Appendix II — Theory of Value: The Demand Side
Many of the difficulties in the Theory of Value arise from not keeping clearly before us that it is a Theory of Human Valuation; of the values which men do—not of what they should—put on things. The idea of “intrinsic value” dies hard.
Connection with Wealth.—“Wealth consists of useful things.” “Wealth consists of valuable things.” Both statements reflect current views, and both are true, the one suggesting an Inventory, the other a Calculation of the same things.
The Problem stated.—Twenty goods, different in substance, size, shape, quality, use, are equal in this, that a twenty-first good, say a shilling, will purchase any of them. What is it that puts them in a balance, and pronounces all the twenty-one goods equal in value?
An Indication.—It has been suggested that Value is the order of our Preferences. But can one thing, strictly speaking, be “preferred” to another unless the two are at equal price? At any rate, it cannot be said simpliciter that the ordinary man “prefers” diamonds to his dinner. The suggestion, however, reminds us that we never value anything by itself; we always value it by reference to something else. Thus, in the last resort, Value expresses an order—a more or less.
Comparison with other Measures.—Measures do not hang in the air; they are based on something—a unit proclaimed by Governments, either quite arbitrarily or as corresponding to some presumably fixed natural phenomenon, e.g., the yard and the metre. So, in ancient times, the gold talent weighed 120 to 140 food-grains, and was equated, by convention, to the ox, which was the primitive unit of value. But this throws no light on the value measurement which equated the ox to the talent. (It is submitted, in passing, that the equation was only an ideal one—a convenient point of departure; that the ox generally exchanged for the talent with a plus or a minus, just as the point of departure for a lawyer’s fee is “six and eightpence,” or as the 30 acres presumed necessary for the support of a manorial family was the point of departure for a “virgate.”) The grain basis of the gold talent, however, suggests that the value measurement also has a natural basis;—that Value is the comparison and expression of things in a Common Third. What is this Common Third?
Labour as the Common Third.—A famous theory says that value expresses and measures the more or less of labour “embodied” in goods—the labour involved in the getting or making of goods. This, however, involves the idea of a Unit of Labour, i.e., it assumes the possibility of bringing all labour to a common expression—a previous equation. This difficulty seems insuperable, even when we look only at one side of the primitive equation: can any labour be more different in amount, intensity, and quality than that which gets gold? Suppose this overcome, and suppose the similar difficulty of equating the various labours involved in getting oxen overcome, what common quality measures these two sets of labours? When, finally, one tries to weigh head labour against hand labour, except by the price paid for their results, the full impossibility stands revealed. But, of course, to bring different labours to an equality by referring to the price 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 them will be correspondingly valuable; but the previous question is—Why are the products so variously valued? The hold which the Labour Theory took in last century can be explained only by its introduction of a moral idea making results (prices) depend on that which makes and elevates man, namely, Labour. But it certainly would make Value something very different from Human Valuation. (Note in passing that this theory is not to be confounded 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 said that water had great value in use, and diamonds scarcely any, he suggested life as the common third. It might, indeed, be possible to draw out a “natural order” of values—a hierarchy of things according to their power of sustaining an average human life. An animal or a Crusoe might value things in this way. It is evident that in prehistoric times the ox was adopted as the standard because of its measurable potentiality in this respect. But, in any community that we know, “life” is too complex to afford a basis; not only does “living” become intellectual, moral, æsthetic, but goods naturally availing to life, becoming plentiful, notoriously lose their value. This, however, suggests the true answer.
Utility as the Common Third.—The common third is Utility. Jevons’ words, in his introduction to the Theory of Political Economy (1871) put this succinctly. “Repeated reflection and inquiry have led me to the somewhat novel opinion that Value depends entirely upon Utility. Prevailing opinions make Labour rather than Utility the origin of value; and there are even those who distinctly assert that Labour is the cause of Value. I show, on the contrary, that we have only to trace out carefully the natural laws of the variation of Utility, as depending upon the quantity of commodity in our possession, to arrive at a satisfactory theory of exchange, of which the ordinary laws of supply and demand are a necessary consequence. This theory is in harmony with facts; and, whenever there is any apparent reason for the belief that Labour is the cause of Value, we obtain an explanation of the reason. Labour is found often to determine Value, but only in an indirect manner, by varying the degree of Utility of the commodity through an increase or limitation of the supply.” Here, however, we must hark back to first principles, and see what we mean by Utility. The question is pertinent, not only because of the misleading meaning given to the word by current opinion, but because of its association with the supposed materialist tendencies of Utilitarianism—an association, indeed, from which economic science still suffers.
The Boundary Line in Economics.—Every science, as expressing the division of labour which rules in thought as in industry, must limit itself and specialise. Granting in the fullest way that men never escape the obligation to ethical 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 economic science, just as we draw a line between ethical science and political science. Let us drop, so far as possible, the word Wellbeing, which is generally taken as explaining “Wealth,” and has, in current language and in cruder economics, become confused with it. Take it from Aristotle that Happiness is the “end in itself”—the Good for which we desire all other things. Men, blindly seeking Happiness, aim, not indeed at Money, but at the things which Money can buy, and these they call Wealth. It is true 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” by finding their other uses. What remains beyond doubt is that men buy goods—that is, express and measure the value they attach to them in a money price—because they want them. Why do they want them? We may avoid the ethical connotation of the word Happiness by taking a word which has been hypothecated by economics, and saying that they seek Satisfaction. Here “Wealth” becomes marked out, both currently and scientifically, as the “collection of instruments” which aims, rightly or wrongly, at this Satisfaction. We take Satisfaction, then, as the boundary line of Economics—although a limit always suggests something on the further side. But what is Satisfaction?
Satisfaction.—Satisfaction is found in men and animals alike, in the filling of physical wants and the forth-putting of activities. To these man adds infinite desires—less urgent, perhaps, but hungrier and more far-reaching than physical wants. Mark, however, that wants, desires, and activities merge into one another—human hunger, e.g., is appetite; the best life is one long purposed activity, subordinating, but necessitating, the satisfaction of wants and desires incidental to it.
Goods.—This satisfaction gives us the meaning of Goods. The reason—and the sole reason—why we want goods is that by our constitution we cannot get satisfaction without them. Wealth, then, is the complex of goods on which satisfaction is presumed to be dependent.
Law of Satiable Wants.—All wants and desires weaken with satisfaction, and, if satisfaction is carried far enough, they, for the moment, disappear. Generally, however, as our wants and desires are many and various, and as one satisfaction limits another, we leave off in the satisfaction of any want at a margin far short of satiation. This is purely a physiological and psychological phenomenon, not an economic law.
Law of Diminishing Utility.—Satisfactions being dependent on Goods, we easily reflect the satisfaction on to the goods, and use the relative word Utility as if it were a quality of goods. Transferring, by the same process, the weakening satisfactions to goods successively presented to a want (or to similar goods in our possession), we get a statement of a fundamental tendency of human nature, the Law of Diminishing Utility; namely, that the additional utility which a person attaches to a given increase of his stock of anything diminishes as the stock increases. This is purely an Economic Law; for, physically considered, the goods themselves retain their material content unchanged, and are not in the abstract less capable of satisfying want, if there be want. Thus is explained Jevons’ “variation of Utility, depending on the quantity of commodity in our possession,” which, in developed exchange, gives us the law that Demand, ceteris paribus, decreases as Supply increases, and vice versa.
A Caveat.—The above analysis corresponds with, and would be recognised by, current ways of thinking and speaking; and, since Jevons, it seems to be accepted by economists. But it may be granted that Utility might be, and has been, defined differently—as the potentiality of satisfying human want; in which case we might speak of Intrinsic Utility. Here Utility would not rise and fall, but be measured by the properties useful to man which things contain; it would correspond, then, with certain fixed physical elements. But such nomenclature leads us into the same difficulties as “intrinsic value” does; and we should in any case require another word to designate Utility in Jevons’ sense. It might be advisable, however, where clearness is required, to speak of Economic Utility.
Total Utility.—On these lines there is suggested one way of measuring Utility. Taking ten successive increments of a similar good, the whole stock may be figured as 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 is somehow connected with Utility, it is clear that the Total Value of such a stock is not the same as its Total Utility, but something much less. Water, e.g., in spite of the fact that successive increments generally give utilities (though diminishing utilities), is valued at nothing. Supposing the units in the above sum were gallons of water, and an 11th gallon were to be added—representing superfluity as regards wants—the Total Utility would still be 55, as the final utility of 0 does not alter the sum in addition. And yet the Total Value, as men call value or as measured by any canon of purchase or exchange, would be 0. This suggests the solution.
Final Utility and Value.—The value of a stock of goods is measured by the Least or Final Utility—the utility of the last increment. The value of the single good is the Final Utility, and the Total Value is the sum of the Final Utilities. In the above illustrations, the value of each of the ten goods is 1, and the Total Value is 10; the value of each of the eleven goods, on the other hand, is 0, and the Total Value likewise is 0. The test always is: If you lose one item, how much value do you lose? You lose only the least utility, and, seeing that value cannot be greater than utility, and that all the items are equal, the utility you lose expresses the value.
Two Objections.—(1) It may be objected that there is an assumption here, namely, that Value is not differential like Utility. We need to be reminded that we are dealing with human valuations, and that, in such valuation, Value is not differential. When men speak of things having “different values but one price,” what they mean is “different utilities but one value”; things of the one objective value or price have different subjective utilities. We certainly find differential values in this sense, that sometimes one man is charged more than another if his pocket can be forced by necessity or his ability to pay is known. But this is exceptional, and, in any case, it does not apply to one and the same man buying successive items of the same goods. (2) It may be objected, in the case of the eleven gallons of water, that it would not generally be acknowledged that the total value was nothing although the loss of one gallon involved no loss of utility, the proof being that, if the total stock is lost, a considerable value is lost. But this is to value the eleven gallons together, considering them as a single good, whereas we are considering them as eleven separate goods with diminishing utilities attached to each. The absence of value in the eleven gallons, in short, depends on them being considered not as one stock of water, but as eleven separate gallons.
The Paradox of Value.—From this measurement of value by Final Utility, comes the paradox that the addition of items of goods is an addition of value only up to a certain point: if carried beyond, the Total Value falls; and, if superfluity is reached, it disappears. Taking the former figures; 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, 0; that is to say, an up-grade till the stock consists of five goods, equality between a stock of five and a stock of six, then a down-grade to zero. Thus one may have less Total Value with many goods than with few. The explanation is, as before, that, as goods increase, wants diminish; the satisfaction dependent on the last added increment is always less than that dependent on the earlier increments—that is, the Final Utility falls; till, in superfluity, no satisfaction is dependent on one item, and the Value of the single item has disappeared because its Utility has disappeared.
Illustration.—Take the wheat crop in France in 1817, 1818, 1819. The harvest was successively 48, 53, and 64 millions of hectolitres (and presumably the Total Utility increased), while the Total Value was successively 2,046,000,000, 1,442,000,000, and 1,117,000,000 francs. This should remind us that the effort of the industrial world, as distinguished from that of the individual, is always towards the increase of Utility, not necessarily of Value. The total disappearance of Value, however, is almost never seen, because, at the worst, articles however useless subjectively, have always the use of exchange.
The Course of Total Value.—As a rule, Total Value increases with Total Utility, though not in the same proportion: the reason being that there are very few things of which the community, as distinguished from the individual, ever has more than enough to satisfy its most urgent wants. As goods increase, the dependence of the richer classes on them indeed diminishes, but they then come within reach of poorer people, whose want has hitherto been entirely unsatisfied. Thus an abundant crop, although the Final Utility may be low, is generally of much greater Total Value than a short one.
Marginal Utility.—As there are many closely related wants, and as the satiation of one would prevent the emergence of others, it is seldom that we completely satisfy any single want. As one want is being satisfied, it diminishes in urgency till there comes a point when another want, not originally so urgent, becomes more urgent; and having satisfied one want partially, we pass on to the satisfaction of another, and so on successively from want to want, describing a marginal line in the satisfaction of each. This is generally—though perhaps doubtfully—described by saying that, on this line, the marginal utilities are equal. For this reason we replace the expression Final or Least Utility—which is apt to suggest satiation or zero—by the expression, Marginal Utility—the margin at which we stop in the circumstances.
Exchange.—Hitherto Value has been presented as a relation between Satisfactions and Goods. It remains to say that this subjective valuation becomes objective and explicit in exchange; we have, in fact, a definite expression of this valuation in the thing surrendered in exchange. In other words, we need not measure Value by the subjective satisfaction we should lose in losing the marginal item—we actually do lose the utility we part with in purchasing, and this—generally money—names the value. If exchange were by barter, it would be clear that the exchanger surrendered a utility as well as gained one. Take a shepherd and goatherd bartering successive items of their flocks; the gain and loss of sheep-utility and goat-utility are quite evident—as is also the diminishing marginal utility of the items successively acquired and the increasing marginal utility of the items successively parted with. When money forms the one side of the exchange, it is not essentially different; the motive always is that the thing purchased is considered of greater utility than the money parted with: that is to say, of greater utility than all the things that might, in the circumstances, have been purchased with the money. But, in this case, the money parted with expresses universally the value of the goods bought, and gets the name of Price. Thus Price, in this point of view, is the money expression of Marginal Utility.
Marginal Utility of Money.—Money, like all other goods, diminishes in utility with increase in the amount of it possessed. But the diminution is much less marked, and never comes near zero, because money is not one commodity, satisfying one want, but is potentially, everything that money can buy, i.e., a complex of things satisfying almost the whole complex of wants. Till we have no need for anything which money can buy, the marginal utility of money will not sink to zero.
Footnotes
1 The division is as old as Aristotle. “Of everything which we possess there are two uses both belonging to the thing as such, but not in the same manner; for one is the proper and the other the improper or secondary use of it. For example, the shoe is used for wear, and it is used for exchange; both are uses of the shoe.”—Politics (Jowett), § 9.
2 “Value is the life-giving power of anything; cost, the quantity of labour required to produce it; price, the quantity of labour which its possessor will take in exchange for it. ‘Value’ signifies the strength, or ‘availing’ of anything towards the sustaining of life, and is always twofold; that is to say, primarily, intrinsic, and secondarily, effectual. Intrinsic value is the absolute power of anything to support life. A sheaf of wheat of given quality and weight has 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; and a cluster of flowers of given beauty, a fixed power of enlivening or animating the senses and heart. It does not in the least affect the intrinsic value of the wheat, the air, or the flowers, that men refuse or despise them. Used or not, their own power is in them, and that particular power is in nothing else. But in order that this value of theirs may become effectual, a certain state is necessary in the recipient of it. The digesting, breathing, and perceiving functions must be perfect in the human creature before the food, air, or flowers can become of their full value to it. The production of effectual value, therefore, always involves two needs: first, the production of a thing essentially useful; then the production of the capacity to use it.”—Munera Pulveris, i. § 12.
I quote this passage, partly on account of its suggestiveness, partly to show how impossible it would be to reconcile any such definition of value either with ordinary language or with economic science.
3 For instance—to say nothing of the fact that all economic ends must be subjective—of the four ways indicated above in which Wellbeing may be conceived, the three first may be considered objective as compared with the subjective fourth, while the wellbeing of man generally—particularly the ideal good—may very well be called the only objective end in contrast to the accident of a technical result. But, as it is impossible to keep the economic vocabulary clear of the philosophical, we may be satisfied if these names are definite enough to keep before our minds the broad lines of the division indicated above.
4 Böhm-Bawerk, like Neumann, while acknowledging that the two conceptions have many internal and external relations, and that both spring undoubtedly from one common root, thinks that any more universal conception, which should embrace them both, would be ganz leer und schattenhaft.
5 “Anything which an individual is found to desire and to labour for must be assumed to possess for him utility. In the science of Economics we treat men, not as they ought to be, but as they are.”—Jevons, Theory, 2d Edition, p. 41.
6 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 have made no scruple of rendering the honest German Gut by its literal equivalent, and it is in this sense that the word is used above and throughout this book. It will be noted in what follows that there is a difference between simple goods and “economic goods.”
7 It is perhaps a pity on two grounds that the word “utility” should have been adopted by economic science:—(1) that the word seems to suggest things really useful, when it means no more than things desired, bought, and sold; (2) that it has so often suggested to shallow thinkers that Political Economy is a “sordid science” whose investigations do not go beyond mere material considerations.
8 Menger’s definition is “Die Bedeutung, welche concrete Güter oder Güterquantitäten für uns dadurch erlangen, das wir in der Befriedigung unserer Bedürfnisse von der Verfügung über dieselben abhängig zu sein uns bewusst sind.”—Grundzüge, p. 78.
9 In view of the loose way in which we use “economic” and “economise,” Menger’s definitions are worth remembering. When men recognise that their wellbeing is bound up with the command over certain goods within certain periods of time, and that such goods are likely to be insufficient for their demand, their impulse is (1) to get such goods into their possession or disposal; (2) to preserve the useful properties of the same; (3) to decide which are their more important and which their less important wants, and to satisfy the former only; and (4) to so dispose of the goods as to get the greatest possible result or satisfaction on the whole, and to obtain every individual result with the smallest possible expenditure. “The activity men direct to those ends, in its totality, we call their ‘economy,’ and the goods which stand in these quantitative relations, as the exclusive objects of that economy, we call ‘economic goods.’”—Grundsätze, chap. ii. § 3.
10 There are two typical cases where valuations are made:—where a man values something he has, with the view of parting with it (in selling, giving, lending, etc.), and where he values something he has not, with the view of acquiring it. As will be seen from above, the two methods of valuation come practically to the same result.
11 The difficult subjects of capital value and of interest on durable goods are fully treated in Böhm-Bawerk’s Positive Theory of Capital. See particularly p. 339.
12 Just as the nutritive value of the horse competed with its draught value during the siege of Paris.
13 How far the theory of Complementary Goods admits of being applied directly to the problem of distribution of product among the various factors is matter of controversy. Böhm-Bawerk considers that it is the key which will lead to its solution. The line which this suggests would be something like the following. Labour and Capital enter into the composition of all productive groups: in proportion as they are abundant and mobile do they enter into competition with all labour and all capital, and become perfectly replaceable. In entering into products, then, they can never secure more than their outside value—that fixed by all their employments or uses. The surplus in the price of each product goes to the monopolist factor, whether that monopoly be caused by natural and site advantages of land, mental and technical qualities of undertakers and workers, peculiar conditions of process, or the like. And in proportion as these factors lose their monopoly, does the value of the group shrink; if all the members were to become replaceable, as when first-class land in other countries becomes available through rapid and cheap carriage, or when education makes unskilled labour the exception, the group value, as distinct from the combined isolated values, would disappear.
Wieser, again, considers that this is no more than a valuable suggestion. What guidance, he asks, will this law give where there are several irreplaceable members, and how is the outside value of replaceable members given if not in other combinations of complementary goods which in turn require to be split up into their factors? He points out acutely, in reply to Menger, that, to estimate the proportion contributed by any factor by the loss which would accrue if that factor were absent, is to reckon too much to it, as the loss of a factor from a co-operation will generally disorganise the group and cause more damage than its presence would cause gain. Instead of using the doctrine of Complementary Goods in this way, he proposes to find, by a series of equations, what each factor positively contributes; not, of course, the physical share, but the proportion of value which may be economically “imputed” to it. A great part of the Natürlicher Werth is taken up with this doctrine of the “Zurechnung,” which is treated in Wieser’s usual strong and graphic manner.
14 As might be expected of a reaction against the old position claimed for value in exchange as the sole economic value, the Austrian economists have devoted their energies mainly to the neglected branch, Subjective Value. Böhm-Bawerk alone has followed out the marginal theory of value in detail into the theory of price.
15 In justice to that large class of economists who strive to suit the stubborn fingers of the economic man to the lute of social life, it may be said that their dislike of the egoistic motive is due simply to its being egoistic. If struggle and fight is the necessary and healthy condition of industry and commerce, then the utmost demand of the reformer must be a fair field for every one and no favour; if the ethics of commerce are necessarily the ethics of war, we may weep over the fallen but we shall not waste our time crying mercy. But a great many people—and these not the worst economists—think that the economic field may justly be regarded, not as a battle, but as a harvest field, where the greatest results are to be had, not by fighting against, but by working with each other. For the last hundred years, they would say, men have been dazzled by the new possibilities of life which the great increase of wealth has opened up, and the solidarity of mankind has been broken up by the eagerness of each to get hold of an advantage which, obviously, could only be had by the few. Now that the world is passably rich, should we not draw breath, and try to organise the industrial life with an end to the character and conduct of the workers? Ideas like these have a way of making the egoistic motive seem a little contemptible. But, in justice also to the practical man, it must be said that he ridicules all this mainly because he does not understand that it is a new point of view—the subordination of the economic to the higher life—and because his spiritual advisers have long allowed him to think that the business life has canons of its own, with which “theoretic” morality may not intermeddle.
16 To be exact, this limit may be more closely drawn. Böhm-Bawerk’s law is that the price is determined between the valuation of the last buyer and that of the first excluded seller as Higher Limit, and the valuations of the last seller and first excluded buyer as Lower Limit, viz. between the valuations of the Marginal Pairs. But, for reasons which will shortly be evident, it is scarcely worth while adding to the difficulty of the subject by too great exactness.
17 In connection with this, the following passage is worth attention. “Goods which can only be obtained in very small quantities and which only the rich are likely to demand, will obtain the highest prices. Goods, again, of common quality, suited to the wants of the poor, obtain very low prices, along with those goods of better quality which are so numerous that the poorer classes are able, to a considerable extent, to purchase them. Medium prices, lastly, will rule in the case of goods of which the middle classes are the principal buyers, while poorer people either do not compete or compete only so far as compelled by their most urgent feelings of want. It will readily be understood that changes in the economical provision and power of great classes must be followed by changes in the prices of goods. The greater the inequalities of wealth, the greater will be the differences in price. Luxuries will rise in price as great fortunes increase and fall as they diminish.... Thus it is that diamonds and gold stand so very high; they are luxuries of the rich and richest, and are valued and 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 are goods for the people, their value being decided by the valuation and purchasing power of poor men.”—Wieser, Der Natürlicher Werth, pp. 44, 45.
18 This is not quite true. They have subjective exchange value just as money has. The product of labour which has been paid by 20/ of wage has the same sort of subjective value to the wage-payer as the 20/ had. But as the professional producer anticipates demand the subjective value is not so calculable.
19 It need scarcely be said that it is anticipated product; in modern circumstances it is of course impossible for the fore producers to wait on final sales, even if makers and merchants did not regularly anticipate demand; but this does not affect the logical connection.