Smart on Wieser’s theory of value

EDITOR'S PREFACE

In the preface to my Introduction to the Theory of Value, in which I attempted to make clear to English readers the main lines of that theory as expounded by the Austrian School, I said that, in justice to Professor Wieser, I stopped short of his application of the value theory to distribution, preferring to put the translation of his brilliant and suggestive work into the hands of one of my former students. The rendering of Natural Value which follows will, I think, justify at once my reserve and my selection of a translator.

The theory of value, of which the Austrian economists are now the chief exponents, is the Final or Marginal Utility theory, best known to English economists through Jevons's great work publlshed in 1871. In the same year, and quite independently, appeared Menger's Grundsaetze—a work typical of Teutonic thoroughness and strength. This was followed, in 1884, by Wieser's Ursprung und Hauptgesetze der wirthschaftlichen Werthes. The Positive Theory of Capital of Boehm-Bawerk (1889) contains a masterly exposition of value, price, and costs, on which the author bases his well-known theory of interest. Previous to that, in 1887, Sax published his Grundlegung, in which he applied the value theory to the economic functions of the state. Finally came the present work, which at once catches up many loose ends in previous expositions, and carries the whole theory, with its applications, to a higher level of completeness.

The main purpcee of Nutural may be read in chap. vi. of Book II. (p. 60). The general reader, however, will possibly find the most suggestive matter in chapters incidental to this main develolp-ment, particularly in the attacks on Socialist theory. To English economists, again, I venture to think that there are three points which will specially commend themselves as original contributions to our science. These are, the re-setting of the elementary conception of value in Book I., the application to distribution in Books III. and IV., and the bringing of the law of cost of production within the compass of the general Marginal Law in Book V. If an editor's preface has any function it is, I imagine, to elucidate points which his, presumably, close study of the book have shown to be difficult, and my connection with the Austrian School may, perhaps, justify me in putting these points in my own way.

The first book contains the general statement of the theory of value according to the Austrian School. Its main lines are as follows.

The man in the street, asked the simplest questions about value, betrays the popular belief that value originates in Utility, while he is, at the same time, aware of many phenomena which seem to contradict this faith. For instance, free gifts of nature have no value: some confessedly very useful things have little value: scarcity, as well as use, confers value: cost seems the very antithesis of value. It is a fundamental principle of the school that the investigation of value is the investigation of human acts of valuations, and, accordingly, no theory of value can be satisfactory which does not bring these contradictions under its law.

A slight analysis shows that, in the last resort, the “use” of goods—or the use we get from them—is nothing but the satisfaction of want, or rather of desire. Goods which do not satisfy some desire are of no use to anybody: if we could satisfy desire without goods we should have no desire for goods:—these two considerations point to the conclusion that it is not goods in themselves that are either desirable or desired, but satisfactions. We must, first, then, look deeper into the nature of wants and satisfactions.

Gossen's law gives us a correct analysis. According to it, want or desire diminishes with every successive draught of satisfaction till the point of satiation is reached. This is true of all desires, higher and lower, if we are careful to consider the same desires and not other varieties of them, and if the desires in question are full grown, and not merely awakening or in course of development. Thus the satisfaction of every want describes a falling scale, and, at each degree on the scale, the sensations of want are of different intensity.

But here are two things which may be spoken of as “want”: the want as a whole, or kind, or class, and the individual sensation of want. However we classify the kinds of want—according as we look at them from a moral, or hedonistic, or intellectual standpoint —the more important kinds of want remain the more important. But, in these kinds, the sensation of want varies from an indefinite higher point down to zero, according to the circumstances of provision for it. Taken day by day, the appetite for food is constant and important: at any point of the day, its importance depends on the satisfaction afforded by the last meal.

Thus, however we arrange the wants as classes, we constantly find that a want, belonging to what we would recognise as an important class, has no great importance for us in the circumstances. Of two wants the one, of its class, important, the other unimportant, the latter will be felt by us as important if uusatisfied, in comparison with the former if satisfied. In measuring satisfactions of want, then, we have to take both of these into account. The possibilities of want are according to the class; the actualities, according to the satisfaction already reached. It is only in exceptional circumstances that we know much about the possibilities of want within us, just as hunger to most is merely a pleasurable anticipation.

Utility being the general capability of satisfying human want, or, as Jevons defined it, “a circumstance of things arising out of their relation to man's requirements”; if the “use” of goods amounts to satisfaction of want, and if satisfaction depends, partly, on the importance of the class to which the want belongs, and, partly, on previous satisfaction attained, we have already come in sight of that influence of quantity or Supply on the estimate of utility and of use which becomes so prominent in the estimate of value. It is a commonplace that value is not inherent iu things: it is not so well recognised that neither is utility. There is nothing “useful” except in relation to a being who finds it so, but even the useful is not “of use” if that being has already enough or too much of it.

Here we reach the point of view from which the utility of goods is defined and measured. It is only as we find that satisfaction depends on having, and non-satisfaction follows on not having or losing goods, that we transfer our interest in satisfactions to the material conditions on which these eatisfactious are dependent. We attach no importance to goods when they are to be had in superfluity—not even to that portion of them which we use, because satisfaction is not dependent on those we use. If our wants were few we should perhaps attain something like superfluity of goods as regards many of them, but the fact that our wants are many and varied makes us desire many goods, and distribute our effort at acquisition over a wide field. Thus we find that, as a rule, the supply of commodities in the control of any person is not sufficient for all the possible and even actual sensations of want for these commodities. There must, then, be a point, short of complete satiation, at which satisfaction is broken off. This is the marginal satisfaction: the least utility economically obtainable in the cir- cumstances. It is this Marginal Satisfaction that determines the value of goods to us.

It will be noted that this marginal satisfaction is not the general Capacity of use, nor even the actual use made of goods, but the last or least use in the circumstances of the individual demand and the individual supply. Suppose that commodities were represented and ranked in importance according to the letters of the alphabet. A being the most important, we should strive to obtain it first, but only till such time as some supply of B became more desirable than a further supply of A. In the same way we should leave off accumulating B whenever the decreasing satisfaction from it made it more desirable to obtain some supply of C. In A and B, then, there emerges a marginal satisfaction—the least permissible in thethere concrete circumstances. We my that this is the economic margin, inasmuch as persistence in accumulating A or B would result in the total sum of satisfaction attainable being less than by drawing the marginal line at a point short of further satisfaction, and proceeding to the satisfaction of C.

When goods are valued by themselves there is no comparison of utilities, and, therefore, no marginal utility; in this case goods do get their value from the actual use made of them; and, of competing uses for the good, fromit is, theof course, the highest which decides the value. But few goods are valued in this way: they are generally valued as items in a stock or supply of similar items. Supposo that s person gradually acquire several of these items, he will, uccemively put them to less acquireand less important uses. items,But however many or few goods he has, andthere will always be a least use—unless the good is a “free gift”—to which he puts the goods. The larger the stock the less will be this marginal use. But ff the goods are similar, any one of them may be the last used. The value of each item, then, can- not be more than the least: and the value of the whole stock must be a multiple of that least In a stock of ten goods—assuming unchanged demand—the value of each good cannot be more than the tenth use to which the goods are put; and the value of the whole is ten times the tenth use. Of a stock of a million items, the total value is a multiple of the millionth use. Thus, then, all these uses above the marginal ones are unrepresented in value, and it is on the same principle that the uses actually obtained from free goods are not represented in value at all. Here in the main is the solution of the contradictions with which we started. If iron is little valued, it is not because its usefulness is little, but because the supply is so great that the marginal use of iron is quite insignificant, supplyand the total value of iron is a multiple of this insignificant, use. If air is not held of any value, it is because the supply is so abundant that the marginal use is never reached, and its total is multiplied, ff we may say so, by zero.

But this determination of value by marginal utility brings with it a paradox of its own. If increase of supply has lowered marginal utility till value disappears with superfluity, it is evident that somewhere there has come a point at which further increments of supply not only did not increase the total value, but actually diminished it. Suppose that one item yields ten units of satisfaction, and two items eight units each—corresponding with the diminution an desire with successive satisfaction—and three items six units each, and four items four uuits each. The total value is the same when I have two items as when I have four, viz. sixteen (8×2 and 4×4), and is less when I have four than when I have three (4×4 and 3×6).

This, however, is paradoxical only so long as we think of value as simple and positive. It comes from confusing usefulness or use with value. True, the usefulness of goods to man cannot decrease with the supply of them. True, also, that the total use of the four goods to me is 10 + 8 + 6 + 4 = 28, because the use I actually obtain from the goods is no less although the actual use of each is less than that of those preceding it. But if we remember that value disappears with superfluity, although with superfluity use is assured in the highest degree, we shall remember that value involves not only use but dependence. The interest we have in a satisfaction we transfer to a good, but we cannot do so unless we find the satisfaction dependent on that good. With a given want craving satisfaction, my dependence is less when I have four goods with which to satisfy it, than when I have three. At every fresh increment of goods the stock of useful things increases, but the dependence decreases, and the amount which represents the dependence is cumulative: it comes not only off the last good, but off all the goods. If I have one good the dependence of satisfaction on the good is perfect: value reflects the whole of the use (10). If I have two goods the dependence is less, ex hypothesi, by 2, but, as equal goods must have equal values, the 2 comes off each of the goods, so that, instead of 18 (10 + 8) the value is 16 (8 ȕ 2). If I have three goods, two more comes off each good, representing the further failure of dependence, and so on.

Thus value is a combination of positive and negative—of satisfaction gained and of dependence lost. It is a residual amount. Up to a certain point value accompanies the addition of goods, although in slower progression,—because the gain of utility is greater than the loss of dependence. But when the supply reaches a certain point the loss of dependence is greater than the gain of use, and the total value diminishes. So it comes that, in certain cases, the negative element may overpower the positive, and a greater number of similar items have a less total value than a smaller. We should not, however, be surprised at this, if we did not think of value as synonymous with usefulness or with use.

If, then, value were the highest principle in economic life, that is, if economic action were mainly guided by the pursuit of the highest value, we should have a constant antinomy such as Proudhon asserted. But, first, no antinomy emerges till the “down grade” of value has been reached, and this is seldom the case as regards any commodity. With most goods, increase of quantity brings increase of total value, although, of course, the value of the item falls. And, second, it is not true that value is the end of economic action. The higheat principle is Utility. When the two conflict, value has to take the second place. As things are, however, utility and value generally go the same way—in the “up grade,”— and no harm is done in economic effort following the lead of value. The true service of value consists in being the calculation form of utility. In economic life everything stands every moment in need of measurement. Thus value is always with us, while the utility which is obtained, but does not come under its measure, is forgotten, and we get the impression that value is the chief end. All the s ame, the continual effort of the economic world to make things “cheap,” might remind us that, in the last resort, we are trying to bring things as near as possible to those “free gifts” which have boundless usefulness but no value.

In the second book Wieser briefly, and for the sake of comparison, shows the connection of value as thus conceived—thereafter called Use Value or Natural Value—with exchange value or the value of ordinary business life. Far from being something with which political economy has little to do, the former is no less than the foundation of the latter. Take the normal case of sellers competing to sell goods made for sale, and buyers competing to buy them. Each buyer, if he knows his business, comes to the market with a maximum offer in his mind. This maximum will be determined by two valuations; first, by the value in use of the goods to him, and, second, by the exchange value of the purchase money to him—which latter will vary indefinitely with wealth and income. It is that sum of money whose exchange value is equal to the anticipated use value. Considering the individual differences in wants and in wealth, it is evident that this maximum will vary quite indefinitely. Nor is the maximum a mere possibility—a subjective limit which has little relation to actual price. In the degree that competition is perfect, the competition of buyers to secure purchases, and of sellers to sell at the best price they can get, will force the buyers to their maximum. In these circumstancea, if one good is put on the market, price will settle between the maximum of the most capable buyer and that ef the next capable (but excluded) buyer. If fifty goods are put on the market, the price—under the same assumption—will settle between the maximum of the fiftieth and the fifty-first (the excluded) buyer, and so on. The price is a marginal one, determined just as we have seen value generally determined. No one, whatever his wants or means, pays more than the weakest buyer who succeeds in buying, and the price of the whole supply is a multiple of the units by this marginal price; in other words, it is determined by the subjective maximum of the marginal buyer.

It scarcely requires demonstration that the same principle obtains where several items are offered and bought. In this case the buyer has a different maximum per item, falling with the quantity of items he will take, but it is always a subjective maximum determined in the same way, by anticipated use value calculated in terms of exchange value of the purchase money—and it is always a marginal price. In all this there is obviously a clese relation between the law of price and the law of value. But there is one important difference; that here demand does not represent simply degree of want, but degree of want as expressed in purchasing power. The most serious effect of this is that, in the present bad distribution of wealth, the direction of production is given, not only by the wants and necessities of the community, but by the desires of rich men expressed in large figures.

In the modern economy, where the life of most men is occupied in making some one thing not to use but to sell, a new and powerful impulse is given to the formations of exchange value. While within each individual economy use value retains its place, the form of value which obtains between the exchanging commodities comes into new prominence, inasmuch as it is carried on by means of a medium which has, practically, no use value. Buying and selling—the whole mechanism of exchange—is carried on by money, and money itself is always estimated according to its exchange value. But what is this exchange value of money but the anticipated use value of the things which can be obtained for it?—money being merely the commodity we reserve for this particular use. The law of the one, then, is the law of the other. It is the same with goods made to sell; that is, to exchange: their nltimate basis is always use value—the use value of the things for which they exchange. It is the same, again, with goods that are replaceable at a cost less than their utility. In short, exchange is another form of use: one of the uses of goods in general, but the sole use of money. “Exchange value in this sense and use value are of the same nature: the former is derived from the latter, and is one of its forms of development. Both are subjective, and the amount of both varies according to personal circumstances.”

Thus Wieser, in the manner of his school, while confessing that the two values cannot be subsumed under one definition, vindicates the neglected Use Value, showing that exchange value is founded on it, and cannot be understood without it. To exchange equal values is meaningless unless equal (objective) values purchase uneqmd (subjective) values.

Thus far the value of consumption goods alone has been considered, and the estimate of value has been analysed as if goods, like bankrupt stocks, were thrown on a market to sell without consideration of the circumstances of their production. If the theory went no further than this, Wieser might deserve the reproach sometimes levelled at the Austrian School, that they look at value too exclusively from the lids of demand and neglect the “supply schedule.” But what we have considered hitherto is only foundation. In the third book we pass to the value of the means of production, in which is implicated the relation of the value theory to distribution of income and wealth generally.

Inasmuch as production goods are, economically, consumption goods in the making, the utility of the one is the utility of the other, and, so far as they are not to be had in superfluity, they also receive value from their utility. We do not, however, in ordinary life connect the value of production goods with the satisfaction of wants from which all value ultimately comes: we do not need to go further than the value of their returns, for the reason that this value is already based on the satiafaction of wants. Thus production value is, practically, return value, or, rather, anticipated return value. Just as the value of a stock is determined by its dividends, so do all elements of production get their value from the value they help to produce—an illustration which will be found very helpful generally.

Now no productive element works alone, but always in combination. We evidently need a principle which will separate up the return into quotas attributable to each element. Experience chows that this calculation is actually made every day, and that not only by individuals, but by great masses of people at particular periods. Production, indeed, could not be carried on at all if the leaders of production could not say to which element success or failure was due, i.e. if they could not attribute parts of the return to individual factors. Strangely enough, the few writers who have seen that to analyse and explain this common procedure was the first problem, have made solution impouible by stating it as a problem of physical causation. They have tried to discover which share, physically considered, each factor has produced—which is about as reasonable as aaking how much of the child is due to the father and how much to the mother.

The neighbouring science of jurisprudence suggests the solution. In deciding on a murder case, the office of a jury is the limited one of finding which, among all the conditions and instruments necessary to the murder, is legally responsible and punishable. So our problem is to find, from among all the co-operating causes, those which are economically responsible for the return. In calculating return, the farmer takes no eognisance of the past history of his land; nor of the use of it to other creatures than man; nor of the forces of nature working in it which are not as yet under human control; nor of that part of it belonging to the free gifts of nature. Although knowing perfectly that all these causes co-operate, he rightly imputes the return of the farm solely to the causes which he, as a farmer, has to consider if he is to attain the particular end which he aims at. And if he goes further, and, having found the crop as a whole attributable to particular economic factors, proceeds to divide it up and impute particular portions to particular factors, it is simply an extension of the same process. If two fields, similar in size and situation, are cultivated with precisely similar capital, labour, and brains, and yet show a different return in harvest, the surplus return will be attributed, probably, to some virtue in the soil, although without the co-operating factors there could have been no surplus at all. So it is in all branches of production. But what the ordinary business man does the economist can surely do. In fact, unless we can theoretically apportion and impute return to separate factors, we must say that the actual methods of attributing quota of return are under grave suspicion, and that, so far as we can see, the present distribution of income and wealth is quite arbitrary.

Before going further one solution must be cleared out of the way. The Socialists claim all return for labour—and have this much of justification that the mere fact of obtaining income is no argument for production of it. It may be a proof even of fraud or force. But one argument seems decisiva Imagine a communistic state distributing the income “jointly produced” equally to its citizens. Would it, all the same, ascribe all the return to the labour of its citizens? Would it be any more possible than now to produce equal crops from all soils, or equal returns from labour irrespective of the capital it worked with? Would the communistic state not count rich land and suitable tools as wealth, and attach value to them just because they affected the return to the effort of the whole community? It is evident that the economic return to various factors is quite independent of any ordered distribution of income. If rent and interest are no argument for the landowner and the capitalist, wage is no argument for the labourer.

Among previous attempts at solution Menger has just missed the right one. In estimating the value of a supply of similar goods, the clearest way of finding the value of one of them is to smume its loss, as this at once defines the marginal utility dependent on it. Menger applies this to production goods also, thinking thus to find what production loses in losing a factor. But what is true of homogeneous consumption goods may not be true of heterogeneous production ones co-operating towards one result. Menger forgets the common element of the co-operation. In any productive group whatever, ff one factor is lost the co-operation is dissolved, and much more is lost than the fsetor in question. We have to consider what the remaining factors will do in new combinations. In short, the problem must be put positively: it is not what we lose, but what we gain by the co-operation of different factors towards a single end.

Wieser's own solution, then, is the following. Suppose a man's life were to depend on his last shot. The value of rifle and cartridge together is clear enough, but there is no means of ascertaining the value of each. Here are two unknown quantities and but one equalition:— x + y=100. How does this differ from the value turned out by the co-operating factors in any organised production ? In this, that each factor enters into multitudes of different combinations, with returns of different values There are multitudes of equations between production goods and values of return, and every production good can be traced as it enters into other equations. For instance, if labour works with various materials, and the return in each case has a different value, while, at the same time, each material enters into many labours, and the return in each case has a different value, it is possible, from the number of equations, to come to quite accurate understanding of what is due to each separately. If x + y = 100, and 2x + 3z = 290, and 4y ɇ 5: = 590, x = 40, y = 60, and z = 70.

If, then, we take a sufficiently large field, we can find, by this comparison of equations, the share in the return which is credited to each individual factor. This evidently is very far from being anything like the physical return, and to distinguish between the total return to the production and the return to each share, Wieser proposes to call this the “productive contribution” (Beitrag).

The Productive Contribution of any element of production is that portion of the return in which is contained the contribution of the individual productive element to the total return, and the sum of all the contributions exactly exhausts the value of the total return. But, as the return is an anticipated one, it cannot be every return.return, nor is it the average return. It is, of course, the marginal return. Of all goods, production goods are most evidently valued not by themselves, but in stocks; and, as the value of one item must here be the value of all, it can only be the marginal value obtained that determines the value of each item. In other words, what determines the value of the production good is the marshal product, or the share in the marginal product To find the value of iron I go first to the value of iron products. That value is already a marginal one, and, in taking that as basis for the value of the iron, I at once put that value on a marginal level. But the case is not so simple as it appears, for iron enters into many products and in many different amounts, and, as these products do not obtain, and indeed cannot obtain, the same marginal value, the value of the iron, if thus determined, could not be uniform. Yet, as a matter of experience, the value of iron in stores is uniform for the mine quality, and that uniform value corresponds to the value obtained by the marginal one among the many employments. If iron goods, employed in different combinations, yield respectively 8, 9, and 10, the value of the iron will be 8.

It will be obvious, however, that this determination of imputation by equations of return tells us nothing more than that certain shares are imputed to certain elements. We have further to ask, What are the factors which determine the amount of these particular shares? To find, for instance, that labour gets one half of the return due to the co-operation of labour, land, and capital, is so far satisfactory; but we are at once driven to ask what it is that determines that labour should get exactly this half, and that land and capital should get the other half. Into this, however, the compass of a preface will not permit me to enter, and I could at any rate add nothing to the lucidity of pp. 100-107, where the determinants of the respective shares are exhaustively discussed. Suffice it to say generally that each factor gets a greater share imputed to it according as its supply is scarce, as demand for it is great, as technique increases, and vice versâ, and that there is no absolute amount due to any factor.

Hitherto it has been assumed that production goods are like items in a warehouse, precisely similar in quality. But this is not always the case. Of two goods of the same kind, co-operating with similar amounts of other goods, one will give a return of higher value. The principle of employing such goods presents no difficulty. If we have a number of them we shall first employ those which give the larger return, and only afterwards those which give the lesser. When we do, the returns imputable to the better qualities will be greater by the difference between the returns. If, of these production goods, the lowest quality be present in superfluous amount, we shall impute no return to it, an d the better qualities will have imputed to them all the return.

Now, of such differential production goods, the prominent one is land, and on this Ricardo exclusively fixed his attention. But if we look carefully, into his theory, and at the same time into its corollaries—notably the possibility of a general rent for land—we shall find that what Ricardo said of land is true of all instrumants of differential value: that the better instruments have imputed to them a share in the return greater than the poorer ones in proportion to the difference in their quality. The personal income which some land yields— and which Ricardo thought peculiar to land—is, in the last resort, dependent on the fact that this land, when co-operating with other factors, gives a return such that, when the shares imputable to capital and labour are deducted, there remains a part which must, on natural laws, be imputed to the land and to the land alone. It is not only a problem of the division of income, but of the distribution of the return, and, as such, must emerge and be solved by Socialism as it is now.

When, however, we pass to capital, we have greater difficulties, for here a preliminary question meets us;—no less than the question whether a net return is indeed always imputable to capital.

In the case of land, it was obvious that a part of the return must be attributed to it, as the land yields its crops net: that is to say, after every crop the field remains, practically, unimpaired. So labour also yields an obvious net product, as the labourer, practically, is none the worse for producing. But, in contributing to production, capital disappears, and the problem is how capital should yield a recurring return just as land does. For, if it does so, this productive instrument must do what the others do not: it must yield enough to replace itself, and leave besides a net surplus.

The problem is the following. The return to capital is primarily a gross return: the capital disappears in it, If capital is to do as land does, this gross return must be sufficient to replace entirely the capital destroyed, and to leave a surplus. Carefully distinguishing, then, between physical productivity and value productivity, and remembering that it is the former we have now to prove, we find that, over the field of industry, and as a general rule, the total return of the three factors working together is large enough to replace the capital consumed and to leave a surplus. This, at any rate, needs no proof. The millions of people maintained, while millions of capital are accumulating, leave no doubt of this. If so, when it is asked whether, of this net return, a share may be imputed to capital, we may rather retort, why should it be denied imputed it? If capital is an economic factor—one which influences the return, as we have shown—why should it alone be denied a share in the net return ?

It is enough to point out (a) that, where a machine replaces labour, the share formerly accrning to labour— which was a share in the net return—must be imputed to the machine: and (b) that, when additional capital increases the productiveness of any industry, the extra product cannot be imputed to anything else than the capital. And we must conclude that, like land, every form of concrete capital of better quality has a higher return imputed to it than the concrete capital of lower quality, and that this return is measured by the amount of increase in productive results which the employment of the better quality brings. “When we compare qualities of capital it is the net return, not the gross, that decides the imputation.”

In stating all this, it must be remembered that the physical productivity of capital cannot be proved directly. A machine does not reproduce itself, but something foreign to it. Indirectly we see that the introduction of a machine leaves labour free to employ itself in creating capital, and so leads to a great increase in product. But, in modern economic life, before the net surplus can emerge, the products — the gross returns of all the various indnstries — must be exchanged against each other. However circuitous the route may be, theoretically it comes to this, that every lb. of coal consumed in production normally produces another similar lb. of coal, and a surplus bit of coal besides.

Having shown now on what principle value is imputed to production goods, and the factors what which determine the amount of imputation, and having shown that to capital also must be imputed a share in the net return, we come back, in the fourth book, to the “natural” value of the various productive factors.

The general principle, as we know, is that the value of the productive factors is derived from the value of their returns. When we turn to apply this to the various factors, we meet again with the greatest difficulties as regards Capital. The problems are the following. (a) According to the principle laid down, capital gets its value from its fruits. If, then, we wish to know the final return to any production, and so deduct from the value of the fruits the value of the capital consumed, the result is zero, for in production all capital passes into the fruits. The fruits and the capital are the same, and to deduct the one from the other leaves nothing over. If so, how is interest to be explained ?—for the lender of capital demands not only a return of his capital but a surplus under the name of interest. (b) And suppose we find that interest exists, and that capital lent out reproduces itself year after year with a net return, why does the value of the capital not represent that infinite amount of return?

The solution rests on our previous analysis of the productivity of capital. We have just seen that in production capital transforms itself into a gross return, and that this gross return does contain the reproduction of the capital, and a physical surplus. From this we inter, first, that the value of the capital can never be greater than the value of the gross return: it is thus limited and finite. The capital which changes into 105 can never be greater in value than 105. And we infer, second, that, if the gross return always contains a physical surplus, the capital value cannot be credited with the entire gross return. It must be lees than 105. Thus given physical gross return and net return, and we have the solution.

In ordingry life this proeenand is known as “discounting.” We find the present value of a money claim due at a future date by deducting the usual interest. Similarly with all capital: we find its value by taking the sum of products into which it will be transformed and taking the surplus net return. In the case of fixed capital the valuation is more complicated. The essential feature here is that the successive returns have all to be discounted, and complications enter from the fact that repairs, reconstructions, etc., must also be anticipated, and their value discounted. In the case of fixed capital of a very permanent character capitalisation takes the place of discounting, for interest, being a definite part of capital value, and capital value a multiple of interest, it is evident that we may get at the value of capital either by discounting the future interests or by multiplying the present one. The result is mathematically the same.

When we come to the natural valuation of the second productive factor, Land, we find the justification of our procedure in taking capital first. For the method of arriving at the value of the production good, land, by considering the value of its products or crops, is simply that employed in calculating the value of a fixed capital of infinite permanence. We capitalise rent as we capitalise net returns—with this difference that the return to land is always net. This, however, tells us why it is that, till capital had attained to some position in industry, there could be no accurate valuation of land. In capital we have parent wealth reproducing itself with a surplus, and, given this gross and net return, we can find the value of the parent capital. In the case of land, we have nothing but net returns, and therefore can have no principle for calculating the value of land but that which would make it an infinite sum — corresponding to its infinite possibility of rent. But when capital comes on the field, when it is employed on land, and when land and capital begin to be compared and exchanged with each other, a standard is found for the capitalisation of rent. Capital and land become commensurable in their products: the same amount may be reaped by sowing more land or by applying more capital. Under a communism there would, indeed, be no exchange of land and capital, but there would, still be the equations resulting from their co-operation.

As to the third productive factor, Labour. While the free labourer is no longer an object of valuation, as he was once in the days of slavery, his individual acts are so. The method here is similar to the others. The imputation decides what share of return may be ascribed to each service of labour, and the value of each share thus ascribed determines the value of the service. Thus the value of each service, like the value of all factors, depends on supply and demand, on the support it gets from complementary goods, and on the state of technique; and this applies to all services, from the highest monopoly services down to the unskilled labour which figures as a mere “cost good.”

Socialism would value labour by time of work, taking no further note of difference: an hour of skilled labour should be counted, say, two hours of unskilled. The Socialists hero forget the double service of value to the present economy; that it serves not only as a title to income but as the organ of economic control. In the game of income-making, every one receives the value of his stake, and wealth and labour equally figure as stakes: he who puts in much wealth draws out much income. This Socialism might change. But it is this same value that weighs goods and employments against each other, and determines the conduction of production goods to the best possible economic results. Would the change in the distribution of income compensate for the utter disorganisation which would come of neglecting the determinations of value? Is land to have no value because Hodge is to get as much as the squire, or the effect of capital on the total return to industry to be ignored because Jack is as good as his master?

In the fifth book we come to the subject which will probably meet most criticism from English economists. In it Wieser takes the classical theory that value is determined by cost of production, and finds in cost nothing less than the most general form and measure of utility. The argument in brief is the following. The value of production goods is derived from their products. But production goods, which are not subject to monopoly, and which enter into the making of many products, receive their value from the least valuable of these which is still produced: that is to say, from their marginal product, or, more correctly, from their contribution to this marginal product. But once they have got this value, as a rule they retain it in the products into which they pass, and thus the value of those goods—significantly called, in this relation, “Costs”—proximatoly determines value. But, inasmuch as it is the marginal utility of the marginal product which first determines the value of these costs, the law of cost of production is merely a special case of the general Marginal Law of value.

This is the most difficult and subtle part of the book, and I make no apology for trying to put the main contention in another setting.

There can be no doubt that a mineral spring gets its value from the fact that its water is found adapted to certain wants of humanity. If the chemical constitution of the water should change, the value attached to the spring will entirely disappear. This is, perhaps, as clear a case as could be desired of the value of a production good being determined by the value of its product. How does this differ from the case of production goods in general?

It is in this, that the mineral water is the one and only product of the spring, while such production goods as coal, iron, unskilled labour are, as it were, wells of many waters. Their products are innumerable in extent and variety and value. On the same principle, however, as we determine the value of the mineral spring, we should naturally say that the value of coal, iron, and labour must be determined by the value of the totality of the commodities into which they enter. But this totality is a thing that does not come under empirical observation. No statistics can cover its infinite variety. It is so huge and so heterogeneous that its influence on the productive elements from which it comes must be obscure. In the means of production, on the other hand, we have homogeneous goods existing in great stocks and easily inventoried. In comparison with products they impress us by their very vastness and homogeneity. It is easy enough to see why we think of them as determining and of products as determined.

Turning now to the individual employer, we find that he has a very good reason for this same belief. He does not, as a rule, make any of his means of production from the beginning. He buys them; and the impressive thing to him is that his coal and iron and labour already have a price. This price he must pay, and thus the first step in his production process is an outlay, a sacrifice, what he experiences as a “cost.” The commodities he makes are indeed intended to replace the value he destroys, but while the one value is anticipated the other is real. His first principle, then, being that the price he asks must conform to the price he pays, it is obvious enough why he comes to think that the price he asks is determined by the price he has paid.

And certainly if we look at the large undertakings which are now covering so much of the field of industry, it seems absurd to deny that it is cost of production that determines value. In any trade which is compact enough to be studied closely, we find one or two large firms, with large capitals, controlling the prices. If competition is keen we see these firms taking advantage of every reduction of wage, or replacing of labour by machinery, or large buying of material, wage,or improvements in size and arrangement of buildings, to reduce prices. The market is not consulted at all. Prices go down without waiting on demand, on the well-known experience that, as a rule, every decrease in price taps a greater area of consumption. And, in whatever position the other firms are, they have simply to conform their prices to the costs of production of the one or two who are in the best position. Is it not clear that the change in price directly follows the change in cost?

Here the classical theory of Mill leaves the matter. The Austrian theory, however, does not deny all this, but, granting it all in the fullest manner, it asks:—Whence do all these things consumed in the production get the value they admittedly transmit? The product after all is nothing but the product of labour and capital co-operating. Now labour enters into the co-operation at a certain wage, while mills are built, machinery erected, and materials bought at a certain price. What determines that these wages and prices and no others are paid? Logically, the answer of the classical sehool must be that the goods get their value from previous costs of production. But this is only putting the question a stage further back, and lands us in a perpetual regress till we turn the vicious circle. Suppose that, in the continual regress to more remote costs of production, capital itself should be reduced, as the Socialists would have it, to its first elements of labour, the question still is: What gives its value to this primary labour ! Unless it also is determined by its ccet of produetion—a “monstrous idea,” as Wieser calls it, which is powerfully attacked in Book V. chap. vii.—the answer can only he that labour gets its value from its products. To determine value by cost of production, then, leads us finally round the circle till we find ourselves determining cost of production by value.

Wieser's answer, on the other hand, takes us back to the one and only law of value. Products in the shape of consumption goods get their value from the dependence of human want on the possession of them, and production goods get their value derivatively from that of products. “Costs” are the ordinary and universal production goods, capable of many employments and entering many equations of value. That such costs transmit their value to products is only to say that they fnlfil the purpose of their existence; if they did not reproduce their own value in their products they would not be produced at all. But costs of themselves could give no value unless they first received it. What they reccive, however, is not the total value of their products, any more than the value of goods reflects the total utility of the goods; it is the value of their marginal product. That being so, it is only the marginal value which they, of themselve, can tranmnit, but this amount they are able to transmit because it is a marginal value. Raw iron of similar quality fetches one price, not because all products of iron fetch this one price, but because, although they fetch all sorts of prices according to the combinations into which they enter, there is always a lowest or marginal price. Therefore the risk of buying iron at that one price, and producing iron products from it, is a minimum; it is merely the risk of getting the lowest price going, while the slightest increase of demand for the products, or shortening of their supply, will secure a higher price. Producing at cost therefore means destroying value in one form in the expectation that it will be reproduced in another form, and the expectation is justified because the cost represents the marginal value already being realised over the field of industry.

The law which determines value by cost of production, then, is correct so far as applicable; that is, so far as products are “freely produced,” and so far as they are considered in relation to their means of production, and not in isolation. But it is only a law of relative amounts of value. A complete theory requires a law to measure the absolute amounts of value, and this is given in the imputation to costs of the value of the marginal product. The complete law, then, will run thus:—Similar production goods maintain, in the product, similar value, and that value is derived from their marginal productive contribution.

To put it concretely. If iron is 40s. a ton, it is that, in virtue of constant and intimate communication between buyers and sellers, the fact is established that, over the field, a ton of iron, embodied in products, is fetching at least 40s. No producer will give 40s. unless he can get it. It is safe to pay 40s. for the raw iron, because the iron, appearing in the new life of a product, represents at least that value. Or, again, if the unskilled labourer is paid 15s. a week, it is not because it costs the community 15s. to keep him alive and induce him to marry and supply the labour market, but because, over the whole field of employments in which unskilled labour co-operates, 15s. has been imputed to the labourer as his share—his marginal share—in the whole.

The most striking thing in this theory is, perhaps, that it proceeds on an analysis of Cost which regards the word as having a very definite meaning. The English reader will, no doubt, remember Cairnes's attack on Mill, and his vindication of the word “cost” as meaning “sacrifice.” It is this sense that Wieser gives to the expression, although his conception of what the sacrifice consists in is very different. But, like Cairnes, Wieser does not identify cost with capitalist's cost. “Cost” with him is what it costs the community. He never loses sight, as so many economists do, of the fact that the wealth of the world is “not a fund but a flow”: or, rather, a lake that is always being drawn away from below and replenished from above. To keep value in existence, wealth has to be constantly remade. Every employer knows what he risks in throwing materials and labour into the melting pot of the production process. It is more difficult to see that the rising level of the community's wealth is gained by the continual change of that wealth into new forms, and that it is possible, by putting it into unwise forms, to make the community very much poorer. Production “at cost,” with Wieser, indicates the level where production means bare reproduction of value already attained, and where the community would suffer actual loss unless products recovered the value suspended in producing.

Suppose we take labour and materials, pay £100 for them, embody them in a fabric, and that fabric, in course of wear, is consumed and disappears, the community has had, we may assume, £100 worth of use out of it. It has taken that amount of wealth out of the common granary: we do not regret the disappearance, because it has fulfilled its end in giving us its equivalent in satisfaction of want. It has reproduced itself in the sense that material wealth has passed into vital wealth. But if we take labour and materials, pay £100 for them, embody them in a machine, and that machine is worn out afterwards in making something which will not sell for £I00, we have committed an economic offence against society. We have taken £100 worth of wealth out of the world's stock, and have neither “got the use “of it, as we say, nor repaid it. Here we have capital and labour put in a dynamic form, with the deliberate purpose of reproducing at least their own consumed value of £100; not a product which might or might not have value, but capital and labour which might have been otherwise employed, and in other employments would, we know, have brought £100 worth of value.

In this point of view, then, the ordinary and universal production goods are really Costs, and that both positively and negatively. Positively: because the making of any good from such elements “costs” the consumption of these elements or the suspension of them. Negatively: because, when wealth is bound up in one form of production, the production of other cognate commodities is to that extent limited.

Thus, concludes Wieser, if we ask why products produced at cost have value at all, and why they have a definite value which corresponds with the value destroyed in making them, the answer is that it comes to them from utility—not, of course, the utility realised by themselves, but the marginal utility of the totality of utility realised by products made from similar costs over the whole field of employment. That costs have been expended is only a symptom: it is the marginal utility that sanctions the cost value.

Utility is always the source of value. The distinguishing thing here is that marginal utility is no longer confined to the class of which it is the marginal utility: it communicates with all the field of cognate products, and allows all cognate products to be put in a similar ratio of value. Thus products, different to all appearance, come into the same value relations as do different parts of a stock. It would be difficult indeed to compare consumption goods, if, within each class, we had always to find the marginal utility of each. But, in virtue of costs carrying with them a value already determined, and giving it out to products, commodities of the most diverse kind are compared with each other very much as if they were items of the same stock. Thus it comes that the law of costs is by far the most usual form slumed by the genend law of value.

The question which will suggest itself here is: Has Wieser, in this matter of costs remained true to his first principle, that value is what ordinary people recognise as value ? The very logic with which the contention is pressed will make the English economist suspicious. Without committing myself to everything the author has said, perhaps my practical knowledge, as an old entrepreneur, will justify me in stying that his analysis of costs is one which will bear criticism from the man in the street. So far as the individual is concerned, the analysis seems to me no less correct than subtle.

The simplest determination of cost is that of the commission merchant. Executing an export order means to him simply the purchase of the commodities required by his client. If he pays cash, the execution of the order costs him an amount of money which, perhaps, he has taken from bearing interest in his own bank. “Cost price” is exactly this outlay. What it costs the foreign indentor, of course, is that price, plus carriage and the merchant's commiuion, which commission covers office expenses, interest on money, profit, and perhaps risk. The question is more difficult when we pass to the manufacturer. If I know anything about a “costing,” it is this. Any large manufacturer who knows his business has a standing list of certain expenses; this list includes, probably, specific amounts paid for wages, coal and furnish- ings, and percentages for wear and tear of machinery and buildings, for office expenses, and for interest on money. To these he adds the definite amounts paid for raw material, and this makes up his “cost.” Thus a cotton-spinner has a costing of what it takes to manufacture each number of yarn, and, when asked for his prices, he has only to add to it the current delivered price of the cotton, and the result is his “cost.” This, however, is not the price he will quote. That price includes a percentage to cover profit and risk. The costing acts, practically, as a minimum. There are many occasions on which a manufacturer is content to quote at cost— p rincipally when it is a question of keeping his wheels going or of letting his organisation be impaired. But below cost he cannot, normally, go.

It may be thought, however, that each man in his costing is a law unto may himself. But as a fact it is unusual for manufacturers to make a costing for themselves. It generally eomm to them as a tradition of the trade, or an open secret. In this case, what is accepted as the cost is not determined by the expenses of this factory or that, but is a calculation at which, on the average, labour osn be bought, factories built, and mills run. In other words, it is a marginal celculation. If the individual manufacturer cannot produce st this cost, so much the worse for him: it is the most that competition will allow him, and if he is to keep in the rnnning he will have to be content with a smaller percentage of “oncost” If the costing were not based on wages for which labour can generally be obtained, and on percentages of manufacturing expenses which can be realised by any one who has the necessary capital to undertake such a business, it would not be a costing for the trade at all.

If, then, we analyse this trade costing, it will be found based on something quite apart from the empirical expenses of this or that producer. The price of labour it assumes will be the wage paid over s wide field to a class of labour of technical ability. The price of factories will be the price over a definite area of erecting stone and lime. The price of machinery will be the cost of metals, capable of innumerable wrought up into definite shapes by mechanics who cotdd turn their hand to almost any kind of manual work. The price of materials will be determined by the price realisable for the many fabrics into which the material enters. In short, all the factore of production, so far as they are not monopolies, are what Wieser conceives of as Cost Goods; that is, goods of many and various employments, with a value which may be called predetermined, because it is the marginal one of the many values actually being realised by the products into which these costs enter.

It will not have escaped notice that, among ccate, Wieser includes uuskilled labour, which—as Wieser indeed has explicitly claimed elsewhere—involves that labour power is a form of wealth. It is true that man, as man, is the end of economic activity, but man, as labourer, is a mean as well as an end; and, economically, the arms that guide the plough are, equally with it, forces expending themsel ves in producing more wealth. This becomes clear if we consider how really poor a community would be which had dynamic wealth in abundance and had not labour enough to employ it. But however we may differ as to the propriety of including labour power in wealth, we can scarcely deny that, when labour power is employed in one way, an essential factor in the producing of wealth is withdrawn and withheld from any other employment. The particular production certainly “cost” the community this particular labour, just as clearly as the world is the poorer for the death of a good worker.

Further than this I cannot go. The important points which follow are:—the inquiry into the place of rent and interest among costs, the trenchant criticism on that conception of “cost” which identifies it with the pain of labour and the abstinence of capital, and the concise but pregnant treatise which occupies Book VI., on the place of the marginal law in the economy of the state. If I pass over these here, it is not because they are of less value, but because modesty must set some limit to an editor's preface.

I am bound to add that, according to the author's conditions, I have made myself responsible for the economic accuracy of the present rendering, and have revised it word by word. For the translation of the Author's Preface, and the drawing up of the Analytical Table of Contents, I alone am to blame. In all other respects the translation is Mrs. Malloch's, and although, as the inspirer of her undertaking, I am debarred from giving my own opinion as to its excellence, it is no more than justice to quote what Professor Wieser says regarding it:—” der Text schien mir in Ihrer Ueber-setzung wieder klareren und tieferen Sinn gewonnen zu haben.” To Professor Wieser himself my grateful acknowledgment is due of the singular patience and clearness of explanation with which he has answered my numerous queries, and finally revised the entire proofs.

WILLIAM SMART.

Glasgow,

1893.