof each party's " capability of exchange " ; third, whoare the parties that actually come to terms ; fourth,who is the last buyer and who the last seller; andfifth, the price. Thus we arrive at Bohm-Bawerk'sformal proposition : Price is the resultant of subjec-tive valuations put upon commodity and price-equivalent within a market.

Unless, however, we remember what has beensaid of the essential nature of value, we shall beapt to stumble over this word " valuation." Theprice with which a buyer comes to market as themaximum which he is willing to give, does not indi-cate anything of the absolute amount of wellbeingwhich the goods he proposes to purchase represent tohim. We saw that the subjective value of anythingis given by the dependence of a want upon it, andthat this dependence is measured by two factors : thewant which the good is capable of satisfying and the

62 SUBJECTIVE VALUATIONS CHAP.

state of provision already existing to meet that want—in ordinary circumstances, the income or wealth ofthe valuer. To put it concretely : the valuation of16/6, which the buyer puts on the barrel of apples inour illustration, is determined by a calculation, first,of the position the fruit takes in his householdeconomy as compared with other forms of food, and,second, of the money figures in which the amount ofhis income or available wealth enables him to expressthat position. This, among other things, will explainhow two very different classes of competitors may bethe " capable " ones ; those whose needs are urgentand those whose resources are plentiful. The valua-tion of 16/6 may be either the expression of a poorman's necessity, interpreted and limited by the fewshillings he can spare from his wages, or the expres-sion of a rich man's whim, measured by the loosemoney in his pocket.1

1 In connection with this, the following passage-is worth attention."Goods which can only be obtained in very small quantities andwhich only the rich are likely to demand, will obtain the highestprices. Goods, again, of common quality, suited to the wants of thepoor, obtain very low prices, along with those goods of better qualitywhich are so numerous that the poorer classes are able, to a consider-able extent, to purchase them. Medium prices, lastly, will rule in thecase of goods of which the middle classes are the principal buyers,while poorer people either do not compete or compete only so far ascompelled by their most urgent feelings of want. It will readily beunderstood that changes in the economical provision and power ofgreat classes must be followed by changes in the prices of goods. Thegreater the inequalities of wealth, the greater will be the differencesin price. Luxuries will rise in price as great fortunes increase andfall as they diminish. . . . Thus it is that diamonds and gold stand sovery high ; they are luxuries of the rich and richest, and are valuedand paid for in the measure of the purchasing power of these classes.Food and iron are at the other end of the scale because they aregoods for the people, their value being decided by the valuationand purchasing power of poor men."—Wieser, Der NaturlicheWerth, pp. 44, 45-

xi THE BASIS OF PRICE 63

If, then, the subjective valuations on either side donot necessarily say anything of what we might callthe absolute worth of things to the valuers, much lessdoes the price which is the resultant of these valua-tions. It is not even an average of the valuations.However high the valuations of buyers, and how-ever low the valuations of sellers, in an organisedmarket the goods will exchange at the marginalprice. And however many be the excluded competi-tors—the buyers whose subjective valuations do notallow them to buy, and the sellers whose valuationsdo not allow them to sell, at the marginal price—they are unable to affect the price one way or other.

It should not be necessary to point out that thedetermination of price in actual life is not the con-scious resultant of all these valuations. The analysisof price into its factors is as different from thepractical synthesis of price as a statue is from ananatomist's plates. The practical man no more knowsthe machinery set in motion to determine each day'smarket quotations than the child knows the rules ofgrammar by which he speaks. It is the same inmost economic matters. The theory of money, forinstance, is one of the most difficult and complicatedparts of economical science, and yet we all grow upwith a perfectly definite idea of the relation which ashilling bears to English commodities in general—sodefinite, indeed, that, when travelling in a countrywhere there is an inconvertible paper currency andwhere prices are turned upside down by a protectivetariff, we do not notice the leap we take when weturn the quarter-dollar note, in our mind, into a silvershilling, and calculate prices on the English basis.In the same way, a business man applies unthinkingly

64 SUBJECTIVE VALUATIONS CHAP.

and unerringly all those canons of marginal valueand price which we find so puzzling.

But in the business world itself, there is one greatsimplification of the law of the Marginal Pair. Inmodern industry, producers do not make for them-selves but for the market, and the amount of theirown product which they could use in their ownconsumption is insignificant. Consequently it mayalmost be said that such goods have no subjectivevalue for the sellers,1 and we lose one whole side ofour valuations. But, on the other hand, this veryfact enormously increases the numbers of buyers, andbrings their subjective valuations all the closer.Practically, then, our law takes this form : Price isdetermined by the valuation of the Marginal Buyer.

It will probably be thought that only in the lastparagraph have we come to the normal state of things,and so to the only state of things which has anypractical interest for us. All the tedious discussionabout peasants selling horses, or buyers and sellerswishing to trade for just one barrel of apples each, isbeside the mark, it will be said, when we considerthat the questions of value which are of importanceto us are questions between the innumerable personswho compete with each other in the business of makingand buying and selling, and the innumerable personswho buy goods for their own consumption at fixedprices from the shops. The answer to this hasalready been suggested. As well might we expect to

1 This is not quite true. They have subjective exchange value justas money has. The product of labour which has been paid by 20/ ofwage has the same sort of subjective value to the wage-payer as the20/ had. But as the professional producer anticipates demand thesubjective value is not so calculable.

xi THE BASIS OF PRICE 65

understand the organisation of industry by taking ourstand on an omnibus in Cheapside, and watching thesurging life below, as begin our study of the pheno-mena of value with the smooth-running machinery ofexchange which is the growth of generations. Theonly way to understand the completed theory of valueis to go back to the simplest cases of exchange—perhaps even barter ; find what principles are involvedin all exchange ; and then work out the complica-tions and simplifications which come with developedtrade. It is impossible to explain the " short cuts "till we know the roundabout road.

It will not have escaped the notice of the criticalreader that there are many resemblances between thelaw now formulated and that known as the law ofSupply and Demand. It would be strange if therewere not. As in ethics, all theories lead very muchto one practical code of morals, so theories of pricemust all be more or less accurate analyses of theactual transactions of the market. For instance, thezone within the limits of which price is determined is,as we have seen, that lying between the valuations ofthe Marginal Pair. But every one will have noticedthat in this zone supply and demand come, quantita-tively, to equilibrium, and hence it is quite correct tosay that the market pric^ is found in that zone wheresupply and demand balance each other.

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

1st, The Extent of Demand,—that is, the numberof people who wish to buy goods because they attacha certain value to them.

2d, The Intensity of Demand,—that is the sub-jective valuation which these buyers attach to the

66 THE BASIS OF PRICE CHAP, XI

commodity they wish to obtain, and the subjectivevaluation of the money they part with.

3d, The Extent of Supply,—that is, the numberof people who wish to sell goods because they attacha certain value to the money they expect to get inexchange.

4th, The Intensity of Supply,—that is, the valua-tion which these sellers attach to the money they wishto obtain, and which they attach to the commoditythey part with.

We shall cease to wonder at resemblances, how-ever, if we remember that our law of value cannot bea rival of any other law which has been recognised asgiving, within its sphere, a satisfactory explanationof actual phenomena of value, except in the qualitiesof breadth of basis or accuracy of details. Theimpression which most of us, I imagine, have hadin relation to the law of Supply and Demand asusually formulated, is that what it says is undeniable,but that it does not say enough. It devotes amplespace to the phenomena of supply, but it leavesdemand almost entirely without analysis. While itpays lip-service to value as a relative between thetwo, it gives the impression that the side of supplyis so overwhelmingly important that demand maybe taken for granted. What the theory which hasbeen developed in the preceding pages does is indeedto make price a resultant of Supply and Demand,but at the same time carefully to analyse theseambiguous expressions, and make price rest finallyon subjective valuations of commodities and of price-equivalents made by buyers on the one side andsellers on the other.

CHAPTER XII

COST OF PRODUCTION

WE have now to compare the law of Value atwhich we have arrived with that most dwelt on byEnglish economists. It is a matter of commonexperience that, in the case of articles manufacturedon a large scale—" freely produced," or reproducibleat will—the price always tends towards equality withthe cost of their production. On this experience isfounded the familiar statement that the value of agood is determined by its cost. Speaking generally,Costs of Production are all the productive goodsconsumed in the making of a product,—raw andauxiliary materials, machinery, power, and labour.To speak more accurately, we should substitute theterm Expenses of Production, thus indicating that thenaturally incommensurable " efforts and abstinences "are measured by the money paid for them. On thistheory, the value of a good comes from its past.

Now, on the theory above explained, we haveto show that the causal connection runs the otherway, from Product to Cost. Human want, as wasshown, is the very first consideration in the Theoryof Value. The relation of each man's resourcesto his varied wants determines what is the lastwant satisfied in each class of want, and so the

68 COST OF PRODUCTION CHAP.

Marginal Utility and subjective value of goods. Thefigures which buyers and sellers respectively put ontheir goods determine the competitors, determine themarginal pair or the last buyer, and so determineprice. Through price, the subjective valuations arecarried back to means of production. As the typicallabourer, the peasant, measures the value of his labourby the produce he raises, or the value of his imple-ments by the additional crop they procure, so is allvalue reflected back from goods to that which makesthem. Thus value comes, not from the past of goodsbut from their future ; that is to say, from the side ofconsumption in satisfying want. Goods stand mid-way between production and consumption. In theold reading it was the former term that gave value :in the new, it is the latter.

Before going further, it is necessary more exactlyto define the connection between production andconsumption goods.

All goods find their goal in satisfying the wantof man. As Roscher finely says, Ausgangspunkt,wie Zielpunkt unserer Wissenschaft ist der Mensch.The consumption-good then—the good which is tofind its destiny, and its life-work, in ministering tohuman want—is that for which and towards whichwe set in motion the whole machinery of industry.From the soil or the mine downward, every productiveinstrument is, economically, a consumption-good inthe making. This Menger has put in terms which arenow classical. He calls consumption-goods, goods ofthe first or lowest rank. The goods which co-operatein immediately producing these—the group of produc-tive instruments used in the last stage of production—he calls goods of second rank. The factors of this

xn COST OF PRODUCTION 69

second group, again, are goods of third rank, and soon. Thus, if a loaf is the consumption-good or thegood of first rank, the flour, the oven, and the baker'slabour form the group of second rank ; the wheat, themill, the labour, and the material that makes the oven,the group of third rank; the land, the agriculturalimplements, the materials of the mill, etc., the groupof fourth rank, and so on. Now, as we have seen,consumption-goods receive their value from the de-pendence of some want upon them—from their beingthe condition of some satisfaction. Take, then, thegood, a loaf of bread. The value of the loaf in thebaker's shop is determined subjectively by its marginalutility to the consumers, and the valuations (based onthis marginal utility) of buyers and sellers decide themarket price at which the bread is put on the market.Looking back now at the continuity of productionand consumption goods, we see that the last group ofproductive goods which issues in the bread is reallythe loaf in the making. If the baker had not thatgroup he would not have the bread, and we shouldlose our marginal utility—the satisfaction of the want.What, then, depends on the having or losing thegroup of second rank ? Simply the marginal utilityof the finished good. Tracing back the loaf to moreand more remote groups, we find, similarly, that whatdepends upon them all is, at different points of time,the marginal utility of the finished consumption-good :that is to say, they are all, economically, the loaf inthe making. In short, value depends on a relation tohuman wellbeing as indicated by the satisfaction ofwant; and productive goods only come into contactwith human wellbeing through the final member ofthe chain, the consumption-good. No one values the

7© COST OF PRODUCTION CHAP.

iron ore, or the ragged " pig," for what it is in itself.Ingenious and delicate as may be the machine, noone puts together these cunning arrangements ofwheels and pulleys and rollers for the sake of show-ing the machinist's skill, or the working of mechanicalpowers. Even the smooth and gossamer yarn is nota thing which can satisfy any human want. All thesegoods are only " good " because they are cloth, orsome other consumption-good, in the making. We" value " them, not because we see the iron fabricspassing, by wear and tear of the machine, into thewarp, or the threads of human life being woven intothe weft, but because, with prophetic eyes, we see theweb covering the otherwise bare backs of men andwomen, and giving up its life in ministering to theirs.

The conduction of value, then, would seem to be,from productx to means of production ; and thiswould, probably, be generally recognised if everyproduct were connected immediately with only onegroup of means of production. In the case of awine grower it is easy enough to see that the valueof the grapes is derived from the wine, and the valueof the vineyard from the grapes; that the price, forinstance, at which he would let his land to a thirdparty, or the number of labourers he could, economi-cally, hire to assist him, is determined by averageproductiveness. Or suppose we value a good sub-jectively, say, at £100, there seems a very goodreason why we should be willing to pay, say, £50for the labour of raising raw material, £40 for

1 It need scarcely be said that it is anticipated product : in moderncircumstances it is of course impossible for the fore producers to waiton final sales, even if makers and merchants did not regularlyanticipate demand ; but this does not affect the logical connection.

xii COST OP PRODUCTION ?i

manufacturing it, and £10 for delivering it. But inmodern divided industry it is, of course, impossiblefor most of the intermediate producers to know any-thing about the marginal utility, or the price whichthe goods will obtain when finished. The labourerpaid 20/ a week for lumbering will scarcely connecthis wage with the price of the delicately carvedcabinet which, among other final products, is theultimate goal of his labour. Even the timber mer-chant, as a rule, will not make his calculations of theprice he can pay for wood with any better knowledgeof its final destiny. But each branch of productionhas an immediate product as well as an ultimate one,and, in the marginal utility and price of this inter-mediate product, it finds its value and price. Thusthough the conduction of value from anticipated finalproduct back to intermediate product, and from thatback to the very first product of all, may remainhidden from each and every producer, the organisa-tion of industry practically carries the informationfrom stage to stage. The weaver finds a market valuealready attached to yarn, and, measuring by that, heputs a value upon his labour and the raw material forwhich he offers. But the cloth he weaves is themeans of production for the next intermediate pro-duct, and gets its value from it again. And so theline of communication goes on down the ranks till itcomes to the final consumption-good.

The proof of this conduction is not far to seek : itis found in the common phenomenon of Dead Stock.However great the cost expended on an article, if thepublic will not have it, all the costs in Christendomwill not give it a value ; and, if the good continues" dead," all the machinery and buildings by which it

72 COST OF PRODUCTION CHAP.

would have been made lose their value, except in asfar as they can be turned to other uses, and getanother value from another product. Even laboursuffers. Whatever the expense of his special train-ing, the labourer can give no value to his work, andloses his wage to the extent that he cannot adapt hisskill to other employments. Suppose that an articleof which there is a stock, goes out of fashion, thevalue and the price of it fall at once. The firstthing the immediate manufacturer does is to askhimself if he can reduce his costs to suit the newprice : if he cannot, he abandons the manufacture,and it passes probably to some man who is able toproduce more cheaply, it may be by reducing wagesand salaries, by new processes and more complicatedmachinery, or, perhaps, by employing womeninstead of men. In any case the cost must conformto the value.

A striking proof of this is given in the case ofsilver. Most people have a dim idea that silver, asone of the precious metals, has a value almost innate.Yet after 1873 mine after mine was abandonedalthough the ores were as rich and the reefs asplentiful as ever. What was the cause ?—Simplythat silver was discarded as currency in certaincountries : that is to say, silver fell in the estimationof great communities, and the loss of value wascarried back till the price realised by the virginsilver was not enough to pay for the mining of it.

Of course the identity of value between final pro-duct and groups of higher and higher rank is notabsolute. It would be strange if it were ; for whereall the groups get their value from the last product,and this gets its value from a thing so inconstant as

XII COST OF PRODUCTION 73

human want and so elastic as human provision, it isto be expected that the calculation which conductsvalue back and back, will, often enough, be mis-taken. Builders tempted, by high freights at a timeof sudden demand, to lay down a ship, must reckonwith the possibility that, ere it be finished, the tideof prosperity may have ebbed, and that the pricerealised for the ship may scarce repay the wages andprices paid in anticipation. And, besides thesefluctuations which cannot be reduced to law, and areoften the chances on which the employer (as dis-tinguished from the capitalist) makes his great profits—and losses—there is one constant difference betweenthe value of the productive groups and that of thefinal product; that is, Interest. With this, however,we have no concern here.

CHAPTER XIII

FROM MARGINAL PRODUCTS TO COST OFPRODUCTION

THUS far the matter has been comparatively simple.We have looked at a concatenation of successivegroups with one final product, and with, of course,one marginal utility and one value. But we havenow to face the fact that productive groups may passinto a great number of final products, each witha different marginal utility and value. The moreindustry is divided, the more is this the case. Pro-ductive goods, such as coal, oil, labour, go more orless to the making of millions of products. It is thisthat gives the Supply side its almost overwhelmingweight in modern economic science. And it is herethat we find the raison d'etre of the law of cost asa convenient abbreviated expression of a deeper law.Let us follow the matter out methodically.

A stock of productive goods, which we shall callX, is capable of producing finished products A, B,and C. The value of these products for the time is,respectively, ioo, n o , and 120. Which productwill determine the value of the productive unit ofX ?—It will be the least of the three. For, supposeso many units of the stock X get lost that it isimpossible to make A, B, and C, the one given upwill, of course, be A,—the employment of X which

CHAP, xin FROM MARGINAL PRODUCTS TO COST 75

produces the least valuable product. Any otherchoice would be contrary to economic conduct.When we say, then, that means of production gettheir value from their product, we must be understoodas meaning the value of their final or MarginalProduct.

But, again, if B and C are articles of large commonmanufacture, they cannot long retain their value ofn o and 120 ; it is merely a question of time tilltheir value falls to 100. Here we begin to see theplausibility of the idea that cost of productiondetermines value.

To put this concretely. A man has a farm of 90acres divided among three crops, which, in the circum-stances of the market, give him three different returns.On 30 acres, he grows wheat, which, we shall suppose,yields him a value represented by 100 ; on another30 acres, he grows potatoes, which yield him, say,n o ; on another 30 acres, he grows barley, whichyields him 120. What is the value of the productivegroup made up of his labour and one third of hisland ? (We leave out of account, for simplicity'ssake, the other co-operating factors.) If the valuewere given to land and labour by the actual returnsthere would be three different values, and this reallyis the case where competition has not its full play.But, if there is no monopolist factor, these threevalues cannot be maintained. The value of the firstproduct, 100, determines the value of the means ofproduction, the labour and land, and it is only aquestion of time and competition till this value ofthe means of production has imposed itself on thepotatoes and the barley, and reduced their price tothe same comparative level as that of wheat.

76 FROM MARGINAL PRODUCTS TO COST CHAP.

Here, then, we have the explanation of the law ofcost of production. It is quite true that, in the caseof goods reproducible at will, or, in our vocabulary,in cases where substitutes are immediately availableeither by exchange or from production, the costs ofproduction determine the value, and the formula isboth true and convenient. All the same, it is merelya particular instance of the universal law of MarginalUtility. In all cases, the marginal utility of the lastproduct economically produced determines the valueof the means of production ; these means of produc-tion then become the intermediate standard ; and thevalue of goods produced from them cannot, in the longrun, be higher than the value got from the marginalproduct.

The practical working of the law may be seen froma personal experience of the writer. In the cottonthread trade, there was for years a demand for athread which should be a fair substitute for the muchmore expensive article, sewing silk. The prices ofcotton thread and of silk thread respectively gavehousewives and shopkeepers a rough guide to a sub-jective valuation, and the figure put upon this demandwas something like 20/. (It could not be more forthe reason that no cotton substitute was able to takethe place of silk in any but a few of its least impor-tant uses.) This price, offered by shopkeepers totravellers, told the cotton-thread manufacturers whatthey could offer to cotton spinners for superior yarns,and what they could afford for more expensivechemicals and polishing machinery. As conse-quence, after many experiments the silk substitute wasproduced, and sent into the market at a price .of 20/.But once those superior yarns were made, the cotton

xin FROM MARGINAL PRODUCTS TO COST 77

spinners, increasing the production of them, foundother outlets. Before long the thread makers sawthat this silk substitute was not the marginal productof those particular yarns : that, in fact, other cottonthreads of lower price were being made from the sameyarns. These yarns then entered into the cost of silksubstitute with the predetermined lower value giventhem by the other finished goods, and., in a short time,the price of the silk substitute fell from 20/ to 18/,in conformity with the value put upon the yarns bythe new marginal product. The same phenomenonoccurs whenever a demand for a new article or amodification of an old one arises, and is interpretedby the enterprise of manufacturers.

CHAPTER XIV

FROM COST OF PRODUCTION TO PRODUCT

IF, finally, we take the case of those most many-sidedproductive goods, Iron and Labour, the proof of ourtheory may be considered fully tested.

Leaving out complementary factors, which do notdisturb the action of the law and would complicateour statement, suppose that iron is the sole productivegood in the making of those various iron wares wefind selling at different prices in the ironmongers'shops. The general opinion is that it is the price ofiron—disregarding other factors—that determines theprice of iron wares, from nails to kitchen ranges.And what we have to prove is that the conduction ofvalue really runs in the opposite direction—from nailsand ranges to raw iron.

Suppose for the moment that the prices obtainablefor these products range from 40/ to 48/ for a givenunit. That is to say : the ton of iron, when manufac-tured into, say, nails fetches 40/, when manufacturedinto other articles, it fetches respectively 42/, 44/,46/, 48/. These prices are the result of the conditionof the market at the moment. The manufacturers ofthese products—we shall call them respectively A, B,C, D, and E—represent the demand for iron, and the

CHAP, xiv FROM COST OF PRODUCTION TO PRODUCT 79

price they will be able to offer for iron depends onthe prices obtained by these articles.

On the other hand, the supply of raw iron held instore will naturally pass to the most capable buyers—the most capable manufacturers of iron wares—at thevaluation of the last buyer. Suppose the stocks ofiron are sufficient to meet the demand of E, D, andC, the valuation of C, ike last buyer, will determinethe price of iron at 44/ per ton So far all has gone toshow that it is the iron wares—through the marginalproduct—which determine the price of the productivegood, iron.

But now we come to a feature which gives coun-tenance to the old theory. So long as the prices ofiron wares—always assuming that iron is the sole pro-ductive group employed in the manufacture—rangefrom 40/ to 48/, while the market price of iron standsat 44/, it is a proof that competition has not done itswork. What naturally follows ? Producers D and Ewho are getting respectively 2/ and 4/ advantage overcosts will increase the output of their particular ironwares till over-supply brings down the price to 44/.On the other hand, producers A and B, who getrespectively 4/ and 2/ less than cost, will curtail theirproduction, till decrease of supply raises their pricesto 44/. Thus, from above and from below, competi-tion is always levelling prices to the cost of produc-tion. Here it is quite true that cost of productionimposes itself on product. What is forgotten is thatthe cost of production is itself first determined by themarginal product.

There is, however, a stronger argument for theold theory. Stocks of iron are not a fixed quantity.If new and productive mines are opened, or new

80 FROM COST OF PRODUCTION TO PRODUCT CHAP.

processes discovered, the supply of iron increases, andprices of all iron products will certainly fall. Doesthis not prove that the value of iron wares is regulatedby the cost of producing iron ?

Here we have a difficult subject to disentangle, andit will be as well to simplify it. Suppose a farmer issupplying a small village with potatoes, and by a newmethod of cultivation manages to double his crop forthe former expenses of labour. What will happen asregards the price of potatoes ? From our knowledgeof what competition does in large production we areapt to say : " prices of potatoes will fall 50%." Thismay be the final result, but not necessarily so, and atany rate the movement of price is instructive. Thefarmer is now able to sell at half the price if he wishes,but it is his interest to keep up the price as long ashe can. What, however, will certainly happen, innormal circumstances, is that he will increase hisproduction of potatoes. But it is not the case that,whatever nature and man produce, men will desire :it is, rather, that what man desires he usually setsnature and men to produce. To take off the extrasupply of potatoes, then, the farmer must find a widercircle of demand than before; but there is nothing tolead us to suppose that there is any wider circle ofdemand at the old price. What we may safelysuppose is that a great many housewives will buyextra potatoes if they can get them cheaper, but, inany case, the decision lies absolutely with themwhether they will take more or not. It is easy tofall into the mistake of thinking that there will bea demand for everything produced if it is sold ata reasonable price, but this idea simply arises fromthe fact that producers anticipate desire and tempt

XTV FROM COST OF PRODUCTION TO PRODUCT 81

demand. In the present case, demand must comefrom some level of want which was not satisfied atthe former price, and is ready waiting to take up theextra supply if the price is brought down.

If, however, as may very well happen—not inthe case of potatoes probably, but in large articlesof limited consumption—there is no such circle ofdemand at lower levels, what will happen is that thefarmer will dismiss half the hired labour, produce thesame quantity of potatoes as before, and maintainthe former high price. For farmers, like other busi-ness men, do not put themselves on " salaries," andgive the public the benefit of all cheapening of pro-duction. It is characteristic of the capitalist employerin all departments that he speculates on having aprofit, and thinks no profit too high, just because, asa speculative gain, it may be balanced any year by asgreat a loss. It is contrary, then, to all experienceto think that employers will voluntarily reduce prices—any more than they will voluntarily raise wage orpay higher interest—because costs have decreased.They only do so under the compulsion of fear thattheir rivals will cut the feet from under them.Where competition is active, it will often seem as ifreduction of costs were almost immediately followedby fall in prices of products ; but, in the last resort—and that is what concerns us in seeking for a universallaw of value—the new prices are determined by thelower and wider levels of want which are ready totake up increased supply of the majority of ordinarycommodities.

Transfer the argument now to the production ofiron. If new mines are opened, the first phenomenonis not a fall in the price of iron, but an increase oi

82 FROM COST OF PRODUCTION TO PRODUCT CHAP.

supply. If the demand from the side of iron wares hashitherto been met at the price—as we must assume—the new extra supply will not be taken off at the price,and there is, for the moment, over-supply. At thispoint, the lower level of demand for iron wareshitherto unsatisfied asserts itself, and offers its sub-jective valuation. This is accepted : a new marginalemployment is found for iron. The price of thismarginal product now determines the price of theproductive good iron ; and in time it is possible forcompetition to impose this marginal value on all ironproducts, and the price of iron wares generally falls.

Lastly, take the case of Labour. Here we have aproductive good of the same nature as iron in that itis capable of employment in an infinite number ofways. The labouring power of a nation, like all itsother productive goods, goes steadily into the mostremunerative employments one after another. But,of all productive goods, labour shows most evidentlythat it has no predetermined value, but gets its valueentirely from what it produces. Consequently, theprice of labour is, naturally, as variable as the priceof its products. Some products of labour will for thetime fetch a price equal to 10/ a day of wage ; others,prices equal to 9/; and so on down the scale, per-haps, to 3/ per day. If the available labour as awhole is taken up at that wage, those products oflabour which pay 3/ per day of price to labour willassert themselves as the marginal products, and thatwage will seem in its turn to determine the value ofother products. But if population goes on increasing,other things remaining the same, and a new supplyof labour comes forward, this labour will inevitablyseek lower levels of demand—for, of all goods, labour

xiv FROM COST OF PRODUCTION TO PRODUCT 83

is the one that will not " keep." On the other hand,there are at any time endless wants waiting onsatisfaction, but not able to pay the marginal cost ofsatisfaction, the 3/ per day. Consequently, as buyerswith a lower valuation than the marginal one, they donot affect price. But now the new surplus supplyof labour and the unsatisfied layer of wants cometogether. Labour is set to satisfy wants that offer,say, 2/6 per day of wage for their satisfaction, andthe products thus resulting become the marginalproducts. Happily for the labourer, competitioncannot do its perfect work where the commoditybought and sold is human life : but, if labour wereentirely mobile, it would only be a question of timetill the marginal product fixed the wage of labourgenerally, and wages fell in harmony with the newmarginal costs—the low wage for what the labourersproduced being, let us hope, more than recouped bythe universal fall in prices of what the labourersconsumed.

CHAPTER XV

CONCLUSION

THUS we have found that what determines the valueof productive goods where the product is one singlegood directly connected with them, and what deter-mines it in the most complicated cases, where theconduction of value is, first, to means of production,and, then, back again to product, is always the mar-ginal utility, the utility of the marginal product. Asthe vineyards of Tokay get their value from the wineof their grapes, and as cotton gets its value from thebare backs it covers, so do iron, coal, and labour gettheir value in the last resort—far as may be the coursefrom post to finish—from the last employment intowhich they enter.

It has already been said that the law developedin the previous chapters is not a rival to that whichmakes value determined by the relations of Supplyand Demand, but a more adequate expression of it.So, in the last three chapters, the emphasis necessaryto prove a difficult proposition may have given theimpression that the present law is put forward incontradiction of the determination of price, in thegreat majority of cases, by costs of production. Itmay, then, be as well to remember that the work ofthe Austrian school is a quest for the fundamental

CHAP, xv CONCLUSION 85

law of value. In the complicated circumstances ofmodern industry, it is not easy to see the real nexusof cause and effect. In a developed market, whereproduction speculates on demand, value naturallyassumes the appearance of being determined before-hand. Human wants are tempted, as it were, insteadof giving the initiative. Thus the impression is easilygot, and with difficulty got rid of, that human wantwill pay the price which production dictates, the factbeing that production must, in the long run, conformto the nature and measure of human want. And thusalso, I am afraid, comes the idea, certainly commonamong the employing classes, that wages are dictatedby them from above, instead of being produced bythe labourers themselves—an idea degenerating inmany cases into the belief that combinations ofworkers to secure their share in the product areillegitimate interferences with capital.

What is contended is that the Law of Cost isa good working secondary law as regards articlesreproducible at will under large and organisedproduction ; that is, of course, as regards the vastmajority of goods produced. But it has always beentaught by economists that it did not hold outsidethese cases. On the other hand, the Law of MarginalUtility is claimed as the universal and fundamentallaw of value. It has not been difficult to prove itsvalidity in the simpler cases ; and if now, in the laterchapters, our law has been shown to be the real back-ground of the empirical Law of Cost, the contentionis justified.

And thus, as representing, however humbly, themodern Austrian school, I may close with the wordswritten by our own Jevons twenty years ago.

86 CONCLUSION CHAP, XV

" Repeated reflection and inquiry have led me to thesomewhat novel opinion, that value depends entirelyupon utility. Prevailing opinions make labour ratherthan utility the origin of value; and there are eventhose who distinctly assert that labour is the cause ofvalue. I show, on the contrary, that we have only totrace out carefully the natural laws of the variation ofutility, as depending upon the quantity of commodityin our possession, in order to arrive at a satisfactorytheory of exchange, of which the ordinary laws ofsupply and demand are a necessary consequence.This theory is in harmony with facts ; and, wheneverthere is any apparent reason for the belief that labouris the cause of value, we obtain an explanation of thereason. Labour is found often to determine value,but only in an indirect manner, by varying the degreeof utility of the commodity through an increase orlimitation of the supply."

APPENDIX I

WIESER'S chapter on the paradox of value (NatiirlicherWerth, i. §§ 7 and 10) deserves more space than couldappropriately be given it in the text. I therefore give thesubstance of it here. Suppose, he says, that I have acertain good the employment of which yields me a utilityrepresented by 10, and that I add successively 10 similargoods to my stock, the marginal utility, at each additiondiminishing by 1. The value of the stock will stand suc-cessively at 10, 18 (9x2), 24 (8x3), 28 (7x4), 30 (6x5),30 (5x6), 28 (4x7), 24 (3x8), 18 (2x9), 10 (ix 10),o (0 x 11). Here, obviously, each added good brings asmaller utility than the last, and at each addition the mar-ginal utility, and with it the value, of the unit of goodsfalls. But while the value of the single good thus steadilyfalls, the value of the whole stock describes a peculiarcourse: it rises from 10 to 30, pauses there a moment,and then falls from 30 to zero. This phenomenon ofincreasing wealth accompanied by decreasing value is aparadox from which we shall not escape so long as weconsider value a simple and positive amount. Value arisesin the combination of two elements, a positive and a nega-tive. It is a combined amount, or, more accurately, aresidual amount. The positive element in value is thegratification from the use of goods. This gratification issubject to a natural law of " diminishing returns " : as thefirst draught of any pleasure is the most grateful, and asthe gratification weakens at every repetition, so a single

88 APPENDIX I

good stands highest in our estimation, and each additionto the stock occupies a lower place. The value of thestock successively may be represented thus—

When the stock consists of^^JLJ.JL.lL.Z.JLjLISil. £oo(*s>the total gratification is 10 19 27 34 40 45 49 52 54 55 55 units.

This would be the movement of value if value weresimply positive : beyond a certain point, additions to thestock would add no value, but they would not cause anyloss of value, and the highest point would come last inthe series. But there is another, and a negative elementin value.

It arises from the indifference which we naturally feeltowards goods. To man only the human is really im-portant : by nature his thought, his sympathy is for him-self ; for things he only cares, in the first instance, as hefinds in them any relation to human interests. Thisinterest may take the form of sympathy with pain orpleasure in the animal world ; or that of religious andpoetic feeling suggesting the unity of all life; or, lastly*that of economic valuation finding in things the auxiliariesand conditions of human wellbeing. This natural indiffer-ence is so great that it requires a peculiar compulsionbefore we look at anything outside us as having import-ance or value. Simple utility is not enough : if usefulthings are present in superfluity, we think no more ofthem than we do of the sand on the sea shore. It is onlywhen our wellbeing is not assured that an interest awakensin the things on which it is seen to depend, and that weexert ourselves to acquire these things. The overcomingof this natural resistance, then, is something with whichwe have to reckon. The greater our need, the less theresistance : in cases of extreme need, it disappears alto-gether, and we identify our fate with the fate of thegoods which "are life or death to us." The resistance isat its height when we have everything in excess, and feel

APPENDIX I 89

no thanks due to goods which cannot help ministering toour enjoyment—for there is no reason why we shouldvalue additional goods unless they give us additional well-being. Between these two extremes, the interest wetransfer to goods is proportioned to the interest we takein what they do for us. But we do not attach to themthe whole of the interest they really have for us : we donot require to do so, for goods of a stock are not estimatedaccording to their actual importance, but according to themarginal utility they afford. All utility over the marginalutility is kept back from the value of the goods, and thisgives us the figures for the strength of the resistance : thenegative element is equal to the surplus value deducted.Thus, when the stock consists of two goods, the actualgratification is 10+9 = 19, while the calculation of thevalue is 9 x 2 = 18, leaving a surplus of 1 : when the stockconsists of 4 the actual gratification is 10 + 9+8+7=34 ,but the value is 7 x 4 = 28, leaving a surplus of 6, and soon. Putting these two scales together we have thefollowing—

Positive (+) 7V tV & A 4*0" A & h A H HNegative ( - ) p i 3 6 10 15 21 28 36 45 55Residual (+) 1 0 18 24 28 30 30 28 24 18 10 0

That is to say, combining the positive and the negativeelements, we get Residual Amounts corresponding to themarginal scale. Thus we see that the value of a stockincreases with the increase of its units so long as thepositive element is in the ascendant: i.e. so long as theincrement of value obtained from the newly-acquired goodis greater than the decrement of value which its additioncauses to every good already in the stock. We may callthis the " Up Grade " of the movement of value. On theother hand, the value of a stock falls in the conversecircumstances, and this marks the "Down Grade" ofvalue. Twice, then, in the development of value is zero

90 APPENDIX I

touched—when we have nothing and when we have all:in the former case, because value has no object to whichto attach ; in the latter, because there is no subjectivemotive to attach it to anything. In practical life, we havemostly to do with the up grade of value. In most of ourpossessions, we are so far from superfluity that increaseof quantity involves increase of value; while the indi-vidual value of the single good sinks, that of the stockrises. And this is the reason why we usually measurewealth and riches by the sum of the values of theirelements, and count it hard if the value of our propertyand our returns goes down. And this, again, is why itseems paradoxical when we find that the amount of goodsand enjoyment of wealth and welfare has increased whiletheir " value " has gone down. It does on rare occasionshappen that individual branches of economy are for themoment forced on to the down grade—as in the case ofphenomenal weather producing a miraculous crop, or thediscovery of new mineral strata of unsuspected richness,or great discoveries in machinery and processes, or,perhaps, the fact of producers extending too fast fromoverreaching greed or foolish overestimate of demand.But it is probable that the conditions of industry, as awhole, will never be favourable enough to bring produc-tion so near excess that the down grade of value will bepermanently entered on. All the same, the existence ofwhat we call the "free gifts of nature" allows us noroom to doubt that value disappears whenever super-fluity is reached, and this gives us the best confirmationof the statement that it must decrease as we come near it

APPENDIX II

THEORY OF VALUE : THE DEMAND SIDE

MANY of the difficulties in the Theory of Value arise fromnot keeping clearly before us that it is a Theory ofHuman Valuation ; of the values which men do—not ofwhat they should—put on things. The idea of " intrinsicvalue " dies hard.

Connection with Wealth.—" Wealth consists of usefulthings." " Wealth consists of valuable things." Bothstatements reflect current views, and both are true, theone suggesting an Inventory, the other a Calculation ofthe same things.

The Problem stated.—Twenty goods, different in sub-stance, size, shape, quality, use, are equal in this, that atwenty-first good, say a shilling, will purchase any ofthem. What is it that puts them in a balance, andpronounces all the twenty-one goods equal in value ?

An Indication.—It has been suggested that Value isthe order of our Preferences. But can one thing, strictlyspeaking, be " preferred " to another unless the two areat equal price ? At any rate, it cannot be said simplicitetthat the ordinary man " prefers " diamonds to his dinner.The suggestion, however, reminds us that we never valueanything by itself ; we always value it by reference tosomething else. Thus, in the last resort, Value expressesan order—a more or less.

Comparison with other Measures.—Measures do not hang

92 APPENDIX II

in the air; they are based on something—a unit pro-claimed by Governments, either quite arbitrarily or ascorresponding to some presumably fixed natural pheno-menon, e.g., the yard and the metre. So, in ancienttimes, the gold talent weighed 120 to 140 food-grains, andwas equated, by convention, to the ox, which was theprimitive unit of value. But this throws no light on thevalue measurement which equated the ox to the talent.(It is submitted, in passing, that the equation was onlyan ideal one—a convenient point of departure; that theox generally exchanged for the talent with a plus or aminus, just as the point of departure for a lawyer's feeis "six and eight pence," or as the 30 acres presumednecessary for the support of a manorial family was thepoint of departure for a " virgate.") The grain basis ofthe gold talent, however, suggests that the value measure-ment also has a natural basis;—that Value is the com-parison and expression of things in a Common Third.What is this Common Third ?

Labour as the Common Third.—A famous theory saysthat value expresses and measures the more or less oflabour " embodied " in goods—the labour involved in thegetting or making of goods. This, however, involves theidea of a Unit of Labour, i.e., it assumes the possibility ofbringing all labour to a common expression—a previousequation. This difficulty seems insuperable, even whenwe look only at one side of the primitive equation: canany labour be more different in amount, intensity, andquality than that which gets gold ? Suppose this over-come, and suppose the similar difficulty of equating thevarious labours involved in getting oxen overcome, whatcommon quality measures these two sets of labours ?When, finally, one tries to weigh head labour againsthand labour, except by the price paid for their results,the full impossibility stands revealed. But, of course, to

THE DEMAND SIDE 93

bring different labours to an equality by referring to theprice paid for their results, is to beg the whole question.Assume that things are valuable and variously valuable,and one may pronounce that the labour spent on themwill be correspondingly valuable; but the previous ques-tion is—Why are the products so variously valued ? Thehold which the Labour Theory took in last century canbe explained, only by its introduction of a moral ideamaking results (prices) depend on that which makes andelevates man, namely, Labour. But it certainly wouldmake Value something very different from Human Valua-tion. (Note in passing that this theory is not to be con-founded with the Cost of Production theory, which,indeed, is the other—the Supply—side of the true theory.)

Life as the Common Third.—When Adam Smith saidthat water had great value in use, and diamonds scarcelyany, he suggested life as the common third. It might,indeed, be possible to draw out a " natural order " ofvalues—a hierarchy of things according to their powerof sustaining an average human life. An animal or aCrusoe might value things in this way. It is evident thatin prehistoric times the ox was adopted as the standardbecause of its measurable potentiality in this respect.But, in any community that we know, " life " is too com-plex to afford a basis ; not only does " living " becomeintellectual, moral, aesthetic, but goods naturally availingto life, becoming plentiful, notoriously lose their value.This, however, suggests the true answer.

Utility as the Common Third.—The common third isUtility. Jevons' words, in his introduction to theTheory of Political Economy (1871) put this succinctly." Repeated reflection and inquiry have led me to the some-what novel opinion that Value depends entirely uponUtility, Prevailing opinions make Labour rather thanUtility the origin of value ; and there are even those who

94 APPENDIX II

distinctly assert that Labour is the cause of Value. 1show, on the contrary, that we have only to trace outcarefully the natural laws of the variation of Utility, asdepending upon the quantity of commodity in our posses-sion, to arrive at a satisfactory theory of exchange, ofwhich the ordinary laws of supply and demand are anecessary consequence. This theory is in harmony withfacts ; and, whenever there is any apparent reason forthe belief that Labour is the cause of Value, we obtainan explanation of the reason. Labour is found often todetermine Value, but only in an indirect manner, byvarying the degree of Utility of the commodity throughan increase or limitation of the supply." Here, however,we must hark back to first principles, and see what wemean by Utility. The question is pertinent, not onlybecause of the misleading meaning given to the word bycurrent opinion, but because of its association with thesupposed materialist tendencies of Utilitarianism—anassociation, indeed, from which economic science stillsuffers.

The Boundary Line in Economics.—Every science, asexpressing the division of labour which rules in thoughtas in industry, must limit itself and specialise. Grantingin the fullest way that men never escape the obligation toethical conduct in the industrial as in the political life,there can be nothing but confusion if we do not draw a line,however arbitrary, between ethical science and economicscience, just as we draw a line between ethical scienceand political science. Let us drop, so far as possible, theword Wellbeing, which is generally taken as explaining" Wealth," and has, in current language and in crudereconomics, become confused with it. Take it from Aris-totle that Happiness is the " end in itself "—the Good forwhich we desire all other things. Men, blindly seekingHappiness, aim, not indeed at Money, but at the things

THE DEMAND SIDE 95

which Money can buy, and these they call Wealth. It istrue that many of these things are as aptly called Illth(Ruskin's word), still the " Illth " is not in themselves,but in the uses men make of them. They are, at any rate," goods," and they often prove themselves " good " byfinding their other uses. What remains beyond doubt isthat men buy goods—that is, express and measure thevalue they attach to them in a money price—because theywant them. Why do they want them ? We may avoidthe ethical connotation of the word Happiness by takinga word which has been hypothecated by economics, andsaying that they seek Satisfaction. Here "Wealth"becomes marked out, both currently and scientifically, asthe " collection of instruments " which aims, rightly orwrongly, at this Satisfaction. We take Satisfaction, then,as the boundary line of Economics—although a limitalways suggests something on the further side. Butwhat is Satisfaction ?

Satisfaction.—Satisfaction is found in men and animalsalike, in the filling of physical wants and the forth-puttingof activities. To these man adds infinite desires—lessurgent, perhaps, but hungrier and more far-reaching thanphysical wants. Mark, however, that wants, desires, andactivities merge into one another—human hunger, e.g., isappetite ; the best life is one long purposed activity,subordinating, but necessitating, the satisfaction of wantsand desires incidental to it.

Goods.—This satisfaction gives us the meaning ofGoods. The reason—and the sole reason—why we wantgoods is that by our constitution we cannot get satisfac-tion without them. Wealth, then, is the complex of goodson which satisfaction is presumed to be dependent.

Law of Satiable Wants.—All wants and desires weakenwith satisfaction, and, if satisfaction is carried far enough,they, for the moment, disappear. Generally, however, as

96 APPENDIX II

our wants and desires are many and various, and as onesatisfaction limits another, we leave off in the satisfactionof any want at a margin far short of satiation. This ispurely a physiological and psychological phenomenon,not an economic law.

Law of Diminishing Utility.—Satisfactions being depen-dent on Goods, we easily reflect the satisfaction on to thegoods, and use the relative word Utility as if it were aquality of goods. Transferring, by the same process, theweakening satisfactions to goods successively presentedto a want (or to similar goods in our possession), we geta statement of a fundamental tendency of human nature,the Law of Diminishing Utility; namely, that the addi-tional utility which a person attaches to a given increaseof his stock of anything diminishes as the stock increases.This is purely an Economic Law; for, physically con-sidered, the goods themselves retain their material contentunchanged, and are not in the abstract less capable ofsatisfying want, if there be want. Thus is explainedJevons' " variation of Utility, depending on the quantityof commodity in our possession," which, in developedexchange, gives us the law that Demand, ceteris paribus,decreases as Supply increases, and vice versa.

A Caveat.—The above analysis corresponds with, andwould be recognised by, current ways of thinking andspeaking; and, since Jevons, it seems to be accepted byeconomists. But it may be granted that Utility might be,and has been, denned differently—as the potentiality ofsatisfying human want; in which case we might speak ofIntrinsic Utility. Here Utility would not rise and fall,but be measured by the properties useful to man whichthings contain ; it would correspond, then, with certainfixed physical elements. But such nomenclature leads usinto the same difficulties as " intrinsic value " does ; andwe should in any case require another word to designate

THE DEMAND SIDE 97

Utility in Jevons' sense. It might be advisable, how-ever, where clearness is required, to speak of EconomicUtility.

Total Utility.—On these lines there is suggested oneway of measuring Utility. Taking ten successive incre-ments of a similar good, the whole stock may be figuredas a sum in addition of Diminishing Utilities, say, 10, 9,8, 7, 6, 5, 4, 3, 2, 1—a total of 55 units of Utility.

Total Value.—Though it may be suspected that Value issomehow connected with Utility, it is clear that the TotalValue of such a stock is not the same as its Total Utility,but something much less. Water, e.g., in spite of thefact that successive increments generally give utilities(though diminishing utilities), is valued at nothing.Supposing the units in the above sum were gallons ofwater, and an n t h gallon were to be added—representingsuperfluity as regards wants—the Total Utility wouldstill be 55, as the final utility of o does not alter the sumin addition. And yet the Total Value, as men call valueor as measured by any canon of purchase or exchange,would be o. This suggests the solution.

Final Utility and Value.—The value of a stock of goodsis measured by the Least or Final Utility—the utility ofthe last increment. The value of the single good is theFinal Utility, and the Total Value is the sum of the FinalUtilities. In the above illustrations, the value of each ofthe ten goods is 1, and the Total Value is 10 ; the valueof each of the eleven goods, on the other hand, is o, andthe Total Value likewise is o. The test always is : If youlose one item, how much value do you lose ? You loseonly the least utility, and, seeing that value cannot begreater than utility, and that all the items are equal, theutility you lose expresses the value.

Two Objections.—(i) It may be objected that there is anassumption here, namely, that Value is not differential like

98 APPENDIX II

Utility. We need to be reminded that we are dealing withhuman valuations, and that, in such valuation, Value isnot differential. When men speak of things having" different values but one price," what they mean is" different utilities but one value " ; things of the oneobjective value or price have different subjective utilities.We certainly find differential values in this sense, thatsometimes one man is charged more than another if hispocket can be forced by necessity or his ability to pay isknown. But this is exceptional, and, in any case, it doesnot apply to one and the same man buying successiveitems of the same goods. (2) It may be objected, in thecase of the eleven gallons of water, that it would notgenerally be acknowledged that the total value wasnothing although the loss of one gallon involved no lossof utility, the proof being that, if the total stock is lost, aconsiderable value is lost. But this is to value the elevengallons together, considering them as a single good,whereas we are considering them as eleven separate goodswith diminishing utilities attached to each. The absenceof value in the eleven gallons, in short, depends on thembeing considered not as one stock of water, but as elevenseparate gallons.

The Paradox of Value.—From this measurement of valueby Final Utility, comes the paradox that the addition ofitems of goods is an addition of value only up to a certainpoint: if carried beyond, the Total Value falls ; and, ifsuperfluity is reached, it disappears. Taking the formerfigures ; as the items successively increase from 1 to 11,the Total Value describes this course—10, 18, 24, 28, 30,30, 28, 24, 18, 10, o ; that is to say, an up-grade till thestock consists of five goods, equality between a stock offive and a stock of six, then a down-grade to zero. Thusone may have less Total Value with many goods thanwith few. The explanation is, as before, that, as goods

THE DEMAND SIDE 99

increase, wants diminish ; the satisfaction dependent onthe last added increment is always less than that depen-dent on the earlier increments—that is, the Final Utilityfalls ; till, in superfluity, no satisfaction is dependent onone item, and the Value of the single item has disappearedbecause its Utility has disappeared.

Illustration.—Take the wheat crop in France in 1817,1818, 1819. The harvest was successively 48, 53, and 64millions of hectolitres (and presumably the Total Utilityincreased), while the Total Value was successively2,046,000,000, 1,442,000,000, and 1,117,000,000 francs.

This should remind us that the effort of the industrialworld, as distinguished from that of the individual, isalways towards the increase of Utility, not necessarily ofValue. The total disappearance of Value, however, isalmost never seen, because, at the worst, articles how-ever useless subjectively, have always the use of exchange.

The Course of Total Value.—As a rule, Total Valueincreases with Total Utility, though not in the sameproportion: the reason being that there are very fewthings of which the community, as distinguished from theindividual, ever has more than enough to satisfy its mosturgent wants. As goods increase, the dependence of thericher classes on them indeed diminishes, but they thencome within reach of poorer people, whose want hashitherto been entirely unsatisfied. Thus an abundantcrop, although the Final Utility may be low, is generallyof much greater Total Value than a short one.

Marginal Utility.—As there are many closely relatedwants, and as the satiation of one would prevent theemergence of others, it is seldom that we completelysatisfy any single want. As one want is being satisfied,it diminishes in urgency till there comes a point whenanother want, not originally so urgent, becomes moreurgent; and having satisfied one want partially, we pass

ioo APPENDIX II

on to the satisfaction of another, and so on successivelyfrom want to want, describing a marginal line in thesatisfaction of each. This is generally—though perhapsdoubtfully—described by saying that, on this line, themarginal utilities are equal. For this reason we replacethe expression Final or Least Utility—which is apt tosuggest satiation or zero—by the expression, MarginalUtility—the margin at which we stop in the circum-stances.

Exchange.—Hitherto Value has been presented as arelation between Satisfactions and Goods. It remains tosay that this subjective valuation beomes objective andexplicit in exchange ; we have, in fact, a definite expres-sion of this valuation in the thing surrendered in exchange.In other words, we need not measure Value by the subjec-tive satisfaction we should lose in losing the marginalitem—we actually do lose the utility we part with in pur-chasing, and this—generally money—names the value.If exchange were by barter, it would be clear that theexchanger surrendered a utility as well as gained one.Take a shepherd and goatherd bartering successive itemsof their flocks; the gain and loss of sheep-utility and goat-utility are quite evident—as is also the diminishingmarginal utility of the items successively acquired and theincreasing marginal utility of the items successively partedwith. When money forms the one side of the exchange,it is not essentially different; the motive always is that thething purchased is considered of greater utility than themoney parted with : that is to say, of greater utility thanall the things that might, in the circumstances, have beenpurchased with the money. But, in this case, the moneyparted with expresses universally the value of the goodsbought, and gets the name of Price. Thus Price, in thispoint of view, is the money expression of Marginal Utility.

Marginal Utility of Money.—Money, like all other

THE DEMAND SIDE loi

goods, diminishes in utility with increase in the amountof it possessed. But the diminution is much less marked,and never comes near zero, because money is not onecommodity, satisfying one want, but is potentially, every-thing that money can buy, i.e., a complex of things satis-fying almost the whole complex of wants. Till we haveno need for anything which money can buy, the marginalutility of money will not sink to zero.

Demand Price.—What we have in actual life is not, ofcourse, individual bargains between two persons, wherethe exchange would be determined by the marginal utilityon each side, and Demand Price and Supply Price wouldbe convertible terms. Still what we have, on the one side,is multitudes of people—each with different valuationsbased on different subjective marginal utilities dependingon different circumstances of want and provision—offer-ing Demand Prices. That they are confronted, in themarket, with another distinct set of prices brings us to theother side of the total theory of value.

Summing Up.—We have, then, passed from Happinessto Satisfaction of Wants and Desires, and from Satisfac-tion to the Goods which condition it. From this emergesUtility, and the analysis of Utility yields up Total Utilityand Marginal Utility. With Marginal Utility we identifyValue. Then we found Value naming itself in somethinggiven up ; that something, in developed civilisations, isMoney, and Price becomes the universal expression ofValue. When we conceive of Price as the sum of moneyseeking after goods, it is Demand or Demand Price.

Demand and Supply.—The above is the Theory of Valuefrom one side, that of Demand, i.e., of Utility expressedand measured in money figures, and offering itself asdemand for other utilities. It accounts for our willing-ness to pay certain prices. But although the tap root ofvalue is Utility—for there can be no value in the absence

IO2 APPENDIX TI

of Utility—there is another side. The sum we are willingto offer—our Demand Price—is confronted with, and at alltimes affected by, another sum, which seems independent—Supply Price, and this latter sum seems determined byCost of Production. These two sides and their mutualrelations are necessary for any complete Theory of Value.Hence Marshall's words : " There has been a long contro-versy as to whether Cost of Production or Utility governsValue. It might as reasonably be disputed whether it isthe upper or the lower blade of a pair of scissors that cutsa piece of paper."

INDEX

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

85.Bohm-Bawerk, 7, 32, 37, 40,

45. 47, 55, 60, 61.

Complementary goods, 42.Consumption goods, 68.Cost of production, 67 ; con-

duction of value from mar-ginal products to, 74 ; from,to products, 78.

Demand Side of the Theory ofValue, Appendix II., 91.

Desirable and desired, 10, 11.

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

Goods, 11, 16; economic, 17;classification of, 21 ; com-plementary, 42 ; stand mid-way between production andconsumption, 68.

Illustrations : sailor and hisdog, 30; Crusoe and hissacks, 32 ; housewife andher butter, 39; silk sub-stitute, 76.

Jevons, 6, 8, n , 32, 85.

Life, 4, 10.

Marginal buyer, 64 ; marginalpair, 60, 64.

Marginal products, conductionof value to productive goods,

Marginal utility, 29 ; level of,40.

Menger, 11, 15, 17, 42, 45, 68.Mill, 2.

Neumann, 7.

Political Economy, based oneconomic conduct, 9.

Price, 55 ; assumptions of thelaw, 56 ; based on subjectivevaluations, 61 ; determinedby the marginal buyer, 64.

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

Satisfaction, the diminishingscale (Sattigungscala), 27 ;Appendix I., 87.

Scarcity, 10, 11, 16, 40.Schaffle's objection, 36.Subjective exchange value, 47 ;

money the typical example,50.

104 INDEX

Supply and Demand, relationof the Austrian law to thelaw of, 65, 84.

Sydney Smith, 2, 3.

Useful and valuable, the dis-tinction emerging, 11.

Utility, 8, 12 ; the supremeprinciple, 13, 14, 24 ; mar-ginal, 29 ; the foreign, 39.

Value, looseness of the term, 1 ;in use and in exchange, 2 ;not an inherent property, 3 ;always a relation, 5 ; sub-jective and objective, 5 ; de-pends entirely on utility, 8 ;analysis of common usage,9 ; the common element,10 ; difference from utility,11, 12; attaches to a feltcondition, 14 ; the centrewithin us, 16 ; a relation ofdependence, 17 ; scale of,18 ; Adam Smith's scale,20 ; where nearty true, 24 ;the true scale, 26; deter-

mined by marginal utility,32 ; paradox of, 34 ; neces-sity of defining what one isvaluing, 35 ; capitalised,37 ; the lowest use, 37 ; theforeign utility, 39 ; of com-plementary goods, 42 ; sub-jective exchange, 47 ; tran-sition to objective, 52 ; andprice, 55 ; price based onsubjective valuations, 61 ;supply and demand, 65 ;cost of production, 67 ;from the past or the futureof goods, 67 ; the conductionof, 70 ; shown by silver, 72 ;conducted from marginalproducts to cost, 74 ; andfrom cost to product, 7884; the fundamental law, 84

Walker, 4.Wants, a demand for satisfac-

tion, 15 ; classification of,19 ; scale of, 20.

Wieser, 13, 28, 32, 45, 46, 47,51, 62, 87.

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