Economic Doctrines - Schumpeter

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Western thought, from metaphysics to science, must end, must "close", must

"com-plete", "satis-fy", "ful-fil", "ex-haust" itself with the conceptualisation of

totality, of the "Ab-solute". The Ab-solute is what is not "conditioned" by anything

else, what iscausa sui (its own cause), both in the sphere of logico-mathematics

and science (Leibiniz'sintuitus originarius that does not admit of "predicates" andtherefore is entirely "self-evident") and in the sphere of human praxis (Kant's

"autonomous" Practical Reason guided by the Will, which is the union of the

posse[I can] with thenosse[I know] in thevelle[I will]). The Will is the ultimate

ex-pression of "freedom" - it is "the freedom of freedom", "the power of the

freedom of the Subject that "knows itself". Of course, whatever is "self-evident"

does not allow of ex-planation in that thedefiniensis in thedefiniendum and vice

versa. The Ab-solute is therefore "ab-solved" from the "need" to explain itself -

just as the prince is "ab-solved" (a legibus solutus) from the laws because he is

"above" the law.

The error that the Classical and Marxian Economics committed was to presume

that their "subject-matter" (itssub-iectum), its "quidditas"is actually a Sub-stance, a

homogeneousqualitas occulta - and it presumes as much because it starts from the

phenomenology of capitalist social relations of production which are "co-

ordinated and measured" bymoney.Every classical economist from Smith to

Marx started from the factthat every "thing" that is exchanged in the market has a

"price" and that therefore all "things" on the market must have a homogeneous

"Value" - and that this "Value" must be the "subject-matter" of a "science of

Economics"! This essentialism is precisely what distinguishes Classical from Neo-

classical economic theory, as we are about to illustrate through Weber and

Schumpeter.

Weber’s central failure was not that he mistook “scientificity” for “science”, for its

corresponding “practical conduct” – which mostly he did not! Weber’s failure

was rather that his insistence on “categorizing” his “scientific pursuit” with the

introduction of the “ideal types” distracted him from the fundamental question

of how theRationalisierungis possible! This failure led him to reify, to hypostatize

the historicalobject of his studies into the “scientific categories or forms” or "theideal types" that he presumed to adopt for that study – ignoring thereby

Nietzsche’s famous warning against “systematizers”! Essentially, Weber mis-

interpreted(!) Nietzsche’sUmwertung(trans-valuation ofall values) to mean that

“all values areinterpretationsof reality”, and that therefore it is possible for the

“scientific observer” of a given historical reality to select a hermeneuticcode of

interpretation (the ideal types) linkingrationally the means available to its



“actors” with the “pro-jected ends” that they may envisage. Yet, as Nietzsche

would have promptly reminded Weber, this framework of analysis (Entwurf), this

“phenomenalism and relativism” starts from the pre-supposition that such a

“rational code” of interpretation is both possible and applicable – which

Nietzsche would vehemently deny on the ground that it is the very possibilityandapplicability of this “rational code”itself to a given historical reality – itseffectuality

- that needs to be interpreted and explained as themathesis universalis(Leibniz),

as therationalization of the worldthat is based on humanneeds, on the “system of

needs and wants”! In Nietzsche’s own words,

“It is our needs that interpret the world ; our instincts and theirimpulses for and against,” (Aphorism 481, Wille zur Macht ).

Weber’s Neo-Kantian hypostatization not only of his sociology but above all of

“the scientific fields of knowledge” to which he sought to apply it – fromeconomics, to law, to music – is induced fatefully from this inability tocom-

prehendNietzsche’sUmwertung, his thoroughgoingDe-struktion (Heidegger) of

Western metaphysics and science and the related critique of WesternKultur and

Zivilisation. It should come as no surprise, then, that it remains suspended, as we

noted earlier, between theDezisionismusof “charisma” derived from the

individualist relativism and the Neo-Kantian formalism of the “ideal types”

necessitated by Weber’s needto groundthis hermeneutic relativism onlogico-

mathematical– hence, “rational and systematic”, “scientific” - bases. What Weber

fails to com-prehend above all else is precisely thehistoricalcharacter of “themetaphysical foundations of logico-mathematical rationality” whose political

origins Nietzsche had made all but evident.

A brilliant illustration of these points is provided by Norberto Bobbio who, inreviewin !elsen"s atta#$ on %eber"s theory of the &tate and so#ioloy of lawin 'a %eber e *ans !elsen" (p.+), #on#edes that %eber"s Neo-!antian or&immelian 'formalism" enti#ed him to his detriment into the !elsenian'Norms", but that at the same time %eber"s positivism” was premised on thefa#t that capitalism represents a histori#ally spe#i/# intensi/#ation of this'positivi0ation"of the uridi#al norm, in line with its easperation of the

Rationalisierung (p.++) 2 whi#h is theoreti#ally a far more #onsistent andNiet0s#hean position for %eber to ta$e. Commenting on Kelsen’srequirement that ‘co-action’ be added to the denition of ‘legalnorm’ (the famous Grundnorm) so as to equiparate the concepts of‘ight’ !ith ‘"a!’ and therefore also !ith that of ‘#tate’$ %obbiogoes on to reason (at p&') that eber’s notion of ‘apparatus’(bureaucrac*) must be added to Kelsen’s ‘co-action’ for thisequiparation of ight$ "a! and #tate to ha+e an* historicaleectuality , %obbio then comes uncannily close (at p&') to the



central thesis of this stud* on the meaning of Rationalisierung$ whi#hwe have enu#leated in our Nietzschebuch (and will illustrate more in#isivelyin 3arts wo and hree of our study on %eber). 5n a nutshell, Bobbio

perceives without a#tually #omprehendin that the notion of 6iht or 7aw orthe &tate reuires the eisten#e of appropriate 9institutions9 that 9en-for#e9these abstra#t #on#epts. he uestion that needs to be answered is how

politi#al enfor#ement #an 9#rystalli0e9 or 9#oneal9 into abstra#t #on#epts andhow abstra#t #on#epts 9dis-solve9 themselves into politi#al institutions. his iswhat Niet0s#he attempted and others in#ludin ar did not.Separately , by dis#ussin Kelsen’s claim that his jurisprudence is intended toapply both to capitalist and to socialist States, Bobbio helps us hihliht thelin$ that we are about to tra#e in the followin se#tions, dealin with the#laim on the part of Neoclassical Theory to apply eually to both capitalistand socialist !economies’ , between Neo-!antism and Neo#lassi#al :#onomi#s;

It cannot be doubted seriously that Marx was aware of the impossibility of

reducing objectively, physically,heterogeneous labor to ahomogeneous substance.

Indeed, Marx counted this, the discovery of theDoppelcharakter of the

“commodity” labor power (its being at once living labor that “valorizes” capital

and “labor power” that is exchanged on the market), as perhaps his greatest

achievement. It is just as certain, as Colletti has noted, that for Marx value was a

“social hieroglyph” that, like God or the soul, has no material existence and yet is

“objective” in that it conditions and guides human action. But, and here is the

crux, this theory of value is inconsistent with the notion of market competition.

One of two things:-either “market competition” is regarded by Marx as an

autonomous and spontaneous sphere of activity notenforced politically by one

class against another, in which case it is anaporeticconcept because“competition” invariably ends up “destroying competition” (!);or else “market

competition” is a sphere of activity thatis “politically enforced”, in which case,eo

ipso, there can benocompetition as a realitya se stante (that can stand on its own).

Yet Marx worked precisely on the grim assumption of the Law of Value, that

capitalist society reproduces itself through the operation of the self-regulating

market, especially its “pessimistic” feature – competition (thedira necessitas).

Consequently, he had to persevere with his inconsistent theoretical framework

because to have done otherwise, to have accepted that value is an entirely political

category and that the capitalist economy is operated by concrete and identifiable social institutionswould have meant for him to be lowered once again into “the

kingdom of shadows”, into the shadowy world of the Political which he despised

and spurned because he identified it mistakenly with the public sphere of

liberalism founded on the “optimistic” features of the market (commutative and

distributive justice).



(<f #ourse, ar falls into this s#ientisti# trap” in "as Kapital, but enerallynot in the #rundrisse whi#h are therefore mu#h to be preferred as theeposition of ar"s overall theory of #apitalism. 5n#redibly, in Natural 7awand 6evolution”, now in Theory and $ractice, *abermas arues that it wasar"s /ndin of the the%t of labor time” in the pure e#hane” #ateoriesof boureois law that dis#redit=ed> so endurinly for arism both the idea

of leality and the intention of Natural 7aw as su#h that ever sin#e the lin$between Natural 7aw and revolution has been dissolved”; *abermas, who isalmost entirely innocent of e#onomi# theoreti#al trainin, #annot see thatindeed it is that side” of ar"s theory and of &o#ialism that believes in thefable of the theft of labor time” that then must ne#essarily believe, vi rerum =by for#e of thins;>, in the leitima#y” of leal #ateories 2 /rst amonthem, the belief that the wor$er owns the fruits of his labour”, whereas inreality no su#h ownership” is tra#eable or indeed evident. hismis#on#eption draws *abermas"s analysis ba#$ into the orbit of Arendt"sliberalist and usnaturalist” rendition of the histori#al reality of revolutions”;*abermas manaes therewith to undo the valid #ritiue of Arendt"s &nRevolution that he had epounded in his essay "ie #eschichte von den zwei

Revolutionen. &ee also dis#ussion of these themes in 3art hree of ourWeberbuch.)

We should note further how the German Historical School and other early

opponents of Neoclassical Theory objected to it on the ground that “utility” is a

“homogeneous” entity whereas in fact the “motivations” behind “economic

action” are quite evidently “heterogeneous” (see Schumpeter’s account of this in

the last chapter of hisEconomic Doctrines).One of the constant objections to

capitalist enterprise is precisely this – that it “reduces” all aspects of human

social interaction to the “homogeneous” pursuit of “profit”. Clearly, what these

‘critics’ fail to do is to confront the central question that we are addressing here –

that is, how such a reduction of the heterogeneity of human activity to

“homogeneous” and “rationally calculable enterprise” or “profit” is at all

possible! Here again Weber makes the colossal Neo-Kantian mistake of assuming

that there is a specific “form” of human “knowledge” or “action” that is

singularly “economic” – just as he conceded to Kelsen that there is a specific

dimension of human social activity that is “legal”! Weber simply mistakes what

are mere and highly contingent “institutions” of human groupings – the

“economy” and “value”, the “law”, “the State” and “power” – for hypostatic and

ineluctable “forms” of human knowledge that a social scientist or “observer” can

analyze in their epistemological specificity and “autonomy” from other

“disciplines”! The fact that a great mind such as Weber’s never even posed itself

the question as to how and why “utility” could be adduced as the “ectoplasm”,

the “metaphysicalquidditas” that could constitute the “subject-matter” of the

Economics bears witness to the ability of the social production of “exchange



value” and its politically-enforced transmutation into money, then money capital,

and then profit, to mystify human social relations – as Marx took pains to

emphasize.

With Knies

the matter is somewhat different. His resistance to the splitting up

of the personality into individual 'urges' and to their treatment in

isolation—although we must stress the fact that this does not constitute

the essence of classical economic thought, as Knies thought

—and the emphasis which he places on the vital part played by

non-economic elements even in the field of economics (Heteronomy

of Economics) places him more closely to the genuine historicalschool. (p.!"#

$he general picture of the economic process as presented by the

supporters of the theory of marginal utility, that is, in particular their description of the different types of members of the economy

and their roles, all this is not substantially different from the classical

picture. $he theory of marginal utility, however, places the

main emphasis on a comple% of problems which the classical economists passed over too lightly, namely, the foundations for the

determination of value and price. $he classical economists, especially

&icardo and his group, were content to point to the effect of

free competition and to maintain that from it resulted a definitelaw which determined the amount of value and price. rmed with

these conceptions they immediately seied some great ob)ective

facts and tendencies, such as the price of corn, the number of

wor*ers, etc., which were determined by the law of populations or

the law of diminishing returns from land, and which they tried to

combine into a picture of the concrete laws which governed prices

and incomes.

$he theory of marginal utility attempted in the first place to

investigate in detail the various groups of events which result from

the basic facts of economic activity, without at first introducingadditional concrete data. +t placed the e%planation of the nature of

price determination and of the various forms of income into her forefront and headed therefore in a different direction from the

beginning. $hus a different and much 'purer' economics originatedwhich contains much less concrete and factual material and accordingly

offers considerably fewer summaried practical conclusions,

but is immeasurably more firmly founded. lso from this newHISTORICAL SCHOOL AND MARGINAL UTILITY 189

point of view the reciprocal relation between the various units in

the economy was revealed far more clearly and it became more



evident that many rigid causal chains of the classical economists

could not be accepted. oreover, their nave conviction that only

the great ob)ective facts were important, while the process of price

determination contained nothing very relevant, was shown to be

unfounded.$he theory of marginal utility in addition completely abandoned

those averages and appro%imations which had given such a semblanceof precision to the classical doctrine. ll this means that the

classical picture of economics was not merely elaborated and supplemented

but that it was in fact corrected. $his correction, however,

rendered some classical conclusions irrelevant and proved

others as false, although it was not possible to replace them by

similarly brief propositions. $he representatives of the theory of

marginal utility from their point of view perceived much more

clearly than the classical economists had done, that conclusions

depend on the concrete data which themselves must be derived

from case to case from the material of the facts of place and time

and cannot be established once and for all in a definite manner.

$his *nowledge, which certainly demands humility from us, assumedin the parlance of the opponents, the form of a charge that

the theory of marginal utility was 'barren'.

$he second essential difference between the new and the old

theory is the abandonment of the conception of the uantity of labour as the factor which regulates and measures the value of

commodities—not to mention other /cost theories'—and the emphasis

which was given to the consideration and the development

of the conception of value in use. $his shifting of emphasis on to

the doctrine of 'sub)ective values' in economics produced four

advantages. +t is more correct because the various cost theories are

valid at best only appro%imately and never base the phenomenon

of cost on those facts which really e%plain it. +t is simpler becausethe labour value theory in particular necessitates a number of au%iliary

constructions which now simply disappear. +t is more general

because all cost theories refer in the first place only to those commodities

which have been produced in free competition, and in190 ECONOMIC DOCTRINE AND METHOD

part to those commodities only which can be increased at will.

0urthermore, they are valid only for periods of a certain duration.

$he doctrine of sub)ective value, on the other hand, comprises in

an eual manner all commodities, whether produced under monopoly

conditions or not, whether capable of being increased or not,

and for long as well as for short periods. 0inally, the theory of

marginal utility ma*es economic conclusions more relevant, becausefor most problems the conditions in which wants are satisfied,

and the way in which these wants change, are more important

than changes in the uantity of labour which is contained in the

commodities the consumption of which produces this satisfaction.

$he theory of marginal utility accepts value in use as a fact of individual psychology. +t is basically nothing but the law of satiated

wants as formulated by 1ernoulli, 2ossen, 3ennings and other

'forerunners!. $his method of starting from a fact of individual



psychology led to two groups of ob)ections. 0irstly, the general

ob)ections to individualism and atomism were levelled especially

against this school. +n this respect an adeuate distinction between

political individualism, the view that individuals are independent

causes of social phenomena which represent merely a resultant of these causes, and the mere method of starting from the individual

for purposes of pure economics, was not made. $he representativesof the theory of marginal utility reacted to these ob)ections

in different ways. 4ome ignored them altogether, others tried to

deny their validity or importance in principle, still others attempted

to ta*e them into account by stressing the social element as much

as possible.

mongst the latter we must mention in particular the group

which employs the term of 'social use value' and stresses the valuations

of the social groups as opposed to those of the individual

(v. Wieser, similarly the school of 5lar*#. We cannot go into the

contents of these discussions. 6et us merely mention that there is

a special variety of this charge, represented by the assertion which

is often made in ar%ist uarters, that the theory of marginal uti-1 This law was—rightl !r wr!"gl—ass!#iat$% with th$ &'s#h!('hsi#al&

)asi# law* O" this '!i"t #!+'ar$ M* ,$)$r- &Di$ Gr$"."/t.$"l$hr$ /"%

%as 's#h!'hsis#h$ Gr/"%g$s$t.&- Archivfur Soiialwissenschaft y 1908*

HISTORICAL SCHOOL AND MARGINAL UTILITY i9i

lity is nothing but a description of the mentality of the employer

and that by its individualist point of departure its representatives

ma*e it impossible for themselves to see the great ob)ective conditions

and results of the economic process.

4econdly, because of its starting point the theory of marginal

utility became associated with psychological and philosophicalHedonism. +ts representatives are often called 'hedonists'. $his

first of all implies the charge of having dragged psychological considerations

into economics at all and, furthermore, of being concernedwith an antiuated and erroneous psychology. ost of the

marginal utility theorists tried to point out in reply that they did

not turn into 'psychologists' merely by starting from a fact of

psychological e%perience, others tried to avoid any statements of

a psychological character altogether and to proceed strictly from

basic economic facts that could be observed from the outside.7

8nly a few reveal a relation to utilitarianism, amongst them above

all 3evons. We could, however, replace his utilitarian creed by a

protest against utilitarianism without having to abandon one single

economic conclusion of his. $here was an additional charge against

the *ind of 'psychology' which was found in the wor*s of the

marginal utility theorists9 this charge refers to its rationalist character.$here is a parallel development in the modern school of

professional psychologists (einong, :hrenfels and others#. ;et, as 1ort*iewic in his wor* on ar%, which we uoted above, )ustly

points out, however 'insipid' the capitalist manner of calculation may be, its

importance for capitalist reality is no less for that. 0urthermore, we havealready repeatedly stressed the fact that ar%' argumentation depends also

on definite assumptions regarding individual behaviour and that these assumptions

can be e%pressed most naturally in the language of individual psychology.



7 $hus <areto, 1arone, uspit, 6ieben and others. =ietel declaredalready in his reply to Wieser that the marginal utility theory as 'psychology'

did not belong into economics. 5ompare on this point Wieser, '=as Wesen

und der Hauptinhalt der theoretischen >ational?*onomie', Schmoller's Jahrb,@, 1?hm-1awer* in the third edition of his Positive Theorie, @7, p. AB,

et. seq., 'Hedonismus und Werttheorie' and 'Wertgr?ssen und 2efChlsgr?ssenDost of the ob)ections against the psychology of the marginal

utility theory are summed up in 6ifschit' treatise9 Zur rl!" #er $%hm& $aer"schen erttheorie @BEF compare for this my review in the Zeltschrlft fur *ol"slrtschaft, Solal+olit" un# *eraltun- @B.

G*

19 ECONOMIC DOCTRINE AND METHOD

Within the theory of marginal utility itself a rift revealed itself

which went bac* to a classical influence, centred round 4enior and

5airnes. While the ustrian school too* merely the element of

the use value of products as the basis of their e%planation, 3evons

already placed ne%t to it the element of 'disutility of labour' as a

second factor in the formation of the value of commodities in connection

with his basic conception of economics as calculus of pleasure

and pain. nd some of the later thin*ers, especially arshall,

further added the element of 'having to wait', 4enior's abstinence.$his conception prevailed in :ngland and merica (cf. besides

arshall also the article by :dgeworth9 '<rofessor 1?hm-1awer*

on $he Gltimate 4tandard of alue', Economic Journal, E@", and

5lar*9 $he Gltimate 4tandard of alue', ale /evie, E@7#,

but with these authors it is essentially based on the same foundations

as is the pure theory of use value, even if without doubt

we can discover in it remnants of the cost theory. 8nly for the

problem of interest does this perhaps involve a considerable

difference.

+n connection with the discussion about the admissibility or

possibility of introducing psychological factors into economics

there stood the uestion of a standard of value. $his uestion becameessential as soon as the theorists saw the e%cellent ob)ectivemeasure of labour vanish. :ven before 4mith people had discussed

the uestion of a standard of e%change value and it had been recognied

that there could be no standard that was unchangeable in

itself. ll the classical writers taught this, while the old supportersof the theory of value in use, as e.g. 4ay, insisted on euating the

e%change value of a commodity simply with the uantity of goods

which it was possible to obtain for it in the mar*et. +t was, however,

simply considered impossible to measure the value in use,

although in practice everybody definitely compares values of commodities

with each other. $he psychological theory of value now

seemed to demand such a standard of value in use also in economictheory. gainst this doubts were raised whether it was substantially

possible to measure 'uantities of intensity' and in particular whether

valuations of different people could actually be compared. ;et

5f. 1?hm,1awer*,':%*urs' +I in the third edition of the Positive TheoryH+4$8&+56 45H886 >= &2+>6 G$+6+$; @A

there is really no need for such a comparison and in measuring the

valuations of one person it is uite possible to proceed merely from

facts that can be observed if we start from the following formulation9



$he value of a uantity of a commodity for somebody is measured

by that uantity of another commodity which ma*es the

choice between both a matter of indifference to the economic individual.

(0isher, 0athematical 1nvesti-ations into the Theory of

Prices, E@7.# $his method of basing the measurement of valueson acts of choice of the individuals gained more and more adherents

(<areto, 1oninsegni and others#. ;et it is possible to overcomethe difficulties of the problem also in a different way.

$he primary fact with which the theory of marginal utility is

concerned and in which its fundamental achievement consists and

on which everything else is based, is the proof that in spite of

appearances to the contrary the factor of wants and as a result from

this the utility character of commodities determine all individual

occurrences in the economy. t first it was necessary to deal with

the old antinomy of values, the opposition between utility and

value. $his had already been done. $he distinctions between categories

of want and the incitement of want, between the total value

of a store and the value of partial uantities of which the store held

by the economic individual is composed, help to overcome thisopposition. +n this lies the importance of the conception of 'marginal

utility'.7 $hus all facts relating to the determination of prices

could be e%plained with the help of the basic principle. +t is true,

however, that there never had been any doubt that those facts onwhich the 'demand side' of the problem of price is based could

be e%plained with its help and this had usually been considered as

self-evident. 1ut it was only the theory of marginal utility which

based the 'supply side' of the problem on it and conceived costs as

phenomena of value. +n this respect the decisive achievement—

mostly overloo*ed by the critics—lay in the proof that the esti-

5ompare 5uhel, Zur 2ehre von #en $e#3rfnissen, @B"F on this :%*urs I

in 1?hm-1awer*'s treatise, uoted above.7 +n 2erman 4reninutien y in :nglish the term 'final utilityJ was formerly

used, in 0rench raret5, utilit5 limite. <areto coined the e%pression o+helimit5elementaire, in order to e%clude the secondary meaning of the terms 'value'

and 'utility'.19 ECONOMIC DOCTRINE AND METHOD

mation of commodities according to their costs, which is so predominant

in economic life, is merely an e%pedient abbreviation of

the real correlation, that this correlation is e%plained with the help

of the element of value in use, that the calculations of the entrepreneur

are merely the reflection of valuations on the part of the

consumers, and that in cases in which somebody estimates a

commodity according to the value in use of commodities which he

can obtain for it in the mar*et—sub)ective e%change value—the'e%changeability' and with it the sub)ective e%change value is

based on alternative estimates of the value in use. $his led to a

uniform e%planation of all occurrences in the e%change economy

with the help of one single principle and in particular also to a

classification of the relation between costs and prices. $he classical

law of costs—the proposition of the tendency for costs and returnsto euate in free competition—only now received a cogent

)ustification and its deeper meaning. +f, therefore, the interaction



of supply and demand has been compared to the co-operation of

the two blades of a pair of scissors (arshall# no opposition to the

theory of marginal utility was implied as long as both were based

on the same factor, that is, as long as the costs of any production

were euated with the resulting utility of those productions whichwould otherwise have been possible with the same means of

production (opportunity cost, displacement cost#.7 ;et as most +t has been said repeatedly that the theory of marginal utility because itstarts from the valuation of given uantities of goods disregards the process

of production and is unable to e%plain how these uantities come into being.

;et the assumption of given uantities of goods merely serves as an introductorydemonstration of the law of marginal utility. t a further stage these

uantities of goods become un*nown factors, and the investigation of the

causes that determined them becomes the main problem, as appears particularlyclearly in the system of Walras. +t has further been said that the theory

of marginal utility ma*es the value of the various goods depend only on

their uantity and neglects the influence which the e%istence of other goodse%ercises on them. $his li*ewise is only true as far as preliminary discussions

are concerned. t a further stage the value of any commodity is treated as

an element in the total economic situation of every individual (cf. in particular

arshall and <areto#. >either does the fact that supply, demand and price mutually influence each other constitute on ob)ection against the theoryof marginal utility, although it is usually stated as such. C2* Da3$"'!rt- Value and Distribution^ 1908*

HISTORICAL SCHOOL AND MARGINAL UTILITY i94

:nglish authors base the 'supply side' of the problem on the independent

element of disutility of labour and postponement of en)oyment,

the formulation referred to is usually put forward in

the form of an ob)ection. $he material difference, however, from

the pure theory of value in use, revealed by this attitude, is, as has

been said already, e%tremely small.

8n this basis there emerged above all a solid theory of price

which had been lac*ing in the system of the classical economists.

+t was created in particular by 1?hm-1awer* and Walras and has been carefully elaborated ever since. We cannot describe its contents

here and should merely li*e to emphasie that apart from

numerous individual achievements (theory of monopoly, theory

of devolution of ta%es, of international values and of transport

tariffs# it helps us to obtain a comprehensive survey of the economic process, in comparison with which the classical theory merely

has the significance of having stressed some special cases one-sidedly.

+t described for the first time the interaction of individuals

and functions within the organism of the national economy accordingto clear concepts and on the basis of a uniform principle of

e%planation. +t is true that it is far less 'concrete' than the theory

of the classical economists had been and that only a collection of facts, particularly of a statistical nature, can give to it that factual

precision which is reuired if we want to gain more than a general

understanding of the nature of the economic process. 4o far there

have only been beginnings in this direction but the theoretical

structure has almost been completed. &eally important controversies

no longer e%ist within this theory of price.

$he basic idea of the theory of marginal utility does not force

its supporters to adopt a definite position with regard to the problem



of money and can be employed within the framewor* of any

theory of money. $he special features of the problem of money

ma*e it possible for different solutions to emerge from the same

comple% of principles. 5. enger (rticle '2eld' in Han#%rterb

6uch #er Staatsissenschaften) developed the theory of money inone direction—we may employ a terminology which has become

customary and describe it as 'metallic'—3evons, <areto and manyothers also hold this position. ;et in addition a completely dif-195 ECONOMIC DOCTRINE AND METHOD

ferent theory of money developed ( Walras, Weser# in which the

material value of money plays an entirely subordinate part and

which e%plains the way in which money determines value as the

result of its function in the organism of the national economy. $he

uantity theory of money had already attempted to do this in its

way but it merely stated a rigid appro%imative formula of little

e%planatory value. $he aforementioned new theory, on the other hand, tried to go to the root of the matter in a way similar to the

modern theory of value which stands in uite an analogous relation

to the classical law of price. $his new theory had contactswith a general movement in this field. 2radually and silently—in

:ngland, e.g., almost entirely through gradual changes in the oral

teaching—new conceptions established themselves which have

produced a rich harvest. mongst these we may mention Knapp's

Staatliche Theorie #es 4el#es, @B!, which attracted the attention

of the public at large. While the systematic literature of the sub)ect,

as shown by the wor*s of Helfferich, artello, 6aughlin,

0oville and others, predominantly maintains the old point of view,

the discussion of currency problems—6e%is, 6ot and others—

gradually brought the ma)ority of economists nearer to the new

point of view.

$he problem of distribution is the most important one in thenew economic theory as it had been in the old one. Here the theory

of marginal utility established its basic conception uniformly in

opposition to the special e%planations of each separate branch of income given by the classical economists. +n doing so it too* over

the inheritance of the 'theory of the productive services'. $he

latter, however, had foundered on the ob)ections that the 'shares'

of the various factors of production are ine%tricably mi%ed up in

the product, or that it is altogether impossible to tal* of such

'shares', because in fact all means of production are eually important

for the production of the commodity, and that the productive

services have nothing to do with the rewards of the owners

of the factors of production. >ow, on the other hand, it was possibleto prove with the help of the marginal analysis that we can

attach a precise economic sense to the e%pression 'product of a

factor of production' and that in fact in everyday economic lifeHISTORICAL SCHOOL AND MARGINAL UTILITY

a distinction is made between such shares of the various factors of

production.

$he theory of price then did the rest by proving that the value

of the productive contribution of the various factors of production



really forms the basis for the formation of incomes. >evertheless

the ob)ection that individual contributions of the factors of

production cannot really be distinguished has sometimes been

maintained until our own days. 8n the whole, however, we can

say that the e%planation of the branches of income and of their sie with the help of the 'marginal product! of the factors of production

has become an undebatable commonplace, especially inthe merican, :nglish and +talian literature, but also in that of

0rance.

atters are different with the theory of 'imputation' (Lurechnung#

which is characteristic of the ustrian wing of the supporters

of the theory of marginal utility (enger, Wieser, 1?hm-

1awer*#. $his theory is supposed to form the bridge between the

values and prices of products and those of the means of production

and to indicate the rules according to which the value of the product

is as it were reflected in the value of the means of production.

lthough we do not find in the other groups of the marginal

utility school investigations of this point and the term 'imputation'

is mentioned by them only in passing or even in a hostile way, wefind everywhere, nevertheless, the heart of the matter, e.g. in arshall's

'principle of substitution' and in 5lar*'s 'law of variation'.

$here are hardly any really serious differences about these basic

principles, however little the fundamental unity appears on thesurface. $here are such differences, however, on one point, which $here is essential agreement on the theory of wages and rent. Wageseual the marginal product of labour. $he theory of ground-rent indeed did

not completely emancipate itself from the form which &icardo had given to

it, but the characteristic statement that rent does not enter into price lost its

significance, so that even in authors who formally clung to &icardo, as didarshall, the connection between productivity of the land and rent is established.

+n modern theory the conception of rent plays a large part. 4ince

indeed the classical economists had already applied the marginal analysis to

the ground-rent the modern theory of distribution sometimes appears under the aspect of a generaliation of the classical theory of ground-rent, with the

difference that the law of diminishing marginal utility replaced or suppleECONOMIC DOCTRINE AND METHOD

is actually vital for our entire insight into the social process of the

economy and the economic structure of society, the problem of

interest on capital. +n EEM there appeared 1?hm-1awer*'s critical

wor* which established not only the untenable but also the superficial

character of the e%isting e%planations of interest and opened

a new era for the theory of interest. $his boo* and the one entitled

Positive Theorie, which followed four years later, trained

numerous theorists of interest and hardly a single one remainedunaffected by them. 8f all the wor*s on the theory of marginal

utility these two volumes had the deepest and widest effect. We

find the traces of their influence in the way in which almost all

theorists of interest phrased their uestions and proceeded to answer

them. $here are signs of this influence even in those writers whore)ected the concrete solution of the problem of interest as offered

by 1?hm-1awer*. $his solution is based on the fundamental idea

that the phenomenon of interest can be e%plained by a discrepancy



between the values of present and future consumer goods. $his

discrepancy rests on three facts9 first, on the difference between the

present and the future level of supplies available for the members

of the economy, secondly, on the fact that a future satisfaction of

wants stands much less vividly before people's eyes than an eual but present satisfaction. +n conseuence, economic activity reacts

less strongly to the prospect of future satisfaction than to that of present en)oyment and the individual members of the economy

are in certain circumstances willing to buy present en)oyment with

one that is greater in itself but lies in the future. $he discrepancy

between present and future values is, thirdly, based on the fact that

the possession of goods ready to be en)oyed ma*es it unnecessary

for the economic individuals to provide for their subsistence bymented the law of diminishing returns. $his is particularly true of themerican theory. 5ompare 3ohnson, '&ent in odern :conomic $heory',

7merican Economic 7ssoc. Pub2 @B7#F 0etter, '$he <assing of the 8ld

&ent 5oncept, 8uarterly Journal of EconomicsN, @BF 5lar*, '=istribution as

=etermined by a 6aw of &ent' (ibi#em, ol. !#. We might in addition mentionthe application of the conception of rent to that of the sub)ective gain

in utility derived from e%change and production. (arshall's consumer surplus.#HISTORICAL SCHOOL AND MARGINAL UTILITY 199

producing for the moment, e.g. by a primitive search for food.

$he possession of such goods enables them to choose somemethods of production which are more profitable but are more

time-consuming9 the possession of goods ready to be en)oyed in

the present guarantees, as it were, the possession of more such

goods in the future.+n this 'third reason' for the phenomenon of interest there are

contained two elements9 0irst, the establishment of a technical fact

which so far had been un*nown to the theorists, namely that the

prolongation of the period of production, the adoption of 'detours'

of production, ma*es it possible to obtain a greater return whichis more than proportionate to the time employed. 4econdly, the

thesis that this technical fact is also an independent cause of an

increase in value of consumption goods which are in e%istence at

any given time.

+nterest as form of income then originates in the price struggle

between the capitalists on the one side, who must be considered

as merchants who offer goods which are ready for consumption,

and landlords and wor*ers on the other. 1ecause the latter value

present goods more highly and because the possible use of presentstoc*s of consumer goods for a more profitable e%tension of the

period of production is practically unlimited, the price struggle is

always decided in favour of the capitalists. +n conseuence, landlordsand wor*ers receive their future product only with a deduction,as it were, with a discount for the present.

$he achievement which this formulation contains was epoch-ma*ing

and a great deal of the theoretical wor* of the last twenty

years has been devoted to a discussion of it and to its criticism.

$o those who have accepted this theory to its full e%tent, e.g.

<ierson, 2ide, $aussig (lately9 Princi+les of Economics, @7#, must

be added the different groups of all those who have learned from



it and have borrowed some of its ideas. $hus 0isher 9a+ital an#

1nterest, @BO, /ate of 1nterest, @BE and 0etter, Princi+les of Economics,

@BM, too* the 'psychological depreciation' of future satisfaction

of wants as a basis for their e%planation of interest and

approached 3evons' point of view in this way. $hey elaboratedfurther the theory of interest into a general theory of returns from

OO ECONOMIC DOCTRINE AND METHOD

wealth, for which the foundations are contained in 1?hm-1awer*'s

wor* as well.

8thers, li*e 3ohn 1. 5lar*, :istribution of ealth, E@@, and

Wieser, held on to the theory of productivity but attempted to

give it a different foundation—both in different ways. 4till others

united the basic elements of various e%planations of interest into

a new picture of the phenomenon. ($hus arshall combined the

theory of abstinence and productivity and 5arver, :istribution of

ealth, proceeded slightly differently.# part from these there areuite a few authors who hold on to the older methods of e%plaining

interest. $here can, however, be no uestion here of trying

to present a tolerably complete survey of even the most importantintellectual currents.

6ess happened in the field of the theory of the profit of the

entrepreneur. $he discussion moved chiefly within the framewor*

of ideas which have been indicated already in the preceding section.

$he rest of the theoretical wor* was devoted to specialied

uestions and was not directly concerned with the way in which

the basic theoretical problems moved. mongst them the uestion

of economic crises stands out as the most important. fter 5.

3uglar, :es crises commercialese EE@, had recognied the cyclical

movement of economic life as the essential phenomenon and had

discovered the immediate causes of the crises in the period of boom

which precedes every economic crisis, this idea became the basisfor the wor* devoted to the problem of crisis. ost modern performances

in this field, especially that of 4piethoff, are based on

similar foundations.

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